What is blockchain technology?
A blockchain is a distributed database that maintains a continuously growing list of records. Each record, called a block, contains an index to the previous block and transaction data (generally represented as a Merkle tree root hash).
It is “an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way.” This allows the participants to verify and audit transactions inexpensively.
Why is blockchain important in the crypto industry?
Blockchain is a public distributed ledger that stores data across its network. It can record transactions between two parties efficiently and in a verifiable and permanent way. Data on the blockchain is not controlled by any central authority, meaning users have the freedom to collaborate with anyone they choose. Transactions made on blockchain are permanent, transparent, and secure. No one can alter the details of a transaction once it has been stored on the blockchain. This makes cryptocurrencies like bitcoin more secure than traditional payment systems.
Blockchain technology is the backbone of all cryptocurrencies. It is a continuously growing list of records, called blocks, which are linked and secured using cryptography. This Distributed ledger technology allows for a transparent and secure way for data to be stored and shared between multiple parties. It makes sure that every transaction that occurs goes through a validation system and it can only go through if the majority of the network accepts it. If someone tries to use the blockchain to add fraudulent data, they will not succeed because everyone in the network must agree on each addition to the chain
Making payments with a coin vs commodity (i.e bitcoins)
When bitcoins are sent through the Bitcoin network, the procedure is rather different.
To begin, as the sender, you input the recipient’s Bitcoin address (similar to a bank account number in a bank transfer) and the quantity of bitcoins to send using the interface of your digital wallet. Consider this phase to be identical to how the merchant’s payment terminal prepares the payment information for a card transaction. For in-store bitcoin purchases, shops often scan your products and then generate a QR code that you can scan with your phone’s digital wallet, which will immediately populate the amount to pay and the merchant’s address. The wallet then transmits this information to the network, digitally signing the transaction using your ‘private key.’
The digital signature is similar to the manner a consumer enters their pin number or signs the receipt for a card transaction; it serves to establish the sender’s ownership of the cash. A few nodes will receive the transaction and transmit the data to the rest of the network, and within a few seconds, your transaction will have been propagated throughout the whole network (3). Each node can independently validate the transaction, ensuring that you have the bitcoins you want to transfer and have not already transmitted them. The first two steps are analogous to the authorization process in card payments.
After that,’miners’ will collect transactions in batches and attempt to solve a computationally hard challenge. The first person to resolve an issue tells the network that it has been resolved (4). All other nodes may readily verify if this miner is being truthful, at which point this new batch––a block––is uploaded to the network (5).
Step 5 is analogous to the settlement step in the card transaction example since it is at this point that the money truly changes hands. Step 4’s aim is to guarantee that the blockchain cannot be altered. Modifying the chain would take a significant amount of computer power, making it very difficult to do so operationally. As further blocks are added after the block containing your transaction, modifying that block becomes progressively more difficult.
Once the transaction block is uploaded to the blockchain and logged in the distributed ledger, the merchant’s wallet will show the transaction as confirmed (6), and the merchant will become the new owner of those bitcoins (7). The duration of this whole procedure varies according to a variety of circumstances. However, the average time required to mine a block is ten minutes. Therefore, even if you choose to wait for five further blocks (six confirmations––the community norm) before considering the transaction really successful, you may fairly anticipate it to occur within an hour.
Benefits of Blockchain technology
Decentralization
Decentralization refers to the process through which power and decision-making are transferred from a centralized entity (person, organization, or group thereof) to a dispersed network in the context of blockchain. Decentralized networks seek to lower the amount of trust required of users and to dissuade them from exercising power or control over one another in ways that undermine the network’s performance.
The concept of decentralization is not new. When developing a technological solution, the following three network designs are often considered: centralized, distributed, and decentralized. While blockchain technologies often make use of decentralized networks, a blockchain application cannot be classified only on the basis of its decentralized or centralized nature. Rather than that, decentralization should be implemented on a sliding scale to all components of a blockchain program. By decentralizing the administration of and access to resources inside an application, it is possible to provide a higher level of service and fairness. Decentralization often entails certain trade-offs, such as decreased transaction throughput, but the benefits of increased stability and service levels typically outweigh the trade-offs.
Longer Chains
Adopting the longest chain of blocks enables nodes connected to a computer network to share a globally agreed picture of the blockchain. Additionally, since adding new blocks to the chain consumes energy, it is very difficult for any person to replace blocks that have already been mined into the chain.
The term “longest chain” is sometimes used to refer to the chain with the most consecutive blocks, however, it really refers to the chain with the most effort in it, measured by the difficulty of mining each block.
Prevention of Double-Spend Attacks
When Satoshi Nakamoto created the Bitcoin blockchain, it seemed as if they had solved this issue. The Bitcoin blockchain is a public database that records the creation of every new BTC and the transactions associated with each BTC in circulation, as well as the BTC balances associated with each Bitcoin address. A decentralized network of miners maintains the ledger, each of whom possesses an identical copy.
Satoshi created a game-theoretic framework for maintaining the Bitcoin ledger, motivating miners to remain honest and record only authorized transactions. For instance, when Alice pays Bob one BTC, the transaction is merged with all other unconfirmed transactions into a pool. Under the Proof-of-Work concept, miners compete to be the next to mine a block, expending considerable computational power to solve difficult cryptographic riddles. The first miner to solve the challenge chooses a collection of transactions from the pool, dubbed a block.
The miner then offers their solution and block to the network’s other miners. The miners validate both the solution and the block’s transactions. Alice’s transaction will fail unless she has a valid Bitcoin address that holds at least one BTC. If she does, the transaction is validated and recorded on the Bitcoin ledger.
Each block is cryptographically linked to the previous one, so establishing a verifiable trail of transactions. Returning to the double-spend conundrum, enacting a double-spend would now need convincing or duping the network into thinking that Alice still has that one BTC in her account after sending it to Bob. There are just a few possible outcomes, and none of them are clear.
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