In this article, I will explain what blockchain is, how it works, and what are its pros and cons.
What Is Blockchain?
Blockchain represents a type of system for recording information in such a way that it would be difficult or even impossible to make changes to it, hack it, or cheat it.
It is basically a digital ledger of transactions that is duplicated and distributed across the network of computer systems on the blockchain. Every block in the chain includes a series of transactions. When a new transaction takes place on the blockchain, a record of it is added to the ledger of all participants. This decentralised database that is managed by several participants is called Distributed Ledger Technology (DLT).
Blockchain represents a type of DLT in which a transaction is recorded using a cryptographic signature known as a hash.
Think of a Google Doc, for example. Such a document can be viewed and edited by all those it has been shared with. All the edits and revisions made are recorded and visible to all guests. So if a person with access to the shared file makes any change, everyone will see it.
That’s similar to how blockchain works. It is a shared ledger that all involved parties can access, and everyone in such a network can verify any changes made within it.
How Does Blockchain Work?
When a transaction takes place, it is recorded as a “block” of data. Transactions show the movement of an asset and the data block is able to record the information that interests you, such as who, what, when, and how much.
Every block is connected to the ones before and after it. Together, they create a chain of data as one asset is moved from point A to point B when ownership changes. The blocks record the exact time and sequence of transactions. They are linked securely so that no alterations are made.
All transactions are blocked together in one irreversible chain. Every block has the role of strengthening the verification of the previous block, thus, making the entire blockchain safe, as it’s hard to impossible to tamper with it.
Advantages of Blockchain
Blockchain comes with several advantages, such as a higher accuracy of transactions. This is due to the fact that a blockchain transaction is verified by several nodes, so the chances of an error slipping are really low.
Blockchain also doesn’t require intermediaries. As such, two people that make a transaction can complete it without needing the help of a third party. This means the data remains private, and there’s no extra cost needed for the intermediary.
Transfers are also faster since you don’t have to follow the schedule of a bank.
Also, as we’ve previously mentioned, blockchain makes it really hard to be hacked thanks to its very nature. Proof of Stake or Proof of Work consensus mechanisms are usually used in order to make a network safer.
Disadvantages of Blockchain
Blockchain does have its downsides as well, such as a limit for transactions per second. As an example, Bitcoin processes 4.6 transactions per second, while Visa processes 1,700 in the same amount of time. This means that scalability in blockchain can be a problem.
Energy cost is also a problem – transactions on blockchain tend to be more expensive if the network is overcrowded, and the carbon footprint can affect the environment.
There is also the risk of asset loss, as digital assets are secured with a cryptographic key. But, if that key is lost, so is all the capital that was being kept safe by it since, for now, there is no way of recovering it. As the system is decentralized, there is no central authority, such as a bank, to help you regain access to your assets.
Also important is the fact that blockchain is decentralized, it is more private and more confident than the traditional options. This can make it appealing to bad actors, especially since it is more difficult to follow illegal transactions on blockchain than through a bank.
Conclusions
Blockchain is clearly here to stay, as more and more industries are adopting it. It is safe and fast to use, and it is preferred by those who cherish their privacy. Still, there are some issues that could be solved in order for this technology to be truly perfect.