What Is Blockchain Technology?
With the recent growth spurt of Bitcoin and other cryptocurrencies, the concept of blockchain has suddenly become popular in the technology industry. Companies from a host of industries, including those specializing in media, logistics and finance, have all announced significant investments in the field. Despite its growing acceptance though, most people are still unaware of the sheer scope of the technology.
Even vocal skeptics of the cryptocurrency market have stated that blockchain has tremendous potential outside of its current use-cases. While it is indeed true that the technology has been mostly used by digital currencies since the introduction of Bitcoin in 2009, that is not necessarily the case anymore. Governments and businesses around the world have found unique use-cases that have little to no relation with the highly volatile token market.
Put simply, a blockchain is an ever-growing list of records. Instead of being controlled or run by a single governing entity, each participant in the network has an equal say in its functioning. This is why blockchain-based systems are also referred to as being decentralized in nature. As with any other traditional ledger, a blockchain is capable of adding new transactions. This is done in fixed time intervals in the form of ‘blocks’. However, it is impossible to edit or delete an entry once it has been added.
The system is enforced with the help of a computing process known as hashing, which basically links newly generated blocks to previous ones. If an attacker were to modify a pre-existing block to maliciously change its data, the hashing algorithm would detect the change and automatically reject it from the network.
Blockchain: The game-changer
Up until now, almost every single internet-based application or service has relied on a centralized model for distributing and hosting its content. The term ‘centralization’ thus refers to such services relying on a few central servers. In effect, the existence of the entire service hinges on the continued operation of these servers and can be disrupted quite easily. Furthermore, in the event that the service attracts a sudden influx of new users, it may no longer be enough to handle the increased load. Therefore, such a model suffers from what is known as a ‘single point of failure’.
A blockchain is the complete opposite of such a network, promising decentralization and independence from third parties. Every single participant on the peer to peer network is continuously updated with others. This ensures that new data is propagated throughout the network without any time delay. Users that host the entire blockchain for others to audit and download are known as ‘nodes’. This ensures that the system is transparent to all of the parties involved.
In addition to being extremely robust, blockchains also cannot be taken down by an external regulator or censored in any way. In order for that to happen, all nodes on the network would need to voluntarily comply with the change. However, as more independent nodes begin participating from all over the world, the likelihood of such a collusion taking place becomes negligible. Furthermore, as long as there is even a single node transmitting data on the network, the blockchain will continue to be accessible by any new or existing user.
What makes blockchain technology really valuable though, is its ability to host a vast amount of information without the fear of corruption, unauthorized modification or deletion. Once data is recorded and propagated to all nodes on the network, it cannot be modified under any circumstance. This specific property, also otherwise referred to as immutability, is used to guarantee accountability in cryptocurrencies and other blockchain-based financial applications.
Arriving at a consensus
While most fundamentals of the technology have been covered above, understanding how blockchains function autonomously is the next piece of the puzzle. This is an important consideration because decentralized systems are designed to not have an entity controlling them. In order to establish trust, every blockchain employs a consensus mechanism, which in turn involves a cryptographic process. Most digital currencies, including Bitcoin and Ethereum, use the proof of work consensus algorithm.
Over time though, blockchain developers have designed unique alternatives that improve on features such as security, speed and reliability. A popular example, for instance, is the proof of stake system that proposes a significant increase in efficiency.
Risks and disadvantages
Despite its advantages, blockchain technology is not invulnerable. As with anything related to computers, documented and undocumented attack vectors do exist. Furthermore, since blockchain development and design involves a fair bit of complexity, some implementations may not be as secure as others. In the past year alone, several cryptocurrencies have had their blockchains either exploited or attacked. One of the most noteworthy examples of this was the attack on privacy-oriented currency Verge that led to the loss of $15,000 worth of tokens.
While a blockchain can be attacked in a multitude of ways, most commercial applications try their best to account for them and employ sufficient safeguards. As a result, a correctly configured blockchain can be resistant to these hacks and are generally regarded to be quite safe and effective. That is why, only a few cryptocurrencies have been subject to major attacks so far, with the major ones proving to be secure in spite of their popularity.
While discussing the demerits of the technology, it is also important to point out that not all implementations are highly efficient. In fact, for certain applications, the opposite might be true. Take the cryptocurrency Bitcoin for instance. Even though it is widely used to transfer funds securely and quickly, the network is nowhere near as resource efficient as its non-blockchain counterparts like Visa and PayPal. Since Bitcoin employs the proof of work consensus mechanism, a single transaction may consume a massive amount of electricity. As Bitcoin looks to improve, many new cryptocurrencies are coming out fix this issue such as Bitcoin Cash.
The internet of today
Since Bitcoin – the first blockchain application – is barely even a decade old at this point, many believe that the technology is at a similar stage as the internet in the late 1990s. At the time, access to the internet was limited to a very small segment of the global population and was mired in a number of legal problems. Over time, most of those issues were resolved and it has since developed into an indispensable tool for people around the world. Blockchain may very well stimulate a similar technological revolution and ultimately result in the creation of a new industry.