- Nitish Srivastava
- January 19, 2024
Blockchain technology is a head-turner in the tech world. This technology is revolutionizing industries around the world. Need proof? The global Blockchain market is expected to reach $67.4 billion by 2026. What’s more?
Over 40 million people around the world actively use Blockchain technology. The question now is: What is Blockchain technology and how does it work? In this article, we will answer these in detail. We will also discuss the various applications of Blockchain technology along with its benefits. So, is it a promotional article for Blockchain? Not at all! We will also touch upon the challenges and concerns related to Blockchain technology and how to address them.
So, are you a tech or Blockchain enthusiast? Want to gain in-depth knowledge about it? Read ahead to find all your answers related to Blockchain technology. So let’s get started.
What is Blockchain?
Blockchain is a peer-to-peer decentralized distributed ledger technology that makes the records of any digital asset transparent and unchangeable and works without involving any third-party intermediary. It is an emerging and revolutionary technology that is attracting a lot of public attention due to its capability to reduce risks and fraud in a scalable manner. 90% of U.S. and European financial institutions have started exploring Blockchain technology.
Now here comes the question why is Blockchain a distributed, decentralized P2P network? A decentralized network offers multiple benefits over the traditional centralized network, including increased system reliability and privacy. Moreover, such networks are much easier to scale and deal with no real single point of failure. The reason why Blockchain is distributed is because of shared communication and distributed processing.
The P2P architecture of Blockchains provides several benefits, such as greater security compared to traditional client-server-based networks. A distributed P2P network, paired with a majority consensus requirement, provides Blockchains a relatively high degree of resistance to malicious activities.
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Bitcoin and Blockchain: How are They Related?
Are Bitcoin and Blockchain technology the same? Even though these two terms are often used interchangeably, they are not essentially the same. So, how is Bitcoin and Blockchain technology different? How are they related?
Although the advent of Blockchain has taken the world by storm, many people still get confused about these two terms. Thus, it is important to understand how these terms differ and how they are interrelated.
Bitcoin is a cryptocurrency, which is an application of Blockchain, whereas Blockchain is simply an underlying technology behind Bitcoin that is implemented through various channels. So if you are working on Blockchain and learning Blockchain, then you are not actually learning cryptocurrency but learning how cryptocurrency works.
Let’s break it further to make the concept clearer.
In layman’s terms, Blockchain technology is a distributed and immutable ledger. It records all Bitcoin transactions. Think of it as a never-ending chain of blocks. Each block on this chain contains a batch of transactions. This ledger is maintained across a vast network of computers. All these computers come together to ensure transparency and security on the network. Now, the question is, “How is Bitcoin related to Blockchain technology?”
Let’s connect the dots. You must have already heard the Bitcoin transactions are decentralized. What does that mean? It means that Bitcoin transactions are not processed by a central authority like a bank. So, how does Bitcoin work? They rely on a network of miners. These miners validate and record transactions by solving complex mathematical puzzles. Onc the puzzles are solved and verified, the Bitcoin transactions are added to a block. This block is linked to the previous one, thus forming a chain. And the circle goes on. And, that’s where the term comes from: Blockchain.
Now that we know, “How is Bitcoin and Blockchain interrelated?” Let’s figure out “How does Blockchain work?”
How does Blockchain Technology Work?
We already answered the question, “What is Blockchain technology?” Now, the question comes, “How does Blockchain technology work?”
We know that. Blockchain can be defined as a shared ledger, allowing thousands of connected computers or servers to maintain a single, secured, and immutable ledger. Blockchain can perform user transactions without involving any third-party intermediaries. But how do you perform these transactions on a Blockchain?
In order to perform transactions, all one needs is to have a wallet. So, what is a Blockchain wallet? A Blockchain wallet is nothing but a program that allows one to spend cryptocurrencies like BTC, ETH, etc. Such wallets are secured by cryptographic methods (public and private keys) so that one can manage and have full control over his transactions.
There are now wallet options that allow you to add an address and generate a unique domain name, such as. Sol. Digital eyes (best solana nft marketplace) has introduced a Bonafide that provides such services.
But then comes the question:
What are cryptographic methods?
Cryptography is like a digital guardian in today’s online world. We live in a world where a significant part of our lives is exposed online. As our lives move further into the digital world, it’s crucial to safeguard our information. From whom? From prying eyes and potential threats. We will discuss the threats and why cryptographic methods are important in the next section.
But for now, it is important to know that cryptographic methods transform data into a code, Only authorized individuals can have access to this code. This is how it secures our digital presence.
So, what are the types of cryptographic methods?
If you open WhatsApp on your phone, you can see a message on the top of every chat: “Messages to this chat are end-to-end encrypted.” Have you ever wondered what encryption is? Why does it matter so much for your security?
Encryption is like a secret code for your messages. When you send a message using a chat app like WhatsApp, it gets scrambled into a code. Only the person you’re sending it to, can unscramble it. This way, even if someone tries to read your gossip and secrets, they won’t be able to read it because it’s all jumbled up. Encryption is closely related to the types of cryptographic methods. There are several cryptographic methods. Each has its unique strengths and weaknesses. Let’s break them down:
- Symmetric Encryption: This can be called the oldest and simplest form of digital secret-keeping. It uses a single secret key to both lock and unlock data. While it’s fast and easy, there’s a catch: Anyone with the key can access the data.
- Asymmetric Encryption: Next is the asymmetric encryption. This is more secure than symmetric encryption. It employs two keys. A public key for locking data and a private key for unlocking it. Only the holder of the private key can access the data. It’s slower but way more secure.
- Hash Functions: Hash functions are like digital fingerprints. They create a unique identifier for data just like our fingerprints. This data can be used to verify the integrity of the hash or check for tampering. Hash functions often work alongside other cryptographic methods.
What is the position of cryptographic methods used in the real world?
Let’s have a brief look at the position of cryptographic methods in today’s world:
- Quantum Computing: Quantum computers are like super-powered calculators. They threaten traditional cryptographic algorithms with their immense speed. They could become a major concern within the next couple of decades.
- Post-Quantum Cryptography: To counter the quantum threat, a new field of cryptography is emerging. It’s designed to counter attacks from quantum computers. Researchers are working on various post-quantum cryptographic algorithms.
Google announced the start of a pilot program to test post-quantum cryptography methods in real-world applications in October 2022. However, only a restricted number of consumers and partners can use the program for now.
- Cryptography in Cloud Computing: Cloud service providers are stepping up their cryptographic game to protect customer data. Encryption is used to safeguard data both at rest and in transit, and digital signatures are employed to verify users and devices.
So, why are cryptographic methods so important?
Data is crucial in today’s world. With the internet reaching even to the most remote corners of the world, the need for data protection is more than ever. In 2022 alone there were over 1,800 reported data breaches. This is an alarming 68% increase from 2020. Therefore, data protection methods like cryptography are getting more and more important. As mentioned earlier, Blockchain technology uses cryptographic methods to ensure data protection.
So, how does Blockchain work?
Now that we know the answer to, “what is Blockchain technology?” Le’ts have a look at, “How does Blockchain technology work?”
Initially, when a user creates a transaction over a Blockchain network, a block will be created, representing that transaction is created. Once a block is created, the requested transaction is broadcasted over the peer-to-peer network, consisting of computers, known as nodes, which then validate the transaction.
A verified transaction can involve cryptocurrency, contracts, records, or any other valuable information. Once a transaction is verified, it is combined with other blocks to create a new block of data for the ledger.
Here it is important to note that with each new transaction, a secured block is created, which is secured and bound to each other using cryptographic principles. Whenever a new block is created, it is added to the existing Blockchain network confirming that it is secured and immutable. Let’s sum up the steps of “how does Blockchain work?”:
- A transaction is initiated. This can be a transfer of funds, a contract agreement, or any other type of data exchange.
- The transaction is broadcasted to the Blockchain network.
- The transaction is verified by the network nodes. This process is known as mining. If you want to know more about mining you can check out our article on how Bitcoin is mined.
- Once the transaction is verified, it is added to a block. Each block contains a group of verified transactions. It also includes a hash of the previous block. This creates a chain of blocks. That is how Blockchain technology gets its name.
- The new block is added to the Blockchain network.
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Benefits of Blockchain Technology
We have learned a lot about Blockchain technology. Now let’s explore what its benefits are.
In a traditional database, you have to trust a system administrator that he is not going to change the data. But with Blockchain, there is no possibility of changing the data or altering the data; the data present inside the Blockchain is permanent; one cannot delete or undo it..
Centralized systems are not transparent, whereas Blockchain (a decentralized system) offers complete transparency. By utilizing Blockchain technology, organizations and enterprises can go for a complete decentralized network where there is no need for any centralized authority, thus improving the transparency of the entire system.
Unlike centralized systems, Blockchain is a decentralized system of P2P network which is highly available due to its decentralized nature. Since in the Blockchain network, everyone is on a P2P network, and everyone has a computer running, therefore, even if one peer goes down, the other peers still work.
This is another major benefit that Blockchain offers. Technology is assumed to offer high security as all the transactions of Blockchain are cryptographically secure and provide integrity. Thus instead of relying on third-party, you need to put your trust in cryptographic algorithms.
Types of Blockchain Technology
Now that we know what is Blockchain technology and how does it work, let’s look at the different types of Blockchains:
- Everyone can use public Blockchains.
- On the Blockchain, anyone can read, write, and verify information.
- They are very decentralized and are frequently utilized for cryptocurrencies and decentralized apps.
- Only authorized individuals have access to private Blockchains.
- Enterprises extensively use it to improve productivity and security.
- Consortium Blockchains are managed by a predetermined group of nodes.
- Industries or groups use it for data sharing and cooperation.
- Hybrid Blockchains combine elements from public, private, and consortium Blockchains.
- They are adaptable and may be tailored to meet the demands of specific organizations.
Want to know more about the different types of Blockchain technology? Check out our blog here on the various types of Blockchain technology.
Applications of Blockchain technology
Blockchain technology is making waves in the financial sector. And decentralized finance (DeFi) is a prime example. What is DeFi? It’s like a financial system that operates on Blockchain without the involvement of banks or middlemen. In this DeFi world, you can do things like lend your digital assets to others, borrow from a global pool, and trade cryptocurrencies seamlessly.
Another development to watch out for is central bank digital currencies (CBDCs). These are basically digital versions of regular currencies issued by central banks. Some countries like China, Nigeria and India are exploring the use of Blockchain to create and manage these digital currencies. Think of it as using a digital dollar or euro that’s as secure as Blockchain itself.
And speaking of security, Blockchain also plays a role in payment processing. Consider the Ripple network as an example. Banks and financial institutions are increasingly relying on it to process cross-border payments faster and with less hassle. This means your money can travel around the world in the blink of an eye, securely and efficiently.
Supply Chain Management
Blockchain’s impact extends to supply chain management too. Think about the food you eat. Blockchain can trace that apple you’re munching on all the way back to the farm where it was grown. Big retailers like Walmart and IBM are using Blockchain for this purpose to ensure the safety and authenticity of their products.
Pharmaceutical supply chains are benefiting as well. Blockchain helps to track medications from the manufacturing floor to the pharmacy shelf, making it much harder for counterfeit drugs to find their way into the market. Companies are using networks like MediLedger to ensure every pill is where it should be.
And in the world of logistics and transportation, Blockchain is bringing transparency and efficiency. Maersk Shipping Line, for example, uses Blockchain to track its containers. This means knowing exactly where your package is and when it will arrive. CargoX is another example in this field.
Now, let’s talk about healthcare. Your medical records are super sensitive, right? Blockchain is a champion at securely storing and sharing them. Imagine having control over who gets to see your medical history. Platforms like MedRec are making this a reality, giving patients the power over their health data.
But it doesn’t stop there. Clinical trials, the backbone of medical innovation, are also getting a Blockchain makeover. The Medidata platform is streamlining the whole process, making it more efficient and transparent. This means faster breakthroughs in healthcare.
And let’s not forget about pharmaceutical research and development. Blockchain is speeding up drug discovery by sharing data more efficiently. Verifiable Credentials, for example, facilitates data sharing among researchers, potentially leading to quicker cures and treatments.
In the government sector, Blockchain is creating secure and transparent systems. Voting is a great example. The Voatz app has been used to conduct Blockchain-based elections in various countries. This ensures that votes are recorded accurately and securely.
Land registry is another area where Blockchain shines. Georgia’s government is a prime example, using Blockchain to maintain a tamper-proof land registry. This reduces fraud and makes property transactions more transparent.
Even tax collection is getting a Blockchain boost. Argentina and Estonia’s government are leading the way in collecting taxes from businesses more efficiently and transparently using Blockchain.
Beyond the above-mentioned sectors, Blockchain finds its way into intriguing spaces. Consider non-fungible tokens (NFTs). These are like digital certificates of ownership. They’re used for unique digital items, be it art, music, or rare in-game items. Think of them as digital collector’s items.
Identity management is also being revolutionized. Apps like SelfKey allow you to manage your digital identity securely on a Blockchain, reducing the risk of identity theft.
And for the Internet of Things (IoT), Blockchain provides security. The IOTA Foundation is developing a Blockchain-based IoT network where devices can communicate and share data securely. This means your smart home gadgets and connected devices are less vulnerable to cyberattacks.
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Challenges and Concerns Related to Blockchain Technology
We know what is Blockchain and how does Blockchain work? We know the benefits and applications of Blockchain technology. However, one thing is sure. While Blockchain has the potential to revolutionize the game in a variety of industries, it is not without challenges. Scalability, energy usage, security, regulation, and adoption are all issues to be addressed. So, what are the challenges and concerns related to Blockchain technology? Let’s find out!
Suppose you’re in a supermarket, and there’s a long line at the checkout. Everyone’s waiting for their turn, and it takes a while to get through. Well, that’s a bit like how some Blockchain networks operate. As more people use them, like in a busy store, they can slow down. Transactions can take a while to confirm, sometimes over 10 minutes! This might sound like a little time, but imagine if your valuable assets get stuck in the queue for 600 seconds with no trace. Sounds scary and frustrating right? That’s because every transaction has to be checked by all the computers (nodes) on the network. It’s like asking everyone in the store if your purchase is valid. This takes us to the next challenge of Blockchain technology.
2. Energy Consumption
Now, think about the energy it takes to run all those computers checking transactions. In the case of Bitcoin, it’s so energy-hungry that it’s been compared to the electricity consumption of an entire country like Portugal. That’s because Bitcoin relies on a process called “mining,” where powerful computers race to solve complex puzzles. The first one to solve it gets to validate a block of transactions and earns some new bitcoins as a reward. But this race requires a lot of electricity, and as more miners join in, it becomes even more energy-intensive.
Blockchain is generally considered secure because it uses advanced cryptography to protect data. However, it’s not invulnerable. There have been some high-profile hacks and thefts, where cybercriminals exploited vulnerabilities in specific Blockchain projects or exchanges. If someone finds a weak spot in Blockchain technology, they could break in. It is proven by our examples of Blockchain breaches earlier. So, security remains a top concern.
Blockchain operates in a bit of a legal gray area. Governments and regulators are still figuring out how to treat it. In 2022, the US Securities and Exchange Commission (SEC) charged some cryptocurrency companies with breaking securities laws. This suggests that more regulations are coming. Without clear rules, it can create uncertainty for businesses and investors.
Blockchain is like a hidden gem not everyone knows about. Many businesses and people are still not familiar with it or how it works. A 2022 survey found that only about 22% of businesses are actually using Blockchain technology. That’s like having an amazing tool, but not many people know how to use it. Widespread adoption is crucial for Blockchain to reach its full potential.
Solutions to Improve Blockchain Technology
We have already mentioned that Blockchain networks, like Ethereum, have had issues with slow transaction processing. To fix this, they’re implementing techniques like sharding. Sharding includes splitting a big task into smaller parts to get it done faster. Also, there are layer-two protocols like Polygon that sit on top of Blockchains and make transactions faster and cheaper.
Blockchain used to be quite the energy hog, especially with Bitcoin. Now, there’s something called proof-of-stake, which is way more energy-efficient. Instead of solving complex puzzles, it’s like having a voting system that saves power. And some folks are using renewable energy to make Blockchain more eco-friendly.
To make sure smart contracts and transactions are safe, people are doing smart contract auditing. It’s like checking your code for bugs before you release it. Also, they’re offering bug bounties – rewards for finding and fixing vulnerabilities. And don’t forget hardware wallets – they’re like ultra-secure banks for your digital coins. If you want to become a Certified Smart Contract Auditor, then consider checking out our smart contract certification.
Governments are setting up regulatory sandboxes, which are safe places for Blockchain companies to test their ideas without getting in trouble. Also, there are self-regulatory organizations run by the industry to keep things fair and square with the rules.
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As we discussed earlier, quantum computers might break the encryption on Blockchains. However, developers are working on quantum-resistant cryptography. It’s like creating a lock that quantum computers can’t pick. Algorand is already using it.
Blockchains don’t always talk to each other, but that’s changing. Cosmos connects different Blockchains so they can share data and assets. There’s also the Interledger Protocol, which lets you send money across different Blockchains, like sending emails between different email services.
These work like magic for Blockchain. They let you prove you know something without revealing what that something is. For instance, you can make private transactions on public Blockchains or make Blockchains process more transactions faster.
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Frequently Asked Questions
- Blockchain is like a digital ledger that records transactions.
- It stores data in blocks linked together, making it secure and transparent.
- Blockchain technology is a way to securely record and verify transactions online.
- It’s like a digital ledger that can’t be easily tampered with.
- Its main purpose is to ensure trust and security in digital transactions.
- Blockchain technology does it without relying on a central authority, like a bank.
- Bitcoin is a famous example of Blockchain technology.
- It uses Blockchain to record and verify cryptocurrency transactions.
- It’s used in various real-life applications.
- Examples include supply chain management, healthcare, voting systems, and some financial services, etc.
- Blockchain technology was introduced by an anonymous person or group using the pseudonym Satoshi Nakamoto.
- They created Bitcoin in 2008.