Blockchain is a decentralized and distributed ledger technology that stores transactions in a secure, orderly, and transparent way. Blockchain technology has taken the world by storm since its mysterious invention in 2008 and experts believe it will change the world and impact how we transact.
As the underlying technology behind cryptocurrency and other jaw-dropping innovations, there are still several untapped potentials. In this guide, we’ll explain in detail: what is blockchain, its benefits, disadvantages, potential use cases, and much more. Let’s jump right in.
Key Highlights
- Blockchain is a foundational technology. It proffers new ways of storing and accessing data records securely
- It cuts across several sectors, including information technology, cyber security, health care, and supply chain management, amongst others
- Smart contracts are used in blockchain systems to trigger transactions automatically without verification from users on the network
- To successfully integrate this technology into digital systems, organizations must examine use cases in their industry to identify pitfalls and best practices
- Merging this technology with other emerging innovations can be the solution to global problems that were formerly impossible to solve
What is Blockchain?
- Blockchain is a decentralized and distributed ledger technology that stores transactions in a secure, orderly, and transparent way.
- Each transaction is stored in a safe called a “block”.
- As new block forms, it connects to the other blocks chronologically, forming a chain-like structure. This explains how its name, “block-chain,” originated.
- Users on the blockchain network can see all transactions from the current to the formation of the first block (also called the genesis block).
- This technology is the heart of Bitcoin, Ethereum, and other cryptocurrencies.
How does blockchain work?
A blockchain is like a database of transaction records. It operates on a peer-to-peer network of computers (also called nodes).
Each block on the chain comprises the transaction data, the hash of the previous block, and the next block. The hash can be likened to a unique fingerprint which is used to secure transactions on the blockchain.
As a decentralized and distributed ledger technology, no central authority validates transactions. Each transaction must be verified by a number of nodes on the block (also called the consensus mechanism) before a new block is created.
Let’s explore step-by-step how blockchain works:
- A Transaction is Initiated: First, a node on the network initiates a transaction on the blockchain. This can be sending or receiving cryptocurrency or updating information on the chain.
- The Transaction is Broadcast To The Network: Once the transaction is initiated, it is shared between the users connected to the blockchain network for verification. This is to ensure no unauthorized transaction occurs on the chain.
- The Transaction is Validated: Then, the nodes on the network validate the transaction using a complex algorithm. They also affirm that the transaction meets all necessary criteria for success. Blocks that are tampered with will automatically be rejected on the network.
- The Transaction is Added To a Block: After validation from the network, the transaction is verified, and the new block is added to the chain. The new block has a unique hash, transaction details (sender and receiver information), and the hash of the previous block.
- The Block is Added To The Blockchain: Once the block is created, it is added to the existing blockchain, creating an immutable record for all the transactions.
- The Block is Verified By The Network: In this step, the block is verified by at least more than 50% of the users on the blockchain network. Then, it’s added to the blockchain permanently.
- The User’s Account is Updated: Once the block is added to the chain, the initiator’s account is updated to reflect the new transaction.
- The Process Repeats: This process is replicated for every new transaction on the blockchain. This ensures the ledger is secure, tamper-proof, and up to date.
Benefits of Blockchain Technology
Blockchain technology can optimize the global infrastructure and deal with global issues more efficiently than current systems.
– Marwan Forzley, CEO of Align Commerce.
Blockchain technology is evolving to become an integral part of our lives. With Bitcoin and other crypto assets as one of the successful applications of this technology, the benefits are beyond measure. In this section, we’ll share five major ones worth knowing:
Enhanced Security
With cybercrime on the rise and more organizations falling into the claws of fraudsters, blockchain-based systems provide better security than conventional systems. Every data on the system is secured through decentralization, cryptographic keys, and end-to-end encryption. In fact, each blockchain can be traced to the first block, making it easy to follow an audit trail of each transaction.
Records on the blockchain cannot be altered, and initiating any fraudulent transaction requires controlling over 50% of computers connected to the network. Even if this happens, it’ll be noticeable to other users on the network. Though blockchain doesn’t wholly annihilate fraud, it provides a clear audit trail to identify when and where it occurs.
Improved Transparency
Blockchain technology can be adopted in industries where trust is a concern, for instance, logistics and supply chain, financial and governmental institutions, etc. This is because every record on the ledger is visible to all users on the network; it’s easy to identify where and when something goes wrong on the blockchain.
In addition, once a block has been verified and added to the chain, it’s impossible to reverse or delete the transaction. This method of immutability and traceability that blockchain provides makes it better than the traditional digital system. The cases of loss of funds or falsification of records are less likely to occur on the blockchain.
Cost Efficiency
By automating complex administrative tasks such as record keeping or verification, blockchain technology can help industries to save overhead costs. In current systems, transferring assets, recording data, and audits are handled by humans. Blockchain-based systems can automate transactions using smart contracts, and employees can focus on other value-adding activities.
Embracing blockchain technology in the financial sector can significantly reduce operation costs. In a scenario where one needs to initiate international payments, former hindrances like transaction costs and conversion fees will be removed. Transfers that usually take up to 5 working days will also be completed instantly. Research by McKinsey affirms that it’ll spur $4 billion in savings in cross-border payments every year.
Decentralized Nature
Decentralization in blockchain simply means the transfer of decision-making from a central authority to a distributed network. Centralized databases are prone to hacking or, worse, data loss. But with blockchain, there’s no single point of failure, making it harder to hack the network.
Blockchain uses a peer-to-peer network of nodes that communicate with each other on the chain. In this system, each network member has a copy of the database; without consensus, no transaction will be approved. Infiltrating this system will require hacking all computers on the chain, which is almost impossible.
Improved Efficiency and Speed
Blockchain technology automates several tasks that humans previously handled—for instance, real-time tracking in the supply chain. Many supply chain processes are handled manually, leading to reduced speed and poor customer experience. Blockchain enables data sharing between intermediaries on the chain and facilitates end-to-end flow that allows high-level transparency in the supply chain.
Use cases of Blockchain
Blockchain applications extend beyond bitcoin and other cryptocurrencies. A growing number of sectors are adopting this technology to save time and money and work more efficiently. We’ve rounded up a few in this section:
Financial services
There’s no mention of blockchain without highlighting its impact on finance. As a foundational technology, blockchain systems have the potential to streamline digital transactions by creating new operational methods, for instance, decentralized finance, also called DeFi. From increased revenue to controlled risk to improved efficiency, there’s no end to the possibilities of this technology in the financial sector.
How CBA adopted Blockchain Technology
This is seen in the case of the Commonwealth Bank of Australia, the largest bank in Australia. They partnered with the world’s largest crypto exchange platform, Gemini, and blockchain analysis firm, Chainalysis, to produce a crypto app for the bank, CommBank app. It’s the first bank in Australia that validates cryptocurrency transactions.
Supply Chain Management
Blockchain application in supply chain management is changing how businesses and individuals distribute products across the chain. This cutting-edge technology can be used to develop applications and systems that operate on a peer-to-peer network, streamlining communication and distribution across parties on the supply chain. This helps to combat major supply chain issues such as counterfeit goods, zero accountability and traceability, compliance violations, and waste.
How Walmart is streamlining supply chain with blockchain
Walmart, one of the world’s largest retailers, uses IBM’s blockchain technology to resolve payment disputes among its 70 third-party freight carriers. They turned to DLT labs, a leading enterprise in creating distributed ledger technology, to develop an automated system that mitigates these issues altogether. This resulted in less than 1% of invoices with discrepancies, payment issues were resolved quickly, and carriers were paid on time.
Healthcare
One of the significant challenges in the healthcare system is attaining true interoperability – the ability of different health systems and practitioners to communicate and exchange data quickly and effectively. This is because we sometimes receive care in different locations and from various medical practitioners. Combining all these reports isn’t only time-consuming but also prone to errors.
Decentralizing medical records will make it easier for medical practitioners to make informed decisions when administering care. Patient data will be in one ledger and updated accordingly. Patients will have a transparent view of their data records and exercise control over who accesses them.
How Medicalchain reducing data interoperability with blockchain
Medicalchain is a blockchain-powered platform that facilitates the fast, secure, and transparent exchange of medical data. They use decentralized technology (DLT) to provide unhindered access to healthcare agents and patients.
Identity Verification
Privacy has long been a primary issue since we transitioned to the digital age. Our credentials are stored in the riskiest places possible: our devices and third-party sites. Although most of these platforms guarantee the security of personal information, is it truly safe? What happens when your device gets into the wrong hands?
Organizations can use blockchain systems to solve interoperability issues by providing a secure platform for recording and exchanging credential data. Digital credentials generated with DLT are inherently more secure since they’re protected cryptographically. This facilitates instant verification while ensuring data is only accessible to the right parties.
How the European and US Government are Using Blockchain to Increase Data Security
The EU Commission is set to build a European Digital Identity Framework to enable EU citizens to verify their identity online using Digital Identity Wallets. In the words of the EU commission president, Ursula von der Leyen, “Each time a website asks us to create a digital identity or log in with a convenient tech platform, we have no idea what happens to our data. This has to stop.”
Online Voting
Electoral integrity has long been a concern as it’s the only effective means of making democratic decisions. The traditional ballot system’s flawed confidentiality has hampered people’s faith in the electoral process. Electronic voting methods, however, solved the issue of flexibility and simplicity but failed in terms of integrity.
Distributed ledger technologies such as Blockchain can be used to build secure voting systems because of their end-to-end verification advantage. It proves to be a better alternative to the electronic voting method because of the high-level security and authenticity of the data. Electoral officials can effectively control the voting process and mitigate allying trust issues by using proof of stake (PoS) or other consensus mechanisms.
How Japan Integrated Blockchain Into Their Voting System
Tsukuba, a city in Japan, is the first to introduce blockchain in its digital voting system. The startup involved in the project, LayerX, tested the initiative for social development proposals. The voters were registered on a decentralized platform and could easily vote online. Overall, the electoral process was a success.
Challenges in implementing blockchain technology
Undoubtedly, every innovation comes with its own fair share of challenges. It will be a huge mistake to embrace this technology without examining potential roadblocks.
Scalability
Scalability has always been a significant issue hampering blockchain technology. Although the transactions are almost instant, larger transactions take time to process fully. Bitcoin takes about 10 minutes or more to be fully processed and may take longer when there’s traffic on the system.
Thus, it’s safe to say that blockchain technology hasn’t been fully developed to serve many users simultaneously. Organizations looking to incorporate blockchain technology into their digital system should be wary of this and seek solutions to prevent it from affecting business operations. There are, however, faster blockchain networks on the market like Solana and Aptos.
Interoperability
Blockchain helps to reduce data interoperability in health systems. But can its advantage also become a disadvantage? Yes, and here’s how.
Blockchain interoperability refers to the ability of different blockchain-based systems to communicate with each other (cross-chain) and other traditional APIs. This issue is due to the following:
- Blockchain systems are created differently and don’t speak the same language
- Differences in transaction scheme
- Varying levels of smart contracts use
- Different consensus mechanisms used to develop the blockchain systems
All these limit the possibility of achieving true interoperability between blockchain systems and increasing transaction speed.
Regulatory Environment
Governments and large corporations like banks resist adopting blockchain technology fully into their systems. This is likely due to the costs of developing a fully scalable blockchain system or the risks involved in using the technology.
Since blockchain has been tested on small-scale enterprises rather than large scale with larger customer data, a slight mistake or undetected issue poses a significant risk to the financial market and customer data. This explains why larger co-operations are yet to fully embrace blockchain, to prevent running into legal issues.
Energy Consumption
The proof-of-work consensus mechanism used to verify transactions on the blockchain requires high power and electricity. And as the transactions on the blockchain increase, more power required to complete the transaction increases. This makes it costly to adopt blockchain technology or build blockchain systems on a large scale.
Security and Privacy
The cryptographic keys used to access information on the blockchain are like physical wallets. Once it’s stolen or misplaced, it is gone forever.
Many decentralized systems are not private. Each transaction or information stored is visible to each node on the network. Bitcoin, Etherum, and other cryptocurrencies are examples of public blockchains. This is really concerning, as personal information can be accessible to a degree on the blockchain network.
Future of blockchain technology
Having explored the many ways in which blockchain technology can revolutionize the economy, it’s no doubt that it’s here to stay. There are several potentials yet untapped in this cutting-edge technology. Below are some exciting aspects to watch out for:
Mainstream Adoption
Mass adoption of blockchain technology is still in its early stages, and analysts have predicted it’ll grow exponentially in the next few years.
- Many organizations using manual ledgers will be replaced by blockchains.
- Financial institutions are already building their own blockchain systems to reduce costs and improve employee productivity.
- Countries like Mexico have legalized bitcoin as a legal tender, and people in other countries are exchanging cryptocurrencies daily.
- The evolution of Web 3, NFTs (non-fungible tokens), and decentralized finance also increase the chances of mainstream adoption.
- Organizations that refrain from integrating this technology in their systems are at risk of security breaches, reduction in market share, or even loss of potential investors.
Interoperability
Several solutions are developed today to resolve blockchain interoperability issues and facilitate cross-chain transactions.
- Cross-chain is an emerging technology that helps to enable the transmission of data between different blockchain systems.
- It acts as a bridge between isolated ecosystems, providing seamless integrations of tokens across networks.
- For example, Etherum-based blockchain and hyper-ledger-based blockchain, like hyper-ledger besu, are compatible.
- Transferring tokens between them is feasible because the logic is already built into these two systems.
Decentralized Finance
Decentralized Finance, also known as DeFi, is an emerging trend in the blockchain industry. Actually, there’s no way to implement blockchain in the finance sector bypassing this technology.
- DeFi comprises financial products or services operating on a decentralized platform using smart contracts on a blockchain.
- It removes the hassles associated with third-party or intermediaries.
- DeFi can potentially overhaul the finance sector because it promotes transparency, flexibility, and efficiency compared to the traditional centralized banking system.
- Since it operates on the peer-to-peer model, it eliminates the hassles and costs associated with a third party or intermediaries.
Increased privacy
Privacy, as highlighted above, has been a major drawback for people adopting blockchain technology. For instance, in a public blockchain network, all information is accessible to all users on the network. This can be a problem for organizations or individuals who need to keep their data private.
- Blockchain engineers are developing private features in blockchain systems to eradicate this problem.
- Through zero-knowledge proof technology, transactions and claims can be verified without disclosing private data.
- Using a permissioned blockchain system is also a solution to this issue.
- Access to these systems is heavily guarded and can only be granted to specific people.
Integration with emerging technologies
Blockchain technology can be integrated into other emerging technologies such as Artificial Intelligence, Machine Learning, the Internet of Things, and 5G networks. This increases the capabilities of these systems to provide real-time solutions to problems formerly impossible.
- For instance, IoT sensors can be used to create wearable devices such as smartwatches to track vital health metrics in patients.
- The data generated can be uploaded on a blockchain system accessible to the patients and the right medical practitioners. This can be helpful in emergencies to create patient data.
Green blockchain
The environmental impact of blockchain has attracted several contrasting opinions from users and non-users alike. This technology operates on high power and electricity, increasing carbon emissions. Recent research confirms that the carbon footprint of cryptocurrencies is almost equal to that of the entire country.
- Recently, engineers have been exploring an alternative consensus mechanism using environmentally friendly options.
- “Green blockchain” uses renewable energy sources to power blockchain systems while mitigating the high energy usage during crypto mining.
- More sustainable consensus mechanisms such as proof of stake are beneficial and promote the long-term sustainability of blockchain technology.
Conclusion
Despite being in its early stages, blockchain technology is already making giant strides in improving data transparency, security, and authenticity. Research from McKinsey Technology Council suggests that up to 10% of global GDP will be associated with blockchain-based transactions. Even with this, blockchain will take decades to seep into our economic systems.
To begin with, organizations can enable their systems to receive bitcoin payments. Considering that the cryptocurrency market is already well-developed, it’s a low-risk approach.
Next Steps: What now?
- Learn more about blockchain technology and how it’s adopted in cryptocurrency
- Choose a reliable and reputable cryptocurrency platform for your transactions
- Start with single-use applications
- Choose the right and profitable cryptocurrencies to get started
- Add bitcoin as a payment option. Check our experts choice of the best web hosting platforms that accept crypto payments