In the last decade, an array of modern technologies, like artificial intelligence, machine learning, deep learning, virtual reality, etc., gained massive popularity. Along with these technologies, one such technology that has become a buzzword these days is blockchain. This technology is employed in startups as well as in the corporate space, especially in banks and insurance companies.
If you are a newbie to blockchain technology, you have landed at the right place as here you will gain the fundamental knowledge of the blockchain.
Through this article, we will help you understand what exactly blockchain is, the structure and working of blockchain technology, and the different types of blockchain technology. So, let us get started!
What is Blockchain Technology?
Blockchain is a decentralized storage system that enables people to access data directly by eliminating the need for intermediaries or trusted third parties. A blockchain is a distributed database that stores transactional records in the form of blocks, where every two consecutive blocks are linked to each other, thus forming a chain.
Alternatively, we can think of blockchain technology as a shared and immutable ledger that facilitates the process of recording transactions and tracking assets in a business. Here, an asset can be tangible, like a house, car, land, or cash, or intangible, like intellectual property, patents, copyrights, etc.
Each transaction in this ledger is authorized by the owner’s digital signature, which certifies the transaction and protects it from tampering. Therefore, the information stored in this ledger is highly secure. The primary idea behind blockchain technology is that it guarantees the security and fidelity of data records and generates trust without the intervention of a trusted third party.
Also, it records and distributes digital information to the public but does not support modifications to information. Therefore, blockchain serves as the foundation for immutable ledgers or records of transactions that cannot be altered, destroyed, or deleted.
Structure of Blockchain
Like a database, a blockchain also stores data electronically in digital format. Blockchains are well-known for maintaining and securing a decentralized record of transactions in cryptocurrency systems, like Bitcoin. The primary difference between a blockchain and a database is the way the data is structured.
A blockchain gathers information and stores it in groups, called blocks. Each block has a certain storage capacity. Therefore, when one block gets filled with the specified quantity of information, it is closed and linked with the previous block, thus forming a chain of data blocks.
Every block consists of a header and a body, as shown in the below figure:
The header of a block is composed of the hash of the previous block, timestamp, nonce, and Merkle root, whereas the body consists of transaction data.
- The hash of the previous block: Since a blockchain is a collection of multiple interconnected blocks or nodes, this part of the header stores the hashed value of the previous block’s address. The first block in a blockchain is referred to as Genesis and has no hash value for the previous block.
- Timestamp: The timestamp in a blockchain proves that a particular block was used at that instance of time. In addition, the timestamp is used to verify the authenticity of any block in the blockchain.
- Merkle Root: It checks if the data is corrupted, manipulated, or hacked using mathematical formulae.
- Nonce: Nonce stands for ‘number only used once. It is a 32-bit number with a maximum value of 2^(32) total positive values.
How Does Blockchain Technology Work?
We can think of blockchain as a combination of the following three technologies:
- Cryptographic Keys.
- A peer-to-peer network containing a shared ledger
- Digital Signatures to verify the authenticity of transactions.
The private key and public key are two types of cryptographic keys . These two types of keys assist in carrying out transactions successfully between two parties. Each party has one public key and one private key, and with the help of these keys, they produce a secure digital identity. This secure digital identity is referred to as a ‘digital signature’ and is useful in authorizing and controlling transactions.
Blockchain users utilize these two cryptographic keys to carry out digital interactions over a peer-to-peer network. For example, consider the two parties or individuals wishing to perform a transaction over a peer-to-peer network.
To perform a transaction, the first individual would attach the transaction information to the second individual’s public key in the form of a block. This block contains all relevant information, such as the digital signature, timestamp, etc. But it is essential to remember that the block does not contain the identities of both the individuals involved in a transaction.
Later, the block gets transmitted across all the nodes of a blockchain network. The transaction gets completed when the second individual uses his private key and matches it with the block.
Types of Blockchain
There are four different types of blockchain, namely public, private, hybrid, and consortium. Let us discuss each of them in detail below.
1. Public Blockchain
It is a non-restrictive and permission-less distributed ledger system. In this type of blockchain, anyone with an internet connection can sign up on the blockchain platform, become an authorized user, and become a part of the blockchain network. Any user who is a part of the public blockchain has the authority to access current and past records, verify transactions and perform mining.
A public blockchain is highly secure only if the users or participants strictly follow security rules. The most common use of public blockchain is to perform mining and exchange cryptocurrencies. Some popular examples of public blockchain are Bitcoin, Etherum, and Litecoin.
2. Private Blockchain
A private blockchain is a restrictive or permission blockchain that operates on a closed network. Enterprises and organizations majorly employ a private blockchain, where only selected members participate in a blockchain network.
An organization that uses a private blockchain has the authority to control its accessibility, authorization, permissions, and other security options. Therefore, a private blockchain works analogous to a public blockchain but has a small and restrictive network. Private blockchains are widely used in supply chain management, asset ownership, voting, and digital identity. Examples of private blockchains are Multichain and Hyperledger projects.
3. Hybrid Blockchain
As its name suggests, a hybrid blockchain is a combination of public and private blockchain. It combines several features of private and public blockchains, i.e., one can have a permission system or permission-less system with a hybrid blockchain.
In a hybrid blockchain, only the selected portion of data is made available to the public and the rest is kept confidential in a private blockchain. A well-known example of a hybrid blockchain is Dragonchain.
4. Consortium Blockchains
A consortium blockchain is opposite to a private blockchain, where a blockchain network is managed by more than one organization. We can also refer to a consortium blockchain as a federated blockchain.
Unlike a private blockchain, multiple organizations can exchange information and perform mining in a consortium blockchain. Banks and government agencies primarily employ consortium blockchains. Examples of a consortium blockchain are R3 and Energy Web Foundation.
5 Top Benefits of Blockchain Technology
The following are some significant benefits of blockchain technology:
1. Enhanced Security
Since your critical data is sensitive and vital, blockchain can change the way your data is viewed. It helps to prevent fraud and unauthorized activities to your data by creating a record of data that is end-to-end encrypted and can’t be altered. This is the reason why blockchain ensures high security.
In addition, blockchain is a distributed database, which means that it stores your data across multiple servers rather than storing it on a single server. Such a distributed storage of data makes it challenging for hackers to alter the data.
2. Greater Transparency
Since blockchain is an immutable digital ledger, all the transactions and data are recorded identically in multiple locations. All the participants of a blockchain network can view the data simultaneously, which provides complete transparency.
Moreover, as all the transactions are immutable, time-stamped, and date-stamped, each participant can view the entire history of any transaction. This eliminates the possibility of fraud.
3. Instant Traceability
Blockchain creates an audit trail that records the provenance of an asset at each step of its journey. Alternatively, blockchain creates an audit trail whenever the exchange of goods and services is recorded on a blockchain network. This audit helps to trace where these goods and services come from. This traceability data or data about the provenance of goods and services acts as proof in industries where customers are concerned about human rights associated with a product. Blockchain has made it possible to share the provenance of assets directly with customers.
4. Increased Efficiency and Speed
Since blockchain eliminates the need for intermediaries and replaces several manual processes in transactions, it handles transactions more efficiently and faster than conventional methods. In some cases, blockchain can handle transactions within a few seconds or even less. However, the time required for blockchain to handle transactions depends on how large each block of data is and the network traffic.
Immutability means we cannot alter or delete transactions once recorded on a blockchain. In other words, immutability is the ability of a blockchain ledger to remain unaltered and unchanged. The immutability of blockchain offers the following benefits:
- Ensures data integrity.
- Simplifies the auditing process.
- Serves as the proof of fault.
Uses Cases of Blockchain
The following table highlights the use cases of blockchain in different sectors:
|Internet of Things (IoT)||
|Finance & Accounting||
Blockchain technology is simply a distributed database and differs from a conventional database in terms of data storage. A blockchain stores data in the form of blocks, where every block is linked to its previous and the next block, forming a chain of blocks. Moreover, blockchain is highly secure since it stores information on an immutable ledger, and only authorized network members can access the data.
We hope this article has helped you better understand blockchain technology along with its types, use cases, and benefits. If you have any queries or suggestions, feel free to share them in the comments section below.
If you are eager to make yourself familiar with the basics of blockchain and bitcoin, you can sign up here for the course.
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