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| Image source - blogs.iadb |
Introduction:
Bitcoin, cryptocurrency, blockchain, and so on... So, what exactly does it all mean?
Let's begin with some definitions. Blockchain is the technology that allows cryptocurrencies to exist (among other things). Bitcoin is the most well-known cryptocurrency, and it was for it that blockchain technology was developed.
A cryptocurrency, like the US dollar, is a means of exchange that is digital and employs encryption techniques to govern the production of monetary units and to authenticate the movement of funds.
Blockchain Technology?
A blockchain is a decentralized ledger that records all transactions that take place on a peer-to-peer network. Participants can confirm transactions using this technology without the requirement for a central clearing authority. Potential applications include cash transfers, trade settlements, voting, and a variety of other concerns.
The Road to Financial Services:
Trade financing is now a high-volume, expensive, and time-consuming business. Financial institutions and transportation companies have started using blockchain to establish smart contracts between parties. This might be one of the more fascinating places to keep an eye on.
The financial market utility is being redesigned. Many clearinghouses, custody providers, and others are interested in what blockchain can offer to clearing, settlements, and other intermediary services. Expect to see additional blockchain use cases in more major financial market utilities.
Securing the horizon: More emphasis will be placed on security. So yet, authorities have not stated exactly what they want to see in terms of controls. As intermediaries move forward with blockchain initiatives, expect a greater emphasis on problems such as security and monitoring.
Breaking out from the stalemate. Some companies have taken a wait-and-see approach to blockchain, following other companies and planning to move ahead when the time is perfect. This is becoming very dangerous. Technology is rapidly changing, and the learning curve is steep.
Storage Structure:
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| Image Credit - researchgate |
The way data is organized differs significantly between a traditional database and a blockchain. A blockchain gathers information in groupings, sometimes known as blocks, that store sets of data. When a block's storage capacity is reached, it is chained onto the previously full block, establishing a data chain known as the "blockchain."
All new data that accompanies that newly added block is assembled into a newly formed block, which is then added to the chain once it is complete.
A database organizes data into tables, but a blockchain, as the name suggests, organizes data into chunks (blocks) that are connected. As a result, while all blockchains are databases, not all database management systems are blockchains.
When implemented in a decentralized manner, this technology creates an irreversible data timeline. When a block is completed, it is imprinted in stone and becomes a part of this chronology. When a block is added to the chain, it is assigned an accurate timestamp.
Decentralization:
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| Image Credit - researchgate |
It is useful to consider blockchain in the perspective of how it has been implemented by Bitcoin to comprehend it. Bitcoin, like a database, requires a collection of systems to keep its blockchain. This blockchain is just a sort of database that contains every Bitcoin transaction ever made.
In the case of Bitcoin, and in contrast to previous databases, these computers are not all located under the same roof, and every system or combination of computers is managed by a separate individual or group of individuals.
Assume a firm has a server with 10,000 machines and a database containing all of its clients' account details.
This firm has a warehouse where all of these computers are housed under one roof, and it has complete authority over all of these machines and the information contained within them. Likewise, Bitcoin is made up of thousands of computers, but each computer or group of computers that holds its blockchain is located in a different geographic area and is run by different persons or groups of individuals.
Nodes are the machines that makeup Bitcoin's network:
The blockchain of Bitcoin is used decentralized in this concept. However, private, centralized blockchains exist, in which the machines that comprise the network are owned and managed by a single organization.
Each node in a blockchain contains a complete record of the information that has been recorded on the blockchain from its beginning. The data for Bitcoin is the full history of all Bitcoin transactions. If a node's data has a mistake, it can utilize the thousands of other nodes as a reference point to fix itself. In this manner, no one node in the network may change the information stored within it.
As a result, the history of transactions in each block of Bitcoin's blockchain is irreversible.
If a single user tampers with Bitcoin's transaction record, the other nodes will traverse each other and quickly identify the node with erroneous information. This method aids in the establishment of a precise and clear sequence of occurrences.
This information is a record of transactions for Bitcoin, however, a blockchain may also store a variety of information such as legal contracts, state identifications, or a company's goods inventory.
To modify how that system operates or the information stored inside it, a majority of the computing power in the decentralized network must agree on the modifications. This guarantees that any changes that are implemented are in the best interest of the people.
Transparency:
Due to the extremely decentralized structure of Bitcoin's blockchain, all transactions may be transparently observed by owning a personal node or by utilizing blockchain explorers, which enable anybody to witness transactions as they happen in real-time. Every node maintains its copy of the chain, which is updated as new blocks are confirmed and added.
This implies that you could follow Bitcoin wherever it went if you wanted to.
Exchanges, for example, have been hacked in the past, causing people who owned Bitcoin on the exchange to lose everything. While the hacker may be completely anonymous, the Bitcoins they obtained are easily detectable.
It would be known if the Bitcoins stolen in some of these breaches were transferred or spent someplace.
Is Blockchain Secure?
In various ways, blockchain technology addresses the challenges of security and trust. To begin, new blocks are always added in chronological and linear order. That is, they are always appended to the blockchain's "end." If you look at the Bitcoin blockchain, you'll see that each block has a location on the chain known as a "height."
As of November 2020, the block's height has reached 656,197 blocks.
It is extremely difficult to go back and change the contents of a block once it has been appended to the end of the blockchain unless the majority agrees to do so. This is because each block has its hash, as well as the hash of the block before it and the previously mentioned time stamp.
A math function generates hash codes by converting digital data into a string of numbers and characters. If the data is changed in any manner, the hash code changes as well.
Here's why that matters in terms of security. Assume a hacker wants to modify the blockchain to take Bitcoin from everyone else. If they changed their single copy, it would no longer be in sync with everyone else's copy. When everyone else compares their copies, they will see that this one copy stands out, and the hacker's version of the chain will be dismissed as fraudulent.
To be successful, the hacker must simultaneously possess and change 51 percent of the copies of the blockchain such that their remastered edition becomes the majority copy and therefore the agreed-upon chain. Such an assault would also need a massive amount of money and resources since they would have to rewrite all of the blocks due to the various timestamps and hash codes.
Because of the scale of Bitcoin's network and also how quickly it is developing, the expense of accomplishing such a feat would very certainly be impossible. This would not only be very costly, but it would also most likely be futile. Such an action would not go unnoticed by network members, who would detect such significant changes to the blockchain.
Members of the network would then branch off to a new version of the chain that was not impacted.
This would lead the value of the targeted version of Bitcoin to drop, rendering the assault ultimately useless because the bad actor now controls a worthless asset. The same thing would happen if a bad actor attacked the next Bitcoin fork.
It is designed in this manner so that participating in the network is considerably more economically encouraged than attacking it.
Conclusion:
Numerous doubters are beginning to question if the “year of blockchain” will ever come to pass. Although blockchain is not a panacea, there are certainly numerous situations for which this technology is the appropriate solution.
Banks, brokerages, insurers, regulators, and others are still actively investigating methods to exploit the benefits of blockchain. The adventure has only just begun.
Written By - Kirthiga Morais P
Edited By - Daniel Deepak Charles
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