The power of existing ledgers is limited because the data stored on them can be altered or deleted. Therefore they cannot be trusted to provide a clear transparent image. There exists a gap of trust in current business transactions. This is why we depend on third parties to maintain our finances and ensure that our ledgers reflect our true operations. We cannot do business without them.
What if we didn’t have to depend on third parties? What if we had some way to preserve the integrity of our ledgers on our own? That would eliminate the dependencies on all external intermediaries and empower individuals to manage their own affairs.
This is exactly what blockchain can do for us. Blockchains are distributed ledgers that are open to everyone. Everyone can look at them, but once data has been created not even the editor can tamper with them.
Blockchain functions like Wikipedia, anyone can alter the data in the blockchain and create new data. However, unlike Wikipedia, the data is not stored on a central server or regulated by a central party. Rather the data is stored in millions of computers worldwide and regulated by all the computers in the network. Once the data has been recorded inside the blockchain, it becomes extremely difficult to alter that data. In simpler words, a blockchain is a decentralized online ledger that records all transactions permanently without needing any authentication from any third party or intermediaries.
How does Blockchain Technology Work?
Blocks are the building blocks of the blockchain technology. Each block in the blockchain consists of three elements:- Data
- Hash
- Previous Hash
Data
This is the information that has been stored inside the block. It varies from one blockchain to another. A blockchain containing the health record of the patient may record the temperature, blood pressure and heart rate of the patient at any particular time.Hash
The Hash is the unique identification code of every blog. No two blocks in the blockchain can have the same hash code it is like the digital fingerprint of the blocks. If data inside the block is changed, the hash of the block changes as well thus creating a new block. This is what makes the blockchain so secure.Previous Hash
Each block contains the hash of the previous block that it has evolved from. The common hash address between the newly created block and the original block is what creates the chain. It is this technology of digital stamping that makes the block chain so secure.For instance, suppose there are three blocks A, B and C. The first block, called Genesis block, is unique because it is the first one in the chain, therefore, it will not have a hash address of the previous block.
This will make the chain invalid as the hash address of block B will no longer correspond to the hash address of Block C. Such a change can easily be detected in the system.
However, only hashing is not enough to keep the data secure. As modern computers are fast, hackers may override the whole chain by tampering with all the blocks in the chain and recalculating the hash codes. A mechanism called proof of work is used to add another layer of security to the blockchain. This mechanism slows down the creation of new blocks. In the case of bitcoins, it takes around 10 minutes to calculate the required proof of work and add a new block to the chain. This mechanism makes it extremely difficult to tamper with the blocks, because if you tamper with one block in the chain, you need to recalculate the proof of work of all the corresponding blocks in the chain.
Thus the blockchain provides a secure way to store data by making use of hashing and proof of work. Instead of using a centralized network, the blockchain stores data in decentralized a peer to peer network. Anyone and everyone is allowed to join this network. Anyone who joins the network gets a full copy of the blockchain on their computer. The node uses these copies to verify that everything in the blockchain is in consensus. When a new block is created, it is sent to all the computers in the network. Each node verifies the block to ensure that it has not been changed or tampered. Once the block has been verified, it is then added to the blockchain by all the nodes thus creating a consensus validating the block. Tampered blocks will be rejected by the computers on a network. To successfully change the data in a blockchain, the hacker will have to recalculate the hash codes of all the blocks in the chain, redo their proof of work, and take control of over 50% computers operating in the network. This makes it almost impossible to change the blockchain. Since the data is held publicly across all computers in the network, blockchain technology provides complete transparency and visibility into the data set. Since the data cannot be tampered, it can be trusted. This makes it possible to exchange sensitive documents such as ledgers, legal notices, and intellectual property without the need of intermediaries to maintain the integrity of the documents.
Blockchain systems are continuously evolving over time. They may have originally been introduced to support cryptocurrencies, but today more and more people are exploring other industries that can benefit from this groundbreaking technology. In the near future, it is quite possible that almost all business transactions will be carried out over blockchain. The role of banks and other intermediary institutions may be diminished as the World Wide Web becomes more accessible, more secure, and more transparent thus generating more trust to enable direct peer to peer business transactions.
Applications of Blockchain
Blockchain is often used synonymously to cryptocurrencies mainly because it was first introduced as the mechanism behind bitcoins. However, Blockchain is much more than that. It is an encrypted decentralized database that maintains a record of all transactions distributed across potentially millions of computers worldwide. This means that once data has been recorded on the blockchain nobody can go back and change it.Blockchain has the potential to instigate massive institutional and social change by curbing corruption and making the systems transparent and open to the public. Some say it may even drive the intermediary companies out of business.
Some of the major applications of blockchain outside of cryptocurrency are given below.
