What is Blockchain Technology? The Emerging Technology Backing Virtual Assets, Explained
Blockchain is also known as a distributed ledger or database that records and maintains the history of cryptocurrencies or any virtual assets powered by blockchain technology while maintaining transparency standards through cryptographic hashing and decentralization.
However, in simple words, blockchain technology works similarly to Google Docs. when you make a document and share it with a bunch of people, thus, the document gets distributed instead of copies. Therefore, this makes the decentralized distributed channels that provide the access to designated entities at the same time. Everyone on the channel can add or view changes from the other entities, while all the modifications in the document are being recorded in real-time while keeping the changes highly transparent.
Blockchain Explained: A Brief Overview
- A blockchain is a distributed ledger database that creates encrypted blocks and stores the information and then converts the blocks into chains in order to form chronological data.
- Cryptocurrencies or virtual assets are distributed instead of being copied or transferred, making a secure record of the assets.
- Assets or coins powered by blockchain technology are decentralized in nature, allowing customers to access their assets anytime, anywhere with high transparency.
- The blockchain ledgers have the potential of preserving the changes made in the databases, which makes the assets or currencies trustworthy.
- The blockchain ecosystem is highly secured with cryptographic algorithms, making it core technology for almost every industry.
How Does Blockchain Work?
The major point of adopting blockchain technology and integrating it into various industries is to let individuals know that they can now share and hold digital assets as well as valuable information in a highly secure and transparent distributed ledger.
Thus, blockchain has three core pillars on which the whole ecosystem is operating: blocks, nodes, and miners.
Block is considered the key component of blockchain technology and each block has future three significant elements;
- The data regarding digital assets or cryptocurrencies are placed in a designated block.
- The block consists of a 32-bit whole number which is known as a nonce. The number is generated randomly when the block is formed, afterwards a header hash is also created.
- The header hash is a 256-bit integer integrated with the nonce. However, it always starts with a large number of zeros.
Thus, whenever the first block of a particular chain is created, a block number is generated that creates a cryptographic hash. Furthermore, the data placed in the block is also signed and is connected to the hash as well as nonce until developers mine them.
The blockchain developers that solve the complex mathematical equations in order to mine a block on the blockchains are known as miners. However, in blockchain, every block holds a distinctive hash number as well as a unique nonce but references the hash number of the previous block in order to form a chain. Thus, mining a block is not an easy task, especially when you have to create a block on large blockchains like Bitcoin.
To do so, miners use particular blockchain software to solve complex mathematical problems to find block numbers in order to generate accepted hash numbers. As the block number consists of a 32-bit whole number and the hash is 256-bits, this makes around four billion different sets of nonce-hash combinations that are required to be mined before the correct order is found. Therefore, when the miners get the right combination it’s said they have found the golden nonce and their block has been added to the blockchain.
In addition to this, modifying the block in the chain is also a quite challenging task. Changes can not be made, thus, miners need to re-mine the block after altering the data, including all the blocks that come after them. This is the reason why blockchain distributed ledger is considered secure, making it quite hard to manipulate the data placed in the blocks. Once, when the block is mined and chained with the other blocks, further modifications and alterations are accepted by the user (nodes) on the blockchain network, and in case some miners are able to crack the complex problems can also get financial rewards.
Blockchain technology has emerged with the decentralized nature and anonymity factor that is becoming the driving force to ensure blockchain technology’s growth. To make this technology successful, nodes are playing their essential part. As the blockchains are not owned by a single entity or computer, the nodes are interconnected with other nodes in order to create a distributed database.
Therefore, the copies of blockchains are distributed with all the nodes boarded on the distributed ledger, so that the chains can be trusted, confirmed, and modified. In addition to this, the changes can only be made if the network approves the changes through a set of algorithms or in the case when new blocks are to be minded on the blockchain ledger. Every activity in the distributed ledger can easily be examined as well as reviewed by any node as blockchain technology is highly transparent.
However, to secure the ecosystem an additional unique alphanumeric code is also assigned to each node on the network, which is used to trace the transactions as well as activities. This is how the integrity of the blockchain ecosystem is maintained and the customer’s trust is developed by securing their information as well as assets under a highly secured system with a rigid set of security checks.
Also, read more about what is cryptocurrency?
Top 4 Types of Blockchain
Public blockchains are considered permissionless blockchains that are completely decentralized, enabling customers across the globe to become part of the ecosystem. Thus, all nodes of the public blockchain have equal rights to mine new blocks, verify the blocks, solve complex mathematical problems, and access the blockchain network.
Due to these reasons, public blockchains are gaining popularity and are being used for bitcoin mining. Large blockchains including Ethereum, Litecoin, and Bitcoin may be familiar to you. However, on public blockchains, the miners (nodes) mine digital crypto coins by solving a complex set of mathematical problems in order to form blocks for the requested transition from the particular network. Whereas, miners get a tiny amount of bitcoins as the result of solving the mathematical queries.
Private blockchains are also considered managed blockchains and come under branches of permissioned blockchains that are controlled by only a single authority. Unlike public blockchains, the nodes on the private blockchain can not become part of the ecosystem without the governing authority’s permission. Thus, the criteria have been set very high, thus, the central authority does not always authorize two nodes with the same rights to execute activities. In addition to this, because of having restricted access, private blockchains are not completely decentralized. Among heaps of private blockchain networks, Ripple’s B2B digital currency exchanges and Hyperledger are two major examples.
Like private blockchains, consortium blockchains come as under-provisioned blockchains that are controlled by a consortium of firms instead of a single institution. Due to this, this type of blockchain is more decentralized than private blockchains, providing maximum security.
Hybrid blockchains are managed and controlled by a single governing authority but operate somewhat similar to public blockchains, making transition verification mandatory. IBM Food Trust is one of the examples of the hybrid blockchain, which is developed to enhance the efficiency as well as the quality of food supply chains.
With an increase in the blockchain use cases including cryptocurrencies, robust cross-border payments, and smart contracts, blockchain technology is here to stay and is determined to transform the future of industries. Due to the remarkable result, businesses have realized the potential of blockchain technology and how they can get competitive advantages by harnessing it into their operations.