You might have heard about bitcoin right? If not, go through it because it might be the next technology to rule the world. It is based on blockchain technology. In this article, we will address how actually the blockchain works, its application and its advantages and disadvantages.
What is blockchain technology?
Blockchain technology is a new technology of trust and transparency. It is a simple innovative way of spreading information from one to another in a transparent decentralized manner. It consists of multiple blocks chained together.
Two words “block” and “chain” are composed together to form the blockchain. Here, block refers to the set of digital data or information whereas, chain refers to the binding of data together under cryptographic principles.
Google doc is a simple analogy to understand blockchain technology. In google doc, a document is shared with a group of people and all the people have direct access to that document rather than waiting for another party to give access. All the changes and modifications are recorded in real-time and are transparent.
However, blockchain is more vast than google doc to understand.
There are mainly three elements of block.
Data: Data refers to all the information stored in block about the transaction you have made. For example date, time, amount etc.
Transaction: The information about who is participating in the transaction is stored in the block. But, the information here is not your real name. Rather, it’s a digital signature (unique identity).
Hash: It is a 256-bit code generated with each transaction. It distinguishes one block from another. The hash of the new block is connected to the previous one.
It is almost impossible to forge blockchain technology.
So, what makes it impossible to forge?
Hash: It is a code produced by the hash function (the function that takes characters and converts it into a string). It contains a string of numbers and letters. Each transaction has hash which depends on the hash of previous entries. So, if anybody tries to play with the hash need to crack the hash of all the previous blocks too.
Nonce: It is some extra bit of code added to hash making it difficult (almost impossible) to crack.
Nodes: Nodes refers to the devices involved in blockchain. Each node has a copy of ledger which keeps the record of transactions. So, all the transactions are transparent and each node checks its validity. And, if everything goes well, it is added in the block. Also, a minor change in the transaction can be recognized by all the nodes worldwide.
Now that you have known what blockchain is, let’s discuss how it works.
Working of Blockchain:
There are four main steps to add new block in blockchain. They are:
- Occurrence of transaction
- Verification of transaction
- Storing of transaction in a block
- generation of hash in each block
Once a block is added, it is publicly accessible to everybody. When you buy something for an example grocery item, if you pay for it using printed currency, it is verified by a central authority like government. But, when you use bitcoin its not controlled by anybody. Rather, it is verified by the network of nodes.
Once the transaction has occurred, a number of nodes start to verify the transaction. They need to solve the complex mathematical puzzle to verify it and they are awarded some extra bitcoin if they succeed. Once the transaction is verified, it is stored as a new block in the blockchain and its hash is generated. This process is called mining and the one who succeeds is known as miners.
However, to conduct transaction one needs to use “wallet”. Each wallet consists of a public key and a private key. As their name suggests, the public key is distributed publicly whereas the private key is kept private. The public key is however generated using the private key.
Public key and private key:
A simple analogy to understand private and the public key can be “Facebook” which you use in your day to day life. In Facebook, you have a username which anybody can use to send you a message or friend request but only you have access to your Facebook. Only you can read the messages people have sent you and nobody else can. So, here your username is the public key and your Facebook password is your private key which you keep secretly.
Similarly, if you want to do some transaction with anyone, you can encrypt it with the public key of that user. Nobody except him/her will be able to decrypt that encrypted code because one needs a private key to decrypt which is very secret.
Now, let’s go to the application of Blockchain technology.
- Banking: Blockchain technology can be greatly used in the banking sector. Millions of people worldwide use bank today. But, one thing that everybody complains about it is the time that it takes to do some work. Though, e-banking has solved many problems providing the facility of transaction anywhere anytime but, some works still need paperwork and people need to visit the bank only in office hour. But, blockchain has a solution to almost every problems. The transaction is done within 10 minutes, the data is secured, no need to wait for office hour rather, it’s available 24*7 and many more with transaction cost almost equal to 0.
- Cryptocurrency: Cryptocurrency like bitcoin is attracting the attention of many people in financial technology. The currency which is managed and verified by the government is dependent on the status of the country and government. If the status of the country is unstable, the currency can be at risk. But, with cryptocurrency the thing is different. There is no central government or bank to verify your transaction. There is no risk of collapsing of data as there are a number of decentralized nodes to verify your transaction. Only thing is that you should not lose your private key.
- Voting: Blockchain technology can help to avoid election fraud. Each vote can be stored as a block in blockchain in such manner that there will be no chance of frauds. Also, no personnel need to wait for the voters to vote. And there will be transparency in the election.
There are other many applications of blockchain as well like use in health sector, smart contracts etc.
Advantages and disadvantages of Blockchain technology:
- secured and efficient transaction
- minimum transaction cost unlike in traditional transaction method
- Decentralization: not a single body owns it
- irreversible; once the transaction is done there is no way to change it
- once you lose your private key your all the currency is lost and you won’t be able to get it back as happened with James Howells in 2013
- prone to being hacked (though it’s very difficult)
There are still many more thing you need to know about blockchain technology if you are really interested and want to work in it. If you are beginner, then this article can be very helpful for you.
Now that you have known the basics of blockchain technology, what do you think about it? Can it be helpful for you? Are you going to use it? Let us know in the comment section below.
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This is Aarati Shah, a content writer and designer at Modern Writes. I am an undergraduate student at Kathmandu University currently enrolled in the department of computer science and engineering. I love to write on topic related to programming and technology.