What is Blockchain Technology ?

INTRODUCTION

With the growing hype and awareness around Cryptocurrency, NFTs, and other Digital Currencies, understanding the concept of Blockchain Technology has become extremely crucial. 

A Blockchain is a digital ledger that records data, documents, and transactions. Blockchains are essentially shared databases and each participant in the Blockchain has complete access to the entire database and its history. Data is recorded on the ledger is stored on the blocks and blocks are chained together in a cryptographical sense. In simple terms, a Blockchain is a distributed digital ledger that stores data of any kind. Blockchain is a type of Distributed Ledger Technology (DLT) in which transactions are recorded. Let’s dive into some of the key features of the Blockchain technology to get a better understanding of why this technology has been getting such massive traction:

1. Decentralized: A blockchain is a decentralized network made up of multiple nodes or participants. Decentralization refers to the transfer of control and decision-making from a centralized entity to a distributed network. Such a decentralized network ensures that the network is secure as it minimizes the risk of malicious interference and provides the participants with democratic control and financial sovereignty. 

2. Peer to Peer (P2P): The underlying blockchain technology leverages the power of P2P networks to provide a shared and reliable ledger of transactions. P2P communication is achieved without any central administrator, which means all nodes have equal power and carry out the same tasks.

3. Transparency: Blockchain makes the history of the transactions more transparent. It is a type of distributed ledger, so all nodes on the network share a copy of the document. When the transaction history changes, all users on the network can see the changed and updated records. 

4. Security: When it comes to security, blockchain is superior to any other recording system in every way. In the Blockchain, any document of a transaction can only be updated or altered by consensus by the nodes in the network. Information is processed only if all or the majority of the nodes agree to update the database. In addition, if the transaction is approved, it will be encrypted and linked to the previous transaction. Therefore, no person has the potential to change the entire record. Because the blockchain is decentralized, no one reserves the right to update records at their discretion.

5. Efficiency: Blockchain can streamline and control these outdated methods of completing a transaction through traditional paperwork, minimize the risk of error, eliminate the need of involving a third-party beneficiary and in turn, make transactions more efficient and faster. Since there is only one ledger, the parties do not have to keep multiple documents, resulting in a significant reduction in complexity. As each participant in the network has access to the same information, it's easier to build trust. 

HOW DOES IT WORK?

From the definition and the key features of the Blockchain technology as discussed above, we infer that the Blockchain is the concept of digitally storing data in the most transparent, secure, and efficient way. Let us now try to understand the working of the Blockchain technology from the flowchart below:

TYPES OF BLOCKCHAINS

Now that we have discussed the concept and the working of the Blockchain, let’s delve into the major types of Blockchains:

1. Public Blockchain

Also known as Permissionless Blockchains, Public blockchains are open networks that allow anyone to participate in the network. A public blockchain is a decentralized network and does not have any single entity which controls the network. The data on a public blockchain is secure as it is not possible to modify the data or interfere with the same once it has been validated on the blockchain. Bitcoin and Ethereum are examples of Public Blockchains. 

2. Private Blockchain

A private blockchain is a special type of blockchain technology in which only a single organization has authority over the network. Private blockchains, also known as authorized blockchains, are managed by the network administrator and participants must consent to join the network. In this type of blockchain, only the entity participating in the transaction is aware of the transaction being executed and no other entity can access it i.e., transactions are private.  

USE CASES OF BLOCKCHAIN TECHNOLOGY

The use of Blockchain Technology has exploded via the creation and trading of various Cryptocurrencies, NFTs, and other Digital Currencies. However, there are numerous other industries for which this technology can be used. Let’s look at a few industries where the use of Blockchain technology can be extremely beneficial:

Cryptocurrency

This is conceivably the most well-known use of Blockchain technology. When people exchange or spend cryptocurrency, the transactions are recorded on a blockchain, with each block representing a separate transaction that is validated by the participants in the network. 

Financial Exchanges

Blockchains can be used for traditional exchanges as well, in addition to cryptocurrency exchanges. Using blockchain for exchanges allows for faster and less expensive transactions. Moreover, decentralized exchanges provide better management and security because investors do not have to deposit their assets with a central authority.

Banking

Blockchain may also be used to process transactions in fiat currency such as dollars and euros to make such transfers secure, quick, and more economical. It can be extremely beneficial for processing cross-border transactions, which are often slow and expensive.

Insurance

Using smart contracts on the blockchain can increase the transparency of customers and insurers. Recording all claims on the blockchain would prevent customers from making duplicate claims for the same event. In addition, smart contracts can speed up the process for applicants to receive payments.

Lending

Lenders can perform secure lending through smart contracts built on the blockchain. This will automatically trigger the payment of services, margin calls, full repayment of loans, the release of collateral, etc. on the happening of certain events. Well-coded smart legal contracts in a distributed ledger would minimize the need for external third parties to validate performance.

Real Estate

Real Estate transactions require an enormous amount of paperwork to confirm financial information and ownership and then transfer the certificate and ownership to the new owner. By recording real estate transactions using blockchain technology, a safer and more accessible way to identify and transfer real estate can be provided. This would speed up transactions, reduces paperwork, and saves costs.

Healthcare

Blockchain can be used to protect medical records, health records, and other related electronic records. Keeping medical records on the blockchain would give medical professionals accurate and up-to-date information about their patients. This would ensure that patients who see multiple doctors receive the best possible treatment.

NOT ALL IS POSITIVE ABOUT THE BLOCKCHAIN TECHNOLOGY

With the tremendously growing awareness and discussions about the benefits and efficiency of Blockchain technology, it leaves one wondering as to why aren’t mainstream industries adopting this technology at a faster pace. This is because every technology comes with its set of drawbacks. Let’s look at some of the major drawbacks of the Blockchain technology:

1. Power Consumption: The power consumption in the blockchain is relatively high due to mining activities. Maintaining a real-time ledger is one of the reasons for the high consumption, as every time a new node is created, it is communicated with all other nodes at the same time.

2. Scalability: The size of the block equals the data it stores, Currently, the size of the block for a Bitcoin transaction is 1 MB only, which means that it can store very few transactions. This possesses serious difficulties for the practical use of blockchain. As each participant node needs to verify and approve a transaction, one Bitcoin exchange can take up to several hours.

3. Storage: Blockchain databases are stored indefinitely on all network nodes, causing storage space issues. As the number of transactions grows, the size of the database will only expand, and there is no way for a personal computer to simply store the added unlimited data.

4. Privacy and Security: Although the data on the public blockchain is encrypted and anonymous, it is not entirely secure. As the data is in the hands of every node in the network, anyone on the network can legally access that data. It is possible that someone can use transactional data to track someone's identity on the network, much like a company normally uses web trackers and cookies.

5. Regulations: Regulatory regimes in the financial arena are a challenge for blockchain implementation. Blockchain applications need to establish a process to identify the culprit in the event of a scam, which would create a massive issue. Other regulatory aspects of blockchain technology must first be determined to facilitate its widespread adoption.

THE WAY FORWARD

Blockchain technology has only existed for a few years, and businesses are still looking for new ways to use it to support their operations. As the amount of digital data used in our lives grows, so does the need for the security, access, transparency, and integrity of the data that blockchain can provide. While Blockchain technology is considered one of the top innovations of recent times, the industry is yet to overcome major obstacles. 

Disclaimer:

The content of this article is for information purpose only and does not constitute advice or a legal opinion and are personal views of the author. It is based upon relevant law and/or facts available at that point of time and prepared with due accuracy & reliability. Readers are requested to check and refer to relevant provisions of statute, latest judicial pronouncements, circulars, clarifications etc before acting on the basis of the above write up. The possibility of other views on the subject matter cannot be ruled out. By the use of the said information, you agree that the Author / Treelife Consulting is not responsible or liable in any manner for the authenticity, accuracy, completeness, errors or any kind of omissions in this piece of information for any action taken thereof.