Blockchain is the advanced database technology that is at the heart of most cryptocurrencies. By distributing identical copies of the database across the entire network, blockchain makes it very difficult to hack or cheat the system.

Although cryptocurrency is currently the most popular application of blockchain, the technology offers the potential to serve a wide variety of applications.

What is Blockchain?

At its core, blockchain is a distributed digital ledger that stores any type of data. A blockchain can record information about cryptocurrency transactions, NFT ownership, or DeFi smart contracts.

While any regular database can store this type of information, blockchain is unique in that it is completely decentralized. Instead of being maintained in one location by a centralized administrator, the blockchain creates many identical copies and is stored on many computers spread across the network. These individual computers are called nodes.

How does Blockchain work?

The name blockchain is hardly coincidental: The digital ledger is often described as a “chain” made up of individual “blocks” of data. When new data is periodically added to the network, a new “block” is created and attached to the “chain.” This involves all nodes updating their version of the blockchain ledger identically.

How these new blocks are created is key to why blockchain is considered highly secure. The majority of nodes must verify and confirm the legitimacy of new data before the new block can be added to the ledger. For cryptocurrencies, they may involve ensuring that new transactions in a block are not fraudulent or that the funds have not been used more than once. This is different from a standalone database or spreadsheet, where one person can make changes without supervision.

“Once consensus is reached, the block is added to the chain and the underlying transactions are recorded in the distributed ledger,” said C. Neil Gray, partner in the fintech practice at Duane Morris LLP. ”. “Blocks are securely linked together, forming a secure digital chain from the beginning of the ledger to the present.”

Transactions are often secured using cryptography, meaning nodes need to solve complex mathematical equations to process the transaction.

“As a reward for their efforts in validating changes to shared data, nodes are often rewarded with token amounts,” said Sarah Shtylman, fintech and blockchain consultant at Perkins Coie. New native currency of blockchain. For example, bitcoin on the bitcoin blockchain.”

Public Blockchain and Private Blockchain

There are both public and private blockchains. In a public blockchain, anyone can participate, meaning they can read, write, or inspect data on the blockchain. Notably, it is difficult to change transactions recorded in the public blockchain because there is no authority controlling the nodes.

Meanwhile, a private blockchain is controlled by an organization or group. Only it can decide who is invited into the system, and it has the right to go back and change the blockchain. This private blockchain process is similar to an internal data storage system except it is spread across multiple nodes for increased security.

How is Blockchain used?

Blockchain technology is used for a variety of purposes, from providing financial services to managing voting systems.

Cryptocurrency

The most common use of blockchain today is as the basis for cryptocurrencies, such as Bitcoin or Ethereum. When people buy, exchange or spend cryptocurrency, the transactions are recorded on the blockchain. The more people use cryptocurrency, the more popular blockchain becomes.

“Because cryptocurrencies are so volatile, they have not been used much to purchase goods and services. But that is changing as PayPal, Square and other money services businesses offer broad digital asset services to retail providers and customers,” said Patrick Daugherty, senior partner at Foley & Lardner and the head of the company's blockchain division, noted.

Bank

In addition to cryptocurrencies, blockchain is being used to process transactions in fiat currencies such as dollars and euros. This can be faster than sending money through a bank or other financial institution because transactions can be verified faster and processed outside of normal business hours.

Property transfers

Blockchain can also be used to record and transfer ownership of various assets. This is now very popular with digital assets like NFTs, which represent ownership of digital art and videos.

However, blockchain can also be used to handle ownership of physical assets such as deeds to real estate and vehicles. The two parties will use blockchain to verify that one party owns the asset and the other party has the funds to buy it, and they can then complete and record the sale. 

goods on blockchain.

Using this process, they can transfer property certificates without needing to submit paperwork to update local county government records and it will be instantly updated in the blockchain.

Smart contracts

Another blockchain innovation is self-executing contracts commonly known as “smart contracts.” These digital contracts are issued automatically when conditions are met. For example, payment for a commodity may be paid immediately after the buyer and seller meet all the parameters specified for a transaction.

“We see huge potential in the smart contracts sector,” Gray said. Use blockchain technology and encrypted instructions to automate legal contracts.” “A smart legal contract accurately encoded on a distributed ledger can minimize or eliminate the need for performance verification by third parties.”

Supply chain monitoring

Supply chains involve huge amounts of information, especially when goods go from one part of the world to another. With traditional data storage methods, it can be difficult to trace the source of the problem, such as which supplier the poor quality goods came from. Storing this information on the blockchain makes it easier to go back and monitor the supply chain, such as with IBM's Food Trust, which uses blockchain technology to track food from harvest to delivery. consume.

Vote

Experts are looking for ways to apply blockchain to prevent voting fraud. In theory, blockchain voting would allow people to submit ballots that cannot be tampered with, as well as eliminate the need for people to manually collect and verify paper ballots.

Advantages of blockchain

Higher accuracy of transactions

Since blockchain transactions must be verified by multiple nodes, this can minimize errors. If one node has an error in the database, other nodes will detect the error. On the contrary, in traditional databases, if someone makes a mistake, the chances of an error occurring are higher.

No need for intermediaries

Using blockchain, two parties in a transaction can confirm and complete something without going through a third party. This helps save time as well as payment costs to an intermediary such as a bank.

“It has the potential to bring greater efficiency to all digital commerce, increasing financial empowerment for the unbanked or underbanked,” Shtylman said. world and as a result power a new generation of internet applications.”

Additional security

Theoretically, a decentralized mesh network, like blockchain, makes it nearly impossible for someone to commit fraudulent transactions. To participate in fake transactions, they need to hack every node and change every ledger. While this is not necessarily impossible, many cryptocurrency blockchain systems use proof-of-stake or proof-of-work transaction verification methods that are difficult and not in the best interest of the user. participants, to add fraudulent transactions.

Transfer money more efficiently

Because blockchain operates 24/7, people can make financial and asset transfers more efficiently, especially internationally. They don't need to wait days for a bank or government agency to confirm everything manually.

Disadvantages of blockchain

Limit the number of transactions per second

Because the blockchain depends on a larger network to approve transactions, there is a limit to how fast it can move. For example, Bitcoin can only process 4.6 transactions per second compared to 1,700 transactions per second with Visa. Additionally, increasing the number of transactions can create network speed problems. Until this improves, scalability is a challenge.

High energy costs

Having all the nodes working to verify transactions consumes significantly more electricity than a single database or spreadsheet. This not only makes blockchain-based transactions more expensive but also creates a large carbon burden on the environment.

Because of this, some industry leaders are starting to move away from certain blockchain technologies like Bitcoin: For example, Elon Musk recently said Tesla would stop accepting Bitcoin in part because he was concerned about harm. for the environment.

Risk of losing assets

Some digital assets are secured with cryptographic keys, like cryptocurrencies in blockchain wallets. You need to carefully protect this key.

“If the owner of a digital asset loses the private cryptographic key that allows them to access their asset, there is currently no way to get it back,” Gray said. That property will disappear forever." Because the system is decentralized, you can't call a central authority, like your bank, to ask to regain access.

Potential for illegal activity

The decentralization of blockchain increases the 

privacy and security, which unfortunately makes it attractive to criminals. It is more difficult to track illegal transactions on the blockchain than through banking transactions that are tied to a name.

How to invest in blockchain

You can't really invest in blockchain because it is just a system for storing and processing transactions. However, you can invest in assets and companies that use this technology.

“The easiest way is to buy cryptocurrencies, like Bitcoin, Ethereum and other tokens that run on the blockchain,” Gray said.

Another option is to invest in blockchain companies that use this technology. For example, Santander Bank is testing blockchain-based financial products, and if you are interested in getting exposure to blockchain technology in your portfolio, you can buy shares of this bank.

For a more diversified approach, you can buy shares of an exchange-traded fund (ETF) that invests in blockchain assets and companies, like Amplify Transformational Data Sharing ETF (BLOK), placing at least 80 % of its assets in blockchain companies.

summary

Blockchain is still a great technology as Gray sees the potential for blockchain to be used in many situations but that depends on future government policies. “It remains to be seen when and if regulators like the SEC will act,” he said. It is obvious that the goal will be to protect the market and investors.”

Shtylman likens blockchain to the early stages of the Internet. “It took about 15 years of the Internet for us to see the first version of Google and more than 20 years for Facebook. It is difficult to predict where blockchain technology will be in 10 or 15 years, but like the internet, it will dramatically change the way we transact and interact with each other in the future.”

Source: Forbes Advisor