Everything you need to know about blockchain technology
Ever imagined a world where you did not have to pay very high fees when you send money to your loved one? Would you love a very transparent and fraud-proof election process in your country? Do you detest hearing about people being scammed of their money and their goods? Then, you would probably be interested in the blockchain technology.
Blockchain technology enables you to send money without transaction fees, allows for a transparent election process and many more. We are currently still discovering its other applications in other sectors. Most people I’ve met only understand criticize this technology without a having a good knowledge about it. But the blockchain technologyis actually very fun to learn about and this article would be educating you on the fundamentals of blockchain; its invention, significance, types and usefulness. Are you ready? Let’s dive right in.
What is Blockchain?
Blockchain is simply a distributed database containing ledgers (files, data and records of transactions) that are encrypted (stored in a secretive way such that it is not easy to find out). Blockchain technology is the technology behind crypto currencies.
A transaction on a blockchain is said to have taken place when there is exchange of information, files or goods. The transaction details are verified and encrypted. The details are then stored on a block. The number of blocks increases as the number of transaction records increase. The blocks are linked to each other in such a way that the information on a block is independent on the previous block. The blocks are arranged in a chain form and that’s why it is called a blockchain.
Types of Blockchain
1. Public Blockchains:
This is a type of blockchain that is open to everyone around the world (decentralization). Every one who is a part of this blockchain has access to the viewing of the transactions details (blocks). They are also allowed to add and verify the transactions (Miners). Common examples of public blockchain include Bitcoin and Ethereum (ETH) blockchains.
Public Blockchain has been proven to be very secure and trustworthy because it operates on an open and decentralized network.
In this type of blockchain, only one central entity is allowed to verify and add transactions but everyone on the internet is allowed to view it (centralization). It has a restricted access. Examples of Private blockchains includes Ripple (XRP) and HyperLedger. Private blockchains are very scalable.
Hybrid Blockchains or Consortioums:
Hybrid blockchains are between public and private blockchains. Instead of one central entity or everyone, a group of people are allowed to add and verify transactions. People who are not on the blockchain might be restricted from viewing transactions. An example of hybrid blockchain is IBM Foodtrust.
Which is the better Private or Public Blockchain?
The main differences between the private and public blockchains are in terms of scalability, security and transparency.
The public blockchain tends to be more trustworthy than the private blockchain because of its efficient proof of work system (to be explained later).
Bitcoin was founded by Satoshi Nakamoto. It was founded in 2009. It is the first decentralized digital currency. It works using the blockchain technology.
How does the blockchain technology work?
Traditionally, our method of bookkeeping has a couple of flaws. The records can be edited and inputs ca can be tampered with. So the information cannot be trusted. But the blockchain solves this problem by storing the records of transaction on blocks and then cryptographically sealed. This ensures that the records cannot be tampered with.
The records are added to blocks by miners. Miners are the third entity in the blockchain technology that helps to validate transactions. For example, if Mr A from Lagos has 6 coins in his wallet and he wishes to send 2 coins to his wife, Mrs B. After sending it, the miner ensures that the 2 coins were actually sent and that Mr A now has 4 coins in his account. The miner also ensures that Mrs B has received the coins sent to her. The miner then records the details of the transactions on the block.
The newly created block is then added to the blockchain after been verified by the miner. The process of adding a new block to the blockchain is called mining which is also called Proof- of- work (PoW). The miner is rewarded with 12.5 Bitcoins after each mining process. It is important to note that it’s not all blockchains that makes use of miners to verify transactions and add new blocks. The Proof- Of- work system is currently being used by Ethereum and Bitcoin Cryptocurrencies.
Limitations of Proof-of-work (Pow) system
The Proof-of-Work (PoW) system has proved to be inefficient and to be damaging to the environment. It uses a large amount of electricity to process only a limited number of transactions. It takes about ten minutes to process a transaction which can be prolonged with network congestion.
A replacement for this process is the Proof-Of-Stake (PoS). Transactions are validated by a chosen validator based on how many coins they hold (at their stake). This process tends to produce faster transactions. It is currently been used by Peercoin and Blackcoin Cryptocurriencies. It is said to be adapted by Ethereum in the year 2022.
The Blockchain Trilemma
Most of blockchain projects rotate around three core concepts; Decentralization, Scalabitlity and Security.
· Decentralization — ability for a blockchain to not be centrally controlled.
· Scalability — ability of the blockchain to handle increasingly number of transactions.
· Security — ability of a blockchain to defend itself from bugs and attacks.
Most developers often try to achieve these concepts in their projects but according to Ethereum Founder, Vitalik Buterin, in The Bitcoin Dilemma, he maintained that developers would have a of trouble in creating projects that has all the three concepts without any compromise at all.
The blockchain technology does a good job in maintaining decentralization but it lags in the aspect of scalability. It takes slower time in verifying transactions. But if we want faster transactions, the decentralization state of the blockchain technology would have to be comprised. The blockchain technology is also expected to defend itself from all attacks but it has received a couple of hacks. It is therefore suggested that developers focus on decentralization and scalability at the expense of security.
Benefits of Blockchain Technology
1. Enhanced Security:
Blockchain encrypts your data thus making it secured against unauthorized activity. So although your data is in a public ledger, people cannot access it.
2. Transparency of Data:
Traditionally, different people would have their unique information stored in separate databases, but with Bitcoin, your data is stored on a public database where every member of the blockchain can see. Members can see history of transactions so the chances of fraud are greatly reduced.
3. Increased Efficiency and Speed:
Traditional information storage is very slow and requires a third party’s intervention which exposes the information to a lot of errors. But with blockchain, these processes are executed safer and faster with little or no chance of errors.
4. Lower costs:
The transaction fees paid in the traditional banks are exorbitant. Blockchain helps to reduce those transaction fees and also to remove unnecessary intermediaries.
Blockchain technology is currently being used in a lot of industries including supply chain, healthcare, retail, financial services, transportation, gaming and a lot more. Examples of the blockchain technology use cases include:
· Decentralized Banking
· NFTs Marketplaces
· Music royalties Tracking
· Smart contracts
The blockchain technology is just getting started. It would be applied in almost all aspect of our lives in the coming future. Although the blockchain technology has more complexities, I hope this article has been able to give you a basic introduction to the topic. I would be writing more on the blockchain and its applications in later articles. Stay tuned!