What is blockchain technology?
In simple terms, blockchain technology is a decentralized ledger capable of recording transactions across a network of computers thereby making it difficult to hack or alter.
Blockchain is the technology behind Bitcoin and Ethereum with other thousands of cryptocurrencies.
With blockchain, users can carry out transactions without the need for intermediaries such as the government and banks.
How blockchain technology works
Transactions on the blockchain are verified by peer-to-peer computer networks independently and once this is done, they are then time-stamped and added to the data chain. An authorized user initiates a transaction that must be verified by the technology, the system then creates what is called a “block” which is added to the list of other pending transactions. The block is transmitted to a network of computers around the world known as nodes. These nodes in the public blockchain are otherwise known as miners. The miners then contend to confirm the transaction using a computer algorithm. The node that first successfully completes a new block is rewarded for its work.
After the confirmation, the transaction is added to a block on the distributed ledger. The block is linked together with previous blocks by cryptography.
The update is distributed across the networks and that ends the transaction process. Once a block has been added, it cannot be changed.
Types of blockchain
There are four main types of blockchain and these are public blockchain, private blockchain, consortium blockchain, and hybrid blockchain.
The public blockchain code source is an open source which implies that the code is publicly accessible and anyone with internet access can become an authorized node on the blockchain network without any restriction. The node can have access to records and function as a miner.
Public blockchain made distributed ledger technology (DLT) popular and gave the rise to cryptocurrencies like Bitcoin.
Private blockchain functions under a closed network and doesn’t grant computing power to just anybody, rather, the blockchains are operated on a small network in a company. It is otherwise known as permission blockchain or enterprise blockchain. It is related to public blockchain in ways like peer-to-peer networks and decentralization.
A type of blockchain that combines the features of both public and private blockchain is known as the hybrid blockchain. It is most suitable for companies that want the functions of both blockchains that is the organization will have a permission-based system as well as permissionless-based system, and this lets them control data access on the network.
You can verify classified information such as transactions and records stored on the blockchain. Although this information is not made public you can access them using a smart contract. Users’ identities on the hybrid blockchain are kept private and are only available to the third party with which they transact.
A consortium blockchain is semi-decentralized and is similar to a private blockchain, but unlike a private blockchain, there are multiple organizations that manage the platform. It is also known as the federated blockchain. The combination of the private and public features makes it similar to a hybrid blockchain but different. A consortium blockchain is commonly used by banks and government organizations.
Benefits of blockchain technology
The four main benefits of blockchain are decentralization, immutability, security, and transparency.
One of the greatest benefits of blockchain is decentralization which lets it operate on an open-source system a. Prior to the introduction of blockchain, organizations run on a centralized system that is being managed and controlled by a single source. Transactions done on a centralized-based system are traceable by third parties and users’ identities are not private as well.
Decentralization takes the power from just a single source and ensures that users’ identities and transactions are private and also makes it impossible to alter records on it.
Blockchain technology is more secure in comparison with other record-keeping systems. Following the consensus method, all transactions must be generally agreed upon and encrypted with a link to the old transactions, a method known as hashing.
Also, because each node holds a copy of all transactions ever carried out on the network, it will be difficult to make any change in the transaction. Any attempt to make a change in the transaction will be frustrated by other nodes because they will not accept the request to write transactions to the network.
Immutability is yet another great feature of blockchain technology. Being immutable means that the data cannot be reverted once it is written.
Transparency has been one of the major issues organizations have been trying to solve yet with no positive result. This is due to the fact that they operate on a centralized based system. The only lasting solution to this is decentralization.
Blockchain solves the issue of transparency using decentralization through its decision-making process called the consensus mechanism. In blockchain technology, there are peers who are in charge of making transactions and validating them. Although it is not all peers that partake in the consensus method, they can decide if they want to partake in the validation process, the validation is done using the consensus method. Each node keeps a copy of the transaction record after validation and thus helping to maintain transparency in the blockchain network.
Decentrentalized-based system makes it easy to run business profitably without having to rely on third parties. Since most of the work done by third parties can be automated, it reduces the cost of running a business, and organizations can channel their funds to other areas.
Speed and efficiency
The traditional banking system is susceptible to human error, requires third-party intervention and transaction processes are time-consuming, taking up to hours or days. This can be frustrating times as such delay is not in any way good for a business. The introduction of blockchain has helped to facilitate and enhance the transaction process. There are now no human errors and transaction speed has also been increased such that they are verified within minutes or even seconds.
With the aid of smart contracts, transactions can be carried out automatically following the pre-programmed conditions, which increases efficiency and speed up the process further. With smart contracts, there is a lesser need for human intervention and third parties who need to verify that the terms of the contract have been met.
Advantages of blockchain technology
Blockchain technology has some advantages over traditional technology. We will be looking at some of these advantages below.
1. It enhances performance rate and ensures smoother business operation because of its high processing speed which ensures that the time of transaction is cut to the barest minimum.
2. Blockchain needs fewer human interactions because can easily perform a function on its own because of its automation feature. This has helped in reducing human errors which is common with centralized systems
3. Because of its high-security level, it builds trust among those who transact on it. You can easily trace any transaction on the blockchain because of its transparency
4. Users need not worry about their details being compromised because no one else will have access to their information except those they reveal it to.
5. It cuts out incurring costs of third parties because blockchain is decentralized, businesses need not worry about it.
Use cases of blockchain technology
Blockchain technology has wide applications across various industries. There seem to be no limitations to its applications as organizations continue to adopt its features, and have been changing the conventional ways by which these organizations run their activities.
Let us see how blockchain is being used across various industries.
Application of blockchain in financial services/banking
Blockchain helps in the digitization of financial services through the introduction of digital assets, smart contracts, and programmable money. Financial institutions are using these technological instruments to promote safe, fast, and secure transactions and to build trust among trade partners. Banking industries are also using technology to reduce fraud rates and improve individual verification processes.
Application of blockchain in healthcare
Blockchain technology is being adopted by the healthcare sector to tackle common issues such as data breaches and fake pharmaceuticals.
Perhaps the most important application of blockchain in the healthcare industry is in securing patient data such that only the patient can give access to any healthcare provider that needs to access it.
Application of blockchain in insurance
The insurance sector applies cryptography in blockchain for easy verification of transactions and to ensure that they are secured while protecting customers’ identities. Insurance companies also employ the use of blockchain in fraud detection and prevention. Transaction records on the blockchain can’t be altered.
Since the transactions that are recorded on the blockchain can’t be changed by anyone, not even the insurers, it, therefore, means that the data are secured and hence preventing fraudulent activities.
Application of blockchain in supply chain
The use of blockchain technology in the supply chain allows companies to trace the origin of raw materials or products to their current stage in the supply chain. The feature lets professionals know the owners of each asset and at what time, this is possible because each time the product changes hands, the transaction is permanently recorded, stating the history right from manufacture to sales.