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Blockchain: what it is, how it works, why it matters
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Advantages of Blockchain
Having a cryptographically secure permanent record comes with benefits:
More safety
Cryptography and hashing algorithms ensure that only authorized users are able to unlock the information intended for them and that the data stored on the blockchain cannot be manipulated in any form. Consensus mechanisms, such as proof of work or proof of participation, further improve security by requiring network participants to agree on the validity of transactions before they are added to the blockchain. Additionally, blockchains operate on a distributed system, where data is stored on multiple nodes rather than a central location, reducing the risk of a single point of failure.
Improved accuracy
By providing a fully transparent, single-source-of-truth ledger, where transactions are recorded chronologically and immutably, the risk of errors or discrepancies decreases compared to centralized databases or manual record-keeping processes. Transactions are objectively authorized by a consensus algorithm, and unless a blockchain is made private, all transactions can be independently verified by users.
Greater efficiency
In addition to saving paper, blockchain enables reliable communication between teams, reduces bottlenecks and errors while streamlining overall operations. By eliminating intermediaries and automating verification processes, executed via smart contracts, blockchain enjoys reduced transaction costs, timely processing times, and optimized data integrity.
The challenges of Blockchain
While this emerging technology may be tamper-proof, it is not flawless. Below are some of the biggest obstacles blockchain faces today.
Transaction Limitations
As blockchain networks grow in popularity and use, they face bottlenecks in processing transactions quickly and cheaply. This limitation hinders the widespread adoption of blockchain for mainstream applications, as networks struggle to handle high volumes of throughput, leading to congestion and increased transaction fees.
Energy consumption
The computing power required for certain functions, for example BitcoinThe proof-of-work consensus mechanism of: consumes large amounts of electricity, raising concerns about environmental impact and high operating costs. Addressing this challenge requires exploring alternative consensus mechanisms, such as proof-of-stake, that consume significantly less energy while maintaining network security and decentralization.
Scalability issues
As it stands, each node in a blockchain network stores a copy of the entire data chain and processes each transaction. This requires a certain level of computing power, which results in slow, congested networks and delayed processing times, especially during periods of high traffic. Scalability issues arise due to limitations in block size, block processing times, and resource-intensive consensus mechanisms. This is why new approaches are being developed, such as layer 2 scaling solutions, sharding, and alternative consensus algorithms.
Regulatory concerns
Governments and regulators are still working to make sense of blockchain – more specifically, how certain laws should be updated to adequately address decentralization. While some governments are actively driving its adoption and others choose to wait and see, persistent regulatory and legal concerns hinder the attractiveness of the blockchain market, blocking its technical development.
Blockchain applications and use cases
Blockchain originally began as a way to safeguard digital records with tamper-proof technology. Since its introduction into the mainstream alongside the debut of Bitcoin, the data management protocol has expanded beyond that DeFi in its various sectors through a wide range of applications.
Banking
For banks, blockchain makes it easier to exchange currencies, secure loans and process payments. This technology acts as a single-level source of truth designed to track every transaction made by its users. This immutability protects against bank fraud, leading to faster settlement times and provides built-in monitoring for money laundering. Banks also benefit from faster cross-border transactions at lower costs and highly secure data encryption.
Smart contracts
Smart contracts are self-executing protocols that automate the verification of transactions. They are encoded in the blockchain and set according to predetermined terms. In addition to reducing human error, their function is to facilitate decentralization and create a trustless environment by replacing third-party intermediaries.
Cyber security
Considered a “new weapon in cybersecurity”, blockchain’s decentralized, tamper-proof ledger has built-in defenses against theft, fraud, and unauthorized users via cryptographic coding and consensus mechanisms. For this reason, blockchain has been adopted into cybersecurity arsenals to maintain cryptocurrency, protect bank assets, protect patient medical records, fortify IoT devices and even safeguard military and defense data.
Health care
Healthcare services mainly use blockchain encrypt securely patient data stored in their medical records. Particular features, such as smart contracts, automate processes such as insurance claims processing and medication adherence monitoring, improving efficiency and reducing administrative costs. Blockchain also facilitates the secure sharing of medical data between healthcare providers, patients and researchers, and is even being recruited by genome sequencing startups to help decipher the genetic code.
logistics
In logistics, blockchain serves as a traceability tool that follows the movement of goods along the supply chain. The transparent system gives users real-time visibility of their shipments, from production to delivery. This information helps compile data, determine faster routes, remove unnecessary intermediaries, and even defend against interference from cyber attacks.
NFTs
Blockchain carries out the creation, ownership and exchange of NFTs, or non-fungible tokens, possible. The reason why copying these digital assets isn’t as simple as quickly capturing a screen is because each NFT is encrypted with blockchain technology, which keeps a real-time record of ownership of the piece. Smart contracts regulate transactions, assigning and reassigning ownership and delivering royalties to artists as pieces move from one wallet to another.
Types of Blockchain
As blockchain technology has evolved, new variations have emerged. This section provides a brief introduction to four different models that have developed based on the question.
Public blockchain
Public blockchains are permissionless networks that are considered “fully decentralized.” No organization or individual controls the distributed ledger, and its users can remain anonymous. As long as a user can provide proof of work, she can participate in the network.
Private blockchain
Private blockchains they are authorized networks. In the interest of gaining more control or privacy over a network, private blockchains have a single operator responsible for who can access the network and whether participants can view, verify, or create data on the blockchain.
Adding limited access to an encrypted ledger is attractive to some organizations that work with sensitive information, such as large enterprises or government agencies.
Consortium Blockchain
Consortium blockchains, also known as federated blockchains, are permissioned networks operated by a select group. Multiple users have the power to set rules, edit or cancel transactions. With shared authority, blockchain can enjoy a higher rate of efficiency and privacy.
Hybrid blockchain
Hybrid blockchains combine elements of public and private networks. They feature selective transparency, which allows blockchain administrators to limit specific parts of the blockchain to certain pools of participants while maintaining public visibility into the rest of the thread. In this way, organizations are entitled to a certain level of privacy when sharing data immutably and independently of third parties.