Blockchain is the innovative database technology that’s at the heart of nearly all cryptocurrencies. By distributing identical copies of a database across an entire network, blockchain makes it very difficult to hack or cheat the system. While cryptocurrency is the most popular use for blockchain at present, the technology offers the potential to serve a very wide range of applications.
Blockchain is a distributed digital ledger that stores data of any kind. A blockchain can record information about cryptocurrency transactions and ownership of Non Fungible Tokens (NFTs). While any conventional database can store this sort of information, blockchain is unique becuase decentralised. Rather than being maintained in one location by a centralised administrator many identical copies of a blockchain database are held on multiple computers spread out across a network. These individual computers are referred to as nodes.
With blockchain, the digital ledger is described as a “chain” made up of individual “blocks” of data. As fresh 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 to remain identical.
How these new blocks are created is key to why blockchain is considered highly secure. A majority of nodes must verify and confirm the legitimacy of the new data before a new block can be added to the ledger. For a cryptocurrency, they might involve ensuring that new transactions in a block were not fraudulent, or that coins had not been spent more than once. This is different from a standalone database, where one person can make changes without oversight.
Blockchain technology is used for many different purposes, from providing financial services to administering voting systems. Most common use of blockchain today is cryptocurrency like Bitcoin, Etherum or others but it is also used for Banking (e.g. processing of transactions in fiat currency), asset transfers, smart contracts, supply chain monitoring, voting among many others.
Advantages of Blockchain
1. Higher accuracy of transactions
Because a blockchain transaction must be verified by multiple nodes, this can reduce error. If one node has a mistake in the database, the others would see that it’s different and catch the error. In addition, every asset is individually identified and tracked on the blockchain ledger, so there is no chance of double spending it.
2. No need for intermediaries
Using blockchain, two parties in a transaction can confirm and complete something without working through a third party. This saves time as well as the cost of paying for an intermediary, a bank for example.
3. Extra security
Theoretically, a decentralised network, like blockchain, makes it nearly impossible for someone to make fraudulent transactions. To enter in forged transactions, the fraudster must hack every node and change every ledger. While this isn’t necessarily impossible, many cryptocurrency blockchain systems use ‘proof-of-stake’ or ‘proof-of-work’ transaction verification methods that make it difficult, as well as not in participants’ best interests, to add fraudulent transactions.
4. More efficient transfers
Since blockchains operate 24/7, people can make more efficient financial and asset transfers, especially internationally. They don’t need to wait days for a bank or a government agency to manually confirm everything.
Disadvantages of Blockchain
1. Limit on transactions per second
Blockchain depends on a larger network to approve transactions. There’s a limit to how quickly it can move. For example, Bitcoin can only process 4.6 transactions per second versus 1,700 per second with Visa. In addition, increasing numbers of transactions can create network speed issues.
2. High energy costs
Having all the nodes working to verify transactions takes significantly more electricity than a single database. Not only does this make blockchain-based transactions more expensive, but it also creates a large carbon burden for the environment.
3. Risk of asset loss
Some digital assets are secured using a cryptographic key, like cryptocurrency in a blockchain wallet. You need to carefully guard this key. If the owner of a digital asset loses the private cryptographic key that gives them access to their asset, currently there is no way to recover it. The asset is gone. The system is decentralised, so you can’t call a central authority, like your bank, to ask to regain access.
4. Potential for illegal activity
Blockchain’s decentralisation adds more privacy and confidentiality, which unfortunately makes it appealing to criminals. It’s harder to track illicit transactions on blockchain than through bank transactions that are tied to a name.
Sven Franssen