In 2018, blockchain technology and cryptocurrency became such buzzwords to the point that they started losing their actual meanings for laypeople.
Yet, you'll find that the blockchain network is the underlying technology to so much more than decentralized finance. In short, it has a lot more potential than powering the different types of cryptocurrencies.
Your responsibility is to keep up with blockchain's rapid growth and development to be ready for the future. If you're just getting started with blockchain, this is a great place to start. Keep on reading for our full breakdown of all things blockchain technology you need to know.
Blockchain Technology 101: Understanding the Blockchain Network
Due to decentralization and cryptographic hashing, you can track the history of every digital asset using blockchain, also known as Distributed Ledger Technology (DLT).
A Google Doc is a good comparison for blockchain technology.
When a document is generated and shared among several people, it is disseminated rather than copied or transferred. Thus, the paper is accessible to everyone at the same time.
Decentralized distribution chains are easy to manage. All modifications to the document are recorded in real-time by the system. While the opposite party waits for a change, no one is shut out.
Blockchain, on the other hand, is much more complicated. However, the comparison serves a useful purpose. Among the technology's most important ideas are the following:
Risk reduction, fraud eradication, and scalability are all possible with blockchain technology. Consequently, it's a cutting-edge technology that's on the rise.
The Building Blocks of a Blockchain Network
You'll want to move your attention away from cryptocurrencies for a moment. It's time to understand the building blocks that form any blockchain network.
Blocks, nodes, and miners are the three fundamental building blocks of the blockchain.
Blocks
Each link in a chain consists of several blocks, each of which has three elements. There's a nonce is a 32-bit integer.
To build a block header hash, the system randomly generates a nonce while creating a block. And the hash of that number is 256-bits in length. Countless zeroes are required to get the ball rolling (i.e., be extremely small).
A nonce creates the cryptographic hash when the first block of a chain is formed. Unless people mine the block, we can deem the data in the block signed and permanently linked to the nonce and hash.
Miners
People use a mechanism known as mining to add new blocks to the chain. It is difficult to mine a block in a blockchain. Each block has a unique node and hash and a reference to the preceding block's hash.
Finding a nonce that produces an approved hash is an exceedingly tricky arithmetic issue. Nonces are just 32 bits long.
Yet, there are four billion hash-nonce combinations to search through to find the correct one.
Miners claim to have discovered the "golden nonce" when this occurs. It helps them add their block to the chain.
All blocks following the one that someone changed must be re-mined when a user modifies a previous block in the chain. Because of this, blockchain technology is complex to manipulate.
Consider it "safety in arithmetic." After all, obtaining golden nonces demands much effort and computational resources.
All nodes on the network acknowledge change, and the miner is compensated monetarily when a block is successfully mined.
Nodes
Decentralization is a crucial idea in blockchain technology. A single computer or entity can't own the chain—instead, the nodes linked to the chain act as nodes in a distributed ledger.
It's possible to have nodes of any electrical equipment that keeps the network running.
The network must algorithmically approve every freshly mined block to update the chain. Because blockchains are decentralized ledgers, you can see (and verify) every transaction. The system assigns an alphanumeric ID number to each participant to keep track of all transactions.
The blockchain's integrity and trustworthiness grow when public information merges with a system of checks and balances. It is essentially the scalability of trust via technology that makes blockchains possible.
The Applications and Purpose of Blockchain Technology
The system records coin transactions in "blocks" on a cryptocurrency blockchain. There are already more than 10,000 different blockchain-based cryptocurrency systems in operation.
Sure, people mainly use blockchain for financial transactions. But, you may also use it to store information about other sorts of transactions.
This list includes Walmart, Pfizer, and AIG, among others that have already used blockchain technology. The IBM Food Trust blockchain, for example, tracks the path food goods travel to reach their final destination.
To what end? E. coli, salmonella, and listeria outbreaks and the accidental introduction of hazardous compounds into food have plagued the food industry for decades.
These outbreaks and illnesses have previously taken weeks to determine their source or cause. Using blockchain technology, brands can monitor a food product's journey from its inception to its ultimate delivery. If a meal is tainted, companies may trace it back to its source.
Only now can they identify the issue sooner and maybe save lives by seeing everything else it may have come into touch with, as well. There are various ways to integrate blockchain, and this is only one of them.
Financial Services and Institutions
The banking sector may profit the most from incorporating blockchain technology. On business days, banks and other financial institutions are only open for business.
Put another way, you'll probably have to wait until Monday morning to see the money you deposited on Friday at 6 p.m.
It doesn't matter if you deposit within regular business hours. The system might still take one to three days to verify the transaction. This is due to the amount of transactions banks must process each day.
Blockchain, on the other hand, never goes to sleep.
The time it takes to add a block to the blockchain, which is around 10 minutes, incorporates into banks. It allows customers to have their transactions executed in as little as 10 minutes. This is applicable regardless of holidays or the time of day or week.
Banks may now move money more rapidly amongst themselves using blockchain technology. A three-day (or greater) lag time is not uncommon in the stock market settlement and clearing procedure. This means that funds and shares are effectively locked during that time.
Because of the large quantities involved, even a few days in transit may pose considerable expenses and dangers to banks.
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The Cryptocurrency Market
Cryptocurrencies like Bitcoin grow on the foundation of blockchain technology.
The Federal Reserve manages the value of the dollar. The data and cash of a user are effectively under the control of their bank or government under this central authority system. Customers' personal information is in danger if cyber criminals breach their banks.
Currency values may decline if the customer's bank fails. It can also do so if the client resides in a nation with an uncertain government. In 2008, the government bailed out several failing banks.
These are the concerns that sparked the creation of Bitcoin.
Blockchain eliminates the need for a centralized authority. It does so by dispersing its activities over a network of computers. As a result, many of the transaction and processing costs are non-existent.
This is a relief if you're a company owner in a country with unstable currencies or financial infrastructures. As this might let you get your hands on more stable cash with a broader range of uses.
The same applies to those without a government-issued identity card. They stand to gain significantly from using bitcoin wallets as savings accounts or payment methods. War-torn or government-less nations may not have the ability to produce identification.
Those who live in nations where savings and brokerage accounts are not available may not be able to keep their money securely.
Benefits and Drawbacks of Blockchain Technology
There's no denying the prevalent use of blockchain technology in cryptocurrencies. Therefore, we'll want to focus our attention on the advantages and disadvantages of blockchain technology when applied to cryptocurrencies.
Let's take them one at a time, starting with the advantages.
Key Advantage of Blockchain Technology: Decentralization
While the Federal Reserve issues the US currency, no government entity oversees or issues bitcoin or other cryptocurrencies.
As a result, no government or agency will be able to dictate the future of a public blockchain. Due to the elimination of third-party fees, the cost of doing business falls as well.
Another benefit of the blockchain's design is its ability to operate around the clock, 365 days a year, unlike traditional financial institutions like banks.
Discreetness and Privacy
The Bitcoin blockchain is a distributed ledger of all transactions that have ever occurred on the network.
To ensure total transparency, bitcoin wallet addresses and transaction history are made public, but wallet owners are anonymous, and their names and addresses are not made public.
Reliability and Safety
The transaction has a reduced mistake rate because of the lack of human involvement.
Because a majority of the network nodes must validate and record each transaction, it is impossible to falsify or modify the data. This also makes it impossible for someone to spend a bitcoin more than once in a single transaction.
Application in Both Public and Private Sectors
The benefits of blockchain technology may extend well beyond the realm of digital money.
Anyone may join the Bitcoin blockchain network since it is a public one. However, specialists may build many corporate applications on private blockchain networks. This way businesses can regulate who joins.
Many companies like IBM Blockchain provide private network solutions. They target tracking products' supply chains via blockchain technology. Therefore, corporations may utilize the technology to locate recalled food goods swiftly.
Also, a statewide blockchain network for electronic medical data may increase efficiency. They can also enable improved health outcomes for patients.
If you meet specific criteria, the terms of a smart contract may be automatically altered or updated. This is possible because of blockchain technology.
Next, developers can use blockchain technology for use in digital elections. Advocates of blockchain technology believe it is helpful in a wide variety of asset sales. It also includes real estate and automobiles.
Then, there are the benefits for those who are under-served by traditional banks. Cryptocurrencies based on the blockchain system enable the transmission and storage of currency without the involvement of third parties who may be dishonest or corrupt in their dealings. You can learn more about these opportunities at Byte Federal.
The Disadvantages of Blockchain-Based Cryptocurrencies
Is it wise to put money into blockchain? How much risk are you willing to take in your investments?
During the spring of 2021, the price of bitcoin surged to a record high of about $65,000. Nevertheless, bitcoin's price plunged by almost half in early June due to its inherent volatility before beginning to rise once again.
In addition, the adoption of cryptocurrency is a relatively new phenomenon.
Coins such as bitcoin are now available for sale by a growing number of corporations such as PayPal and Microsoft, and more are accepted as a form of payment. Still, the use of blockchain currencies like bitcoin is a rare occurrence, not the norm.
In addition to the state and local taxes paid on the goods or services, the selling of bitcoin for purchases on cash applications like PayPal compels users to pay capital gains taxes on the bitcoin sold.
Unlocking Distributed Ledger Technology
It's no longer a matter of if or whether traditional corporations will adopt blockchain technology—it's a question of when. Tokenization and the growth of NFTs are now commonplace. The next several decades will be critical for blockchain development.
We hope that our guide has given you a strong foundation on the inner workings of blockchain technology. But, if you're still feeling shaky on the details, you should check out our other explainers and guides in our finance section.
