As the concept of cryptocurrencies continues to gain traction across the globe, so does the talk around the blockchain technology.
For some, especially the not-so-tech-savvy lot, the blockchain technology and cryptocurrency were the same. However, if we had to draw an analogy: if cryptocurrency is a human body, the blockchain is its nervous system.
So, what is blockchain?
Blockchain, in simplest of the terms, is a digital ledger of transactions which is duplicated in order to be distributed across the whole network of computer systems on the blockchain. It is a record-keeping technology for cryptocurrencies. It is, however, different from traditional databases in three different ways: storage structure, decentralisation and transparency.
While the traditional database structures its data into tables, a blockchain maintains data in form of chunks (blocks) that are chained together once the block gets filled up. Launched in August 2011 by Ben Reeves, the blockchain has 65 million wallets of Bitcoin now.
How does a blockchain operate?
When a new data comes in, it is entered into a fresh chunk or a block. Once that block is filled with data it is chained with previous blocks. This results in the data being chained with each other in chronological order.
Let us take the example of bitcoin, in which the data is stored in blockchains in the form of nodes, unlike a traditional warehouse where all the data is stored in one warehouse in many supercomputers. In case of a blockchain, the data is stored in computers or group of computers that are spread across the multiple locations around the world. The data in blockchains is maintained using a technology called hashing – an algorithm that assigns a unique identification number to data. So, similar data will have similar unique identification number. The hashing keeps data secure. In case, someone tampers with your transaction data, he or she would end up generating an entirely different unique identification number.
How transparent is blockchain?
The decentralised processes across the globe are most transparent in nature. That is why large democracies like India came up with area level governance models like Panchayati Raj. In case of a bitcoin blockchain, each transaction can be transparently viewed either through a personal node or blockchain explorers that allow people to see transactions occurring live.
Is blockchain used only for cryptocurrency?
The simple answer is no, blockchain usage is not restricted only to cryptocurrency. However, we can say that blockchain shot to the fame when cryptocurrencies started to gain traction. And then people started using bitcoin, cryptocurrency and blockchain, interchangeably – probably due to the lack of know-how on the subject.
However, blockchains have innumerable applications, including the areas where multiple entities are involved, security requirement is paramount, records are transactional in nature, consensus is needed among entities, privacy is must, and high value transactions. And in many of these cases, the blockchain technology has already been roped in – especially to create legal data bases, or to ensure that refugee aid reaches the right people.
But are there any risks associated with blockchain?
Even as there are lot of upsides associated with blockchain, it carries with it many associated risks as well. And most of them are same that accompany any new technology that enters the market. On a lighter note, in early 19th century, even escalators were considered as risky.
The system that bitcoin uses to validate transactions needs loads and loads of computational power. Even if it saves the users transaction fee, the use of technology is pretty costly. To put things in perspective, the power consumed by the computers on a bitcoin network is almost same as that consumed by entire Denmark. For instance, if electricity costs US$0.03 to US$0.05 per kilowatt-hour, the mining costs per coin can go upto US$7,000 per coin, as per the estimates. And that is probably why you saw Tesla Inc (NASDAQ:TSLA) CEO Elon Musk expressing reservations over the bitcoin usage.
Also remember we talked about adding blocks to chain? Bitcoin’s system takes about ten minutes to add a new block to the blockchain. Estimates suggest that a blockchain network can only manage a maximum of seven transactions per second (TPS) at that rate. Compare them to legacy brands like Visa: they process an astounding 24,000 TPS.
As privacy is paramount in blockchain network, many anti-social elements have started misusing it for illegal activities. Using cover of confidentially, they can even go about asking people ransom in form of cryptocurrency.