Imagine a digital ledger that keeps records of transactions in a database.
If stored on a single computer and managed by one organization, such a database can be vulnerable to manipulation, hacking, power outages, equipment failures, and other undesirable events.
But what if identical copies of data were distributed across a vast, decentralized peer-to-peer network of computers that use sophisticated tools to securely exchange information about the latest transactions?
This system, known as blockchain, offers users greater transparency, security, and efficiency, whether tracking assets, transactions, contracts, etc.
What is blockchain in simple words?
In simple terms, blockchain is a highly secure data recording system. It maintains its integrity through advanced technologies and relies on a network of computers. Unlike other ledgers, such as those used by banks, blockchain is decentralized. In other words, no single organization controls or manages the system. The decentralization and transparency of blockchain create trust among users.
How does blockchain work?
An immutable digital ledger stores information or blocks in a chain of computers, or nodes. These nodes can quickly verify and confirm new transactions using cryptography, digital signatures, and hash functions before immutably adding them to the block.
-Cryptographic methods enable blockchain to secure transactions between nodes through encryption.
-Digital signatures authenticate transactions by proving user authorization to nodes without revealing keys.
-Hash functions protect blockchain data by encoding it into unreadable text.
Breaking the integrity of the blockchain is almost impossible, as the digital ledger of transactions is copied, distributed, and updated across the network of computers in the system. Although blockchain technology is best known for giving rise to the first cryptocurrency, known as Bitcoin, it can also be used to maintain any type of record in its peer-to-peer network.
What are the downsides of blockchain?
Blockchain technologies can be expensive, inefficient, and technologically complex for companies to implement.
Furthermore, while blockchain offers transparency by allowing users to see transactions publicly, the absence of a central controlling authority can be a double-edged sword. The lack of user identification may attract criminal activity to blockchain transactions. This is one reason why some cybercriminals use cryptocurrency for illegal transactions.
Moreover, using blockchain to create secure backups comes with some downsides. For instance, if someone can find a way to provide more than half of the computational power active in the network, they could create a false fork and gain control, as blockchain technology is designed such that the majority rules. However, such a scenario is extremely unlikely in a mature blockchain.
What is blockchain used for?
FinTech
Most cryptocurrencies use blockchain to record transactions. In fact, blockchain technology became popular thanks to Bitcoin. Other cryptocurrencies that use blockchain include Litecoin, Ethereum, and Dogecoin.
Blockchain also serves other areas of FinTech (financial technology). For example, financial institutions use blockchain to provide faster settlements, and immutable data recorded via blockchain helps financial companies meet compliance processes and reduce fraud risks. Blockchain can also assist with trade and cross-border payments in countries with underdeveloped banking services.
PropTech
The real estate industry traditionally suffers from a lack of transparency. The property technology industry, also known as PropTech, is changing this by using blockchain to manage and record transactions, agreements, and recommendations. The added transparency helps reduce fraud.
Healthcare
In the healthcare sector, products can be tracked more quickly through the supply chain when managed by blockchain. Blockchain can also help the pharmaceutical industry more efficiently recall potentially unsafe products, meaning patient records, contracts, and other sensitive data are less likely to be lost when they are part of the blockchain.
Automotive Industry
Similar to the healthcare industry, the automotive industry can recall potentially unsafe parts when their movement through the supply chain is recorded using blockchain. The automotive industry can isolate and identify counterfeits, as genuine parts are fully tracked on the blockchain. This is critical because substandard counterfeit parts can endanger lives.
Entertainment and Art
Artists and clients in the entertainment industry can eliminate the costs of paying intermediaries, reduce the risk of fraud, and enhance transaction visibility by using blockchain. We are already seeing how NFT transactions help artists sell digital assets directly to investors. Blockchain should also minimize disputes by helping companies managing digital rights track ownership of intellectual property.
Jewelry
Jewelry companies track and trace precious materials using blockchain technology to avoid trading goods from conflict zones. Blockchain can also help the jewelry industry detect fraud and protect the integrity of supply chains. For example, smart contracts supported by blockchain allow the industry to remove goods produced in rebel countries from the market.
Since blockchain technology attracted attention due to cryptocurrencies, it has garnered interest from numerous industries worldwide. Developers are now using blockchain in many interesting ways. For the end user, this means greater security, transparency, and privacy across various sectors that affect their lives.