The revolutionary database technology that drives nearly all cryptocurrencies is called a blockchain. Blockchain makes hacking or cheating the system extremely difficult by distributing identical copies of a database across an entire network. While cryptocurrency is currently the most common application for blockchain, it has the capacity to be utilized in a wide range of applications.
What Is Blockchain?
Blockchain, in its most basic form, is a decentralized digital ledger that keeps track of data of any type. The information included may be related to cryptocurrency transactions, NFT ownership, or DeFi smart contracts. Blockchain, unlike any other database, is completely decentralized. Rather than being kept in one place by a centralized administrator-think of an Excel spreadsheet or a bank database-a blockchain database is dispersed across many computers on the network and maintained on many machines. Nodes are individual computers that run the software.
How Blockchain Works
The name blockchain is a clear indication of its function: the digital ledger is frequently referred to as a “chain” made up of individual “blocks” of information. As new information enters the network, a new “block” is generated and connected to the “chain.” All nodes must update their version of the blockchain ledger to agree on it.
What makes blockchain so secure is that these new blocks are produced in a certain way. Before a new block may be added to the ledger, it must be validated and confirmed by a majority of nodes. They might include ensuring that new transactions within the block were genuine, or that money had not previously been spent. This is unlike an independent database or spreadsheet, where one person can make modifications without restriction.
Blockchains may be public or private. Both types of blockchain exist. Anyone can join a public blockchain, allowing them to read, write, and audit the data on the network. Because no single entity owns the nodes in a public blockchain, making changes is tough.
A company’s private blockchain is run by a group or organization. It has the power to admit people to the system as well as the ability to modify the blockchain. This private blockchain mechanism is more comparable to an internal data storage system, with several nodes added for increased security.
How Is Blockchain Used?
Blockchain technology is being used for a wide range of applications, ranging from providing financial services to running voting systems.
Blockchain is now most often employed as the infrastructure for cryptocurrencies like Bitcoin and Ethereum. The transactions made using cryptocurrency are saved on a blockchain. As more people use cryptocurrency, the more popular blockchain technology becomes.
Blockchain is being utilized to execute transactions in fiat currency, such as dollars and euros. This may be faster than sending money through a bank or other financial institution because the transactions can be verified more quickly and completed outside of regular business hours.
Blockchain can also be utilized to keep track of and transfer ownership of different assets. With digital assets like NFTs, which are a kind of representation of ownership for digital art and videos, this is now extremely popular. Blockchain, on the other hand, may be used to handle ownership of real-world assets, such as real estate and cars. The two parties would first use the blockchain to verify that one owns the property, and the other has sufficient funds to purchase it; after that, they could complete and record the sale on the blockchain. They may upload the property deed without manually submitting paperwork to update the local county government records by following this procedure. It would be immediately updated in the blockchain as a result of their action.
Smart contracts are another type of blockchain innovation. Self-executing contracts, commonly known as “smart contracts,” are a type of blockchain innovation that allows for automated action when prerequisites are met. For example, after the buyer and seller have completed all essential conditions for a transaction, money may be sent out promptly.
Supply Chain Monitoring
Supply chains are complicated information environments, especially when products move across national boundaries. It might be difficult to determine the source of adverse events such as which vendor sells low-quality items. Blockchain technology would make tracking the supply chain easier with IBM’s Food Trust, which uses blockchain to track food from its harvest to consumption using this technology.
Blockchain is being studied to see if it might be used to prevent electoral fraud. Blockchain voting would allow voters to submit votes that couldn’t be tampered with, as well as obviate the need for people to collect and verify paper ballots manually.
Advantages of Blockchain
Higher Accuracy of Transactions
Because a blockchain transaction must be verified by numerous nodes, it is more difficult to make a mistake. If one node has an error in the database, the rest of the nodes will notice and correct it. In contrast, in a typical database, if something goes wrong, it’s more likely to be discovered. Furthermore, since each asset is identified and tracked on the blockchain ledger, there is no risk of double-spending (such as a person overdrawing their bank account, thereby spending money twice).
No Need for Intermediaries
Two parties in a transaction can confirm and conclude something without working through a third party using blockchain. This saves time and money by avoiding the need to pay for an intermediary like a bank.
In theory, a decentralized network, such as blockchain, makes it nearly impossible for fraud to occur. They’d need to hack every node and rewrite all ledgers in order to create false transactions. While this isn’t necessarily impossible, many cryptocurrency blockchain systems employ proof-of-stake or proof-of-work verification processes that make fraudulent entries difficult and not in the interests of the participants.
More Efficient Transfers
People may transfer assets and money more efficiently, especially across borders, because blockchains operate 24 hours a day, 7 days a week. They won’t have to wait days for a bank or government agency to manually check everything.
Disadvantages of Blockchain
Limit on Transactions per Second
Since blockchain is based on a bigger network that must approve transactions, it can only move at a limited rate. Bitcoin, for example, may only handle 4.6 transactions per second as opposed to Visa’s 1,700 per second. In addition, an increasing number of operations might lead to network congestion. Because of this, scalability is an issue until this gets better.
High Energy Costs
A blockchain, on the other hand, requires a tremendous quantity of energy to run all of the nodes. This makes blockchain-based transactions considerably more costly as well as generates a significant carbon footprint. Due to this, certain blockchain technologies, such as Bitcoin, are being abandoned by some industry leaders. For example, Elon Musk recently stated that Tesla would cease taking Bitcoin payments because he was concerned about the impact on the environment.
Potential for Illegal Activity
Blockchain’s decentralization adds additional privacy and confidentiality, which makes it more appealing to criminals. It’s more difficult to trace unlawful transactions on a blockchain compared to a bank transfer that is linked to a name.
How to Invest in Blockchain
You can’t actually invest in the blockchain itself; it’s simply a means of keeping and processing transactions. You may, however, put money into assets and firms that use this technology.
Another alternative is to invest in blockchain businesses that utilize this technology. Santander Bank, for example, is testing out blockchain-based financial services, and if you’re looking to get exposure to blockchain technology in your portfolio, you might buy its stock. For a more diversified approach, you could invest in an exchange-traded fund (ETF) that owns blockchain assets and corporations, such as the Amplify Transformational Data Sharing ETF (BLOK), which invests at least 80% of its assets in blockchain businesses.
The Bottom Line
Despite its potential, blockchain is still a fringe technology. Gray thinks that in the future, blockchain could be utilized in more situations, but it will be determined by future government laws. Hurdles still exist, especially with transaction restrictions and energy costs, but for investors who see the potential of blockchain technology, blockchain-based investments may be a bet worth taking.
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