Tuesday, June 28, 2022

What Is Blockchain Technology And How Does It Work

A Simple Definition Of Blockchain

What is blockchain technology and how does it work?

Blockchain technology definition can come once a basic understanding of blockchain has been gained. In a coherent and simplified way, we can define blockchain as a system of recording data or information on a distributed ledger, in a bid to make it difficult to be changed or tampered with.

Blockchain explained simply may be more expressive when we consider blockchain to be a system of storing information in sections called blocks. Each block has its own capacity, and when this capacity is attained, it is sealed and chained to the preceding blocks. All this happens automatically, without control from a single individual. All of the participants contributing to a blockchain network are distributed across an interconnected network.

The information stored in each block is visible to everyone and cannot be changed once it has been registered. This makes financial information or data stored on a blockchain to be very transparent.

Our way of explaining a complex technical concept to beginners is using a famous blockchain analogy. Possibly the best blockchain analogy youll ever hear is the following:

During an ice-hockey game, each player knows the score at any time. You cant change the score without convincing everyone playing that there is a very good reason for doing so. Right? Well, in a very similar way, each node in a blockchain network has an identical copy of the ledger. And that ledger is immutable.

What About Private Or Permissioned Ledgers

So far, weve only discussed blockchains from the perspective of the cryptocurrency ecosystem. As we alluded to earlier, though, the technology has found appeal in the most unlikely of places private companies and governments. Blockchains dont have to record financial data they can just as easily hold any other kind of data.

Even though Bitcoin was created to directly compete with financial institutions, banks themselves are now looking to use the underlying technology for faster international transactions and potentially reduce human oversight.

Unlike cryptocurrency blockchains, private implementations are permissioned. This means that they are usually only accessible by a select few, and transaction records are not publicly available or auditable. Some examples include the Hyperledger Fabric and Corda platforms.

So far, several high-profile companies have jumped on the blockchain bandwagon. Walmart, for instance, tested the technology in a bid to improve the traceability of food products. On the other hand, DHL worked with Accenture to develop a blockchain for pharmaceutical supply chains. In its press release, the German logistics firm said,

Using a common, indelible and secure ledger, the industry can achieve much higher safety standards from the factory to the patient at much lower cost. This is one of several opportunities blockchain affords to restructure business processes while reducing cost and complexity.

Is Blockchain Worth Learning What Does The Job Scope Look Like

After looking at the various pros of blockchain and the way in which it is positively impacting businesses worldwide, the next question that pops up in our mind is the potential of this technology and its job prospects. The global blockchain market size is estimated to grow from $3 billion in 2020 to $39.7 billion by

2025. The popularity of blockchain technology is steadily increasing across various industries like retail and supply chain management. If you have been considering a career in blockchain technology then there could not be a better time for it. A recent report by LinkedIn states that blockchain is one of the top tech skills in the year 2020.

EC-Councils Certified Blockchain Professional training program is formulated in such a way that anyone, irrespective of their domain, can enroll for the program and get a comprehensive and complete understanding of blockchain right from the fundamentals of how the technology works to advanced applications and implementation strategies. If you are a blockchain enthusiast, then this certification will upgrade your career to new heights.

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Drawbacks Of Blockchain Technology

On the other hand, the same blockchain technology has its drawbacks too. Let us take a brief look at some of its drawbacks:

  • High Energy consumption: Blockchains like Bitcoin and Etherium, for instance, require massive amounts of electricity for mining.
  • Scalability issues: Scaling is a problem in some blockchain such as Ethereum.
  • Lack of regulation: The blockchain is a decentralized system that relies on millions of computers worldwide. Because it’s decentralized, no one regulates the system and ensures that exchanges are legal and valid. It means there’s no way to trace each transaction back to its originator directly, and you don’t have anyone to turn to if you want to report fraud or file a complaint.

Blockchain Consensus Mechanisms: Whats Next

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While the aforementioned proof of work system works exceptionally well, it suffers from one major problem, which is scalability. The proof of work algorithm that weve discussed so far is designed to generate a block every fixed amount of time 10 minutes in the case of Bitcoin, 1215 seconds in Ethereum, and 2.5 minutes in Litecoin.

However, the system is so astoundingly competitive that we now have entire data centers dedicated to earning the block reward. Transaction validators are almost always incentivized to keep increasing their computational power to improve their chances of winning a reward.

Despite these increased computational contributions, the network capacity does not grow one bit. This is a major problem for many of the aforementioned cryptocurrencies, since a global payment system needs to support thousands of transactions per second, with the ability to scale even beyond.

Proof of works scalability limitations are a staunch design choice, with the goal of promoting decentralization. Still, this stalemate has motivated many critics to find alternative approaches to a consensus that do not involve hash calculations.

So far, no all-encompassing alternative has presented itself. As a stepping stone to scalability, though, we have some cryptocurrencies like Cardano using alternative mechanisms. Proof of stake is currently regarded as one of the best options, at least for now.

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How Does Blockchain Work In 7 Steps A Clear And Simple Explanation

In 2017 the spirit of Bitcoin really got out of the bottle. After years of silence, Bitcoins valuation suddenly rapidly rose from about $1,000 to almost $20,000. A lot of people reinvented themselves as professional crypto-trader.

Yes, there was a lot of money to be made for a short period of time. But lets face it that party is over now.

Still, fact is that even though it was mostly the money that got peoples adrenaline pumping, it is the technology that got the ball rolling in the first place. And this technology, blockchain, might still hold huge potential. This could be the time for business developers, entrepreneurs and curious individuals to jump on the blockchain train and to be inspired. But such inspiration will require a better understanding of how the technology works first. Unfortunately, most of the current explanations out there are either covered in complex technical jargon or are way too shallow and lack in-depth details, neither of them which leads to a clear understanding. So where to start? Allow me to suggest you to start here. This ten to fifteen minute read will explain what is considered so revolutionary about this technology. It will be well worth your time. Enjoy.

A Framework For Blockchain Adoption

If bitcoin is like early e-mail, is blockchain decades from reaching its full potential? In our view the answer is a qualified yes. We cant predict exactly how many years the transformation will take, but we can guess which kinds of applications will gain traction first and how blockchains broad acceptance will eventually come about.

How Foundational Technologies Take Hold

The adoption of foundational technologies typically happens in four phases. Each phase is defined by the novelty of the applications and the complexity of the coordination efforts needed to make them workable. Applications low in novelty and complexity gain acceptance first. Applications high in novelty and complexity take decades to evolve but can transform the economy. TCP/IP technology, introduced on ARPAnet in 1972, has already reached the transformation phase, but blockchain applications are in their early days.

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How Will Blockchain Disrupt Industries

Some of the most-cited use cases for blockchain involve the following sectors:

  • Financial services. Many startups eager to disrupt traditional players deploy blockchain to develop applications that aim, for example, to cut out the number of intermediaries involved in existing transaction processes, such as stock exchanges, cross-border payment networks, and money transfer services.

Their goal is to reduce complexity and cost. Theres also a major focus on developing blockchain solutions to counter fraud and ensure the integrity of data, Sandra Ro, CEO of the Global Blockchain Business Council said. Obviously, all of this has been a big wake-up call for banks and other financial institutions. As they try to understand these developments and their potential impact, were seeing them invest in blockchain. Theyre setting up internal teams, investing in startups, and creating common initiatives to understand the potential and search for use cases that can be implemented with minimal risk.

  • Healthcare. Healthcare startups are exploring ways to use blockchain to streamline the sharing of medical records in a secure way, protect sensitive data from hackers, and give patients more access to and therefore control over their information.

Organizations have also been seeking to develop blockchain-based healthcare applications that can deliver such things as anonymized data pools for research companies, and new ways to fight counterfeit drugs.

What Is A Blockchain Wallet And How Does It Work

How does a blockchain work – Simply Explained

A blockchain wallet is a digital wallet that enables people to manage, store, and trade a collection of digital assets and cryptocurrencies. Users have full transparency on their balances for each virtual currency, such as ether, bitcoin, tether, stellar, and more.

The price of entry to creating a blockchain wallet or bitcoin wallet is free. New users can set up an online account in less than a half-hour. In the process, the person will receive a unique wallet identification number, which is comparable to a standard bank account number. The account holder will also need to supply an email and password, like most applications and accounts.

The blockchain wallet does more than provide a balance for each digital asset. It also details the persons history of transactions and transfers. Depending on the cryptocurrency exchange, the account holder can also analyze charts and other insights for each asset. Most applications and websites will have an education, training, or cryptocurrency news function to say up to date.

So, how does the blockchain wallet work once the account is all set up? Users can utilize the blockchain wallet to submit requests to another party or entity for a set number of ether, bitcoin, or digital assets.

The system will then prepare a specific address or QR code to be transmitted to a third party. This process takes place every time an account holder provides a request.

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Accuracy Of The Chain

Transactions on the blockchain network are approved by a network of thousands of computers. This removes almost all human involvement in the verification process, resulting in less human error and an accurate record of information. Even if a computer on the network were to make a computational mistake, the error would only be made to one copy of the blockchain. For that error to spread to the rest of the blockchain, it would need to be made by at least 51% of the networks computersa near impossibility for a large and growing network the size of Bitcoins.

How Does Dlt Work

DLT solutions do not have a central data store. Instead, information is stored in at least a few locations on the network. This is achieved by using a peer-to-peer system and appropriate consensus algorithms. Data is distributed to several nodes on the network, replicated and synchronized. Each time the ledger is updated, all files are timestamped and have their cryptographic signature. This creates a database that is both secure and auditable.

What is DLT in blockchain?

Although the terms blockchain and DLT are often used interchangeably because both systems record information transparently through a decentralized network, blockchain is actually one type of DLT.

What is DLT technology? Distributed Ledger Technology allows data to be distributed, and blockchain was the first functioning type of DLT. A Distributed Ledger Technology uses nodes to record transactions and then replicate that information across the network. Blockchain collects this data into a block of data and combines it.

Blockchains are usually public, which makes them useful for viewing transaction history. This means that anyone can use the blockchain and then act as part of the surveillance network. This removes the possibility of control by any single governance entity.

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How The Signature Is Created

So, lets picture a block again block 1. Block 1 is a record of only one transaction. Thomas sends 100 Bitcoin to David. This specific string of data now requires a signature. In blockchain, this signature is created by a cryptographic hash function. A cryptographic hash function is a very complicated formula that takes any string of input and turns it into a unique 64-digit string of output. You could for example insert the word Jinglebells into this hash function , and you will see that the output for this specific string of data is:

761A7DD9CAFE34C7CDE6C1270E17F773025A61E511A56F700D415F0D3E199868

If a single digit of the input changes, including a space, changing a capital letter or adding a period for example, the output will be totally different. If you add a period to this word and make it Jinglebells. instead, you will see that the output for this specific string of data is:

B9B324E2F987CDE8819C051327966DD4071ED72D998E0019981040958FEC291B

If we now remove the period again, we will get the same output as before:

761A7DD9CAFE34C7CDE6C1270E17F773025A61E511A56F700D415F0D3E199868

Now imagine that the string of data from this block looks like this:

Block 1 Thomas -100 David +100

If this string of data is inserted in the hashing algorithm, the output will be this:

BAB5924FC47BBA57F4615230DDBC5675A81AB29E2E0FF85D0C0AD1C1ACA05BFF

This signature is now added to the data of block 2. Lets say that David now transfers 100 Bitcoin to Jimi. The blockchain now looks like this:

Speed And Data Inefficiency

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Bitcoin is a perfect case study for the possible inefficiencies of blockchain. Bitcoins PoW system takes about 10 minutes to add a new block to the blockchain. At that rate, its estimated that the blockchain network can only manage about seven transactions per second . Although other cryptocurrencies such as Ethereum perform better than bitcoin, they are still limited by blockchain. Legacy brand Visa, for context, can process 24,000 TPS.

Solutions to this issue have been in development for years. There are currently blockchains that are boasting more than 30,000 TPS.

The other issue is that each block can only hold so much data. The block size debate has been, and continues to be, one of the most pressing issues for the scalability of blockchains going forward.

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Cryptographic Hash Functions: Keeping Blockchains Honest

Within every block on a blockchain, youll find a unique identifying hash. A hash is simply the result of a mathematical function or algorithm. More specifically, its a result of the SHA256 hash function.

While this may sound complicated, its really simple in practice. All the function does is take some data as input and generate a unique output. Take the text Hello world! for example. This is its corresponding hash:

c0535e4be2b79ffd93291305436bf889314e4a3faec05ecffcbb7df31ad9e51a

Even a minor change in the input like swapping an uppercase letter for lowercase would completely change the hash. In the context of blockchains, consider that tampering with the contents of a block would have the same effect on the output hash, making it easy for everyone else on the network to detect.

In a blockchain, each block also includes a reference to the previous blocks hash. That block, in turn, contains the hash for the preceding block, and so on.

If youre wondering how including the previous hash within each new block deters attackers, its because computing the solution to a hash function is not as easy with large cryptocurrencies like Bitcoin. Furthermore, since each blocks hash depends on the previous blocks hash, changing a past transaction requires redoing the computation for all the blocks between then and now. Modifying a past transaction isnt easy.

Satoshi Nakamoto explained this hypothetical situation in the Bitcoin white paper as well:

What Are The Business Benefits Of Blockchain

The primary benefit of blockchain is as a database for recording transactions, but its benefits extend far beyond those of a traditional database. Most notably, it removes the possibility of tampering by a malicious actor, as well as providing these business benefits:

  • Time savings. Blockchain slashes transaction times from days to minutes. Transaction settlement is faster because it doesnt require verification by a central authority.
  • Cost savings. Transactions need less oversight. Participants can exchange items of value directly. Blockchain eliminates duplication of effort because participants have access to a shared ledger.
  • Tighter security. Blockchains security features protect against tampering, fraud, and cybercrime.

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What Is The Difference Between Blockchain And Cryptocurrencies

Blockchain and cryptocurrencies are often spoken about in the same breath, and for a good reason they are closely linked. But what exactly is the difference between them?

In short, blockchain is the technology that powers cryptocurrencies like Bitcoin. Cryptocurrencies are digital assets that use cryptography to secure their transactions and control the creation of new units.

With that being said, lets take a more in-depth look at each of these concepts.

How Blockchain Technology Is Used Today

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The notion of a distributed ledger that no single entity controls has captured the public imagination, but the potential applications of blockchain technology go far beyond cryptocurrencies like bitcoin.

The truth is that blockchain tech has the potential to disrupt everything from supply chains to voting systems. It has helped solve various issues related to the resilience and security of data management. Here are some examples of blockchain in different industries:

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