Traditionally, trusted third parties act as intermediaries for financial transactions. For example, to send money to family or friends, you log in to your online bank account and transfer the funds using the person’s account number. After making the transaction, your bank updates the transaction record.
The drawback of this phenomenon is that interference with such online transactions can be quickly done. Therefore, people who know this truth get skeptical while using these types of transactions, hence the evolution of third-party payment applications, i.e., blockchain technology, in recent years.
What is blockchain technology?
A blockchain collects data together in groups, called blocks that contain a set of information. A block has a certain amount of storage capacity, and when it is complete, the block is closed and linked to the previously provided block, creating a chain of data known as the Blockchain.
The information that follows this added block is compiled into the newly formed block that will be added to the chain when it is complete. Therefore, Blockchain is an open-source technology that acts as an alternative to the traditional intermediary for transfers of the cryptocurrency Bitcoin. It is a common assumption that Blockchain and Bitcoin can be used interchangeably, but that’s not the case.
Blockchain technology can support various applications related to multiple industries like finance, supply chain, and manufacturing, but Bitcoin is a currency that depends on Blockchain technology to be safe.
How does Blockchain technology work
Blockchain is a blend of three principal technologies:
- Cryptographic keys
- A peer-to-peer network consisting of a shared ledger
- A means of assessing to store of the transactional records of the network.
Cryptographic keys consist of two keys – a Private key and a Public key. These keys allow you to send and receive cryptocurrency successfully without needing a third party to verify the transactions.
The public key can be shared to accept transactions, but providing access to the private key would mean handing access to any cryptocurrency linked with those keys. Thus, it needs to be kept a secret.
Each individual has these two keys, which they use to produce a secure digital identity called a ‘digital signature.’ This secured identity is a vital aspect of Blockchain technology and is used for approving and controlling transactions.
The digital signature is merged with the peer-to-peer network; the individuals assigned as authorities use the digital signature with the intent to attain agreement on transactions, amongst different issues. When they authorize a deal, it is verified by a mathematical verification, which leads to a successful secured transaction between the two network-linked parties.
So to sum it up, Blockchain users exercise cryptographic keys to perform varied types of digital interactions over the peer-to-peer network.
Main Benefits Of Blockchain
Blockchain is a surfacing technology with many advantages in an escalating digital world:
- Highly Secure
Blockchain uses a secured identity, i.e., a digital signature feature that you can use to conduct scam-free transactions. It automatically rejects unauthentic transactions and prevents other users’ corruption or data conversion using non-specific digital signatures.
- Decentralized System
Typically, to proceed with a transaction, the consent of official authorities is needed; however, with Blockchain, transactions are done with the shared permission between the users ensuing in smoother, safer, and quicker transactions.
- Automation Action capability
It is programmable and can initiate systematic actions, events, and payments automatically when the standards of the cause are met.
- Cost Control
Blockchains provide a great degree of traceability, security, and cost reduction by limiting the intervention of intermediaries and lowering threat rates.
Types of Blockchain:
The various kind of blockchains are as follows:
Private Blockchain Networks
Private blockchains are restrictive blockchains that work in closed networks. It tends to work well for private businesses and enterprises where only selected members can manage the blockchain network.
The security level and permissions are in the hands of the managing enterprise. Companies deploy private blockchains to customize their accessibility and authorization preferences, asset ownership, digital identity, and other essential security options.
Advantages of private blockchain networks are:
- Speed: The Transactions per second (TPS) are higher for private blockchains due to the limited number of nodes in the network, which in turn fastens the verification process of a transaction by all the nodes in a network.
- Scalability: Forming the size of a private blockchain can be as per the company’s requirement. For instance, if your company needs a blockchain of 30 nodes, they can smoothly deploy one and, if required, can add more nodes in the future. This flexibility acts as a huge advantage.
Public Blockchain Networks
People having online access can sign in on a blockchain platform to become an approved node and be a part of the public blockchain network. A user or node as a part of the public Blockchain can go through current and previous records, verify transactions, do proof-of-work for an incoming block, and do mining.
Public blockchains help eliminate issues, such as security flaws and centralization, and can be risky when security protocols are not followed sincerely.
Advantages of a public blockchain network:
- Secure – There can be as many members or nodes in a public network, making it safe. The greater the web, the more the distribution of records and the harder it is for hackers to hack the complete network.
In addition, each node verifies transactions and proof-of-work, making every transaction and block legitimate. Due to these practices and considerate cryptogenic methods, a public blockchain is much more secure than a private Blockchain.
- Transparent and Open– Public Blockchain is open, and the information is evident to all the participant nodes. A copy of the blockchain facts or digital ledger is available at every authorized node, making the whole blockchain system open and obvious.
A fake transaction cannot be shown as each node has an updated database copy at any given time.
Permissioned blockchain Networks
Permissioned blockchains, also known as hybrid blockchains, seek to take advantage of both private and public blockchains. This Hybrid Blockchain allows you to permit participation to people in your concerned transaction on the Blockchain.
Let’s look into the benefits of Permissioned blockchain networks.
Advantages of Permissioned blockchain networks.
- Provides controlled access and freedom at the exact moment.
- Preserves confidentiality while still communicating with the outer world.
- Works in a closed ecosystem, ensuring information safety on the network.
- Protection from cyber attacks as hackers cannot access the network to carry out the attack.
Like Permissioned blockchains, consortium blockchains have both public and private components, except a single consortium blockchain network will be managed by multiple organizations.
The preliminary setup of these blockchains can be pretty complex; however, as soon as they run, they could provide higher security. Additionally, consortium blockchains are optimal for collaboration with a couple of organizations.
Advantages of Consortium blockchains:
- Control: Instead of a sole entity, a specific group of authentic contributors controls the Blockchain. This control allows them to set rules, amend balances, edit or cancel a wrong transaction, and encourage full cooperation for institutions with common goals upon confirmation from every participant.
- Economical: No service or transaction fee is charged in the setting of consortium blockchain.
- Security: The particulars on the authentic blocks do not allow access to the public. But the consortium users can access the information quickly, ensuring high-end security; this helps build high confidence and trust for the platform clients.
Blockchain stands to make enterprises and government operations more accurate, efficient, secure, and economical with fewer intermediaries. Even though conventional parties still have concerns about Blockchain’s reliability and security, in the broader spectrum, the technology has had a positive response. Countries like China, the UK and Japan, and even the European market have welcomed the move of building a trusted blockchain infrastructure. Therefore it is safe to say that blockchain technology has a big future ahead of it.