Blockchain technology: It is a decentralized and distributed digital ledger technology that records transactions across many computers so that any involved record cannot be altered retroactively, without the alteration of all subsequent blocks. This enables the participants to verify and audit transactions independently. It is essentially a distributed database, operated by participants adhering to a protocol for validating new blocks, transactions, or records.
Why we need blockchain technology:
- Security: Blockchain technology is highly safe and secure due to its decentralized and encrypted nature.
- Transparency: All the participants have access to the same documentation, hence increasing transparency.
- Reducing transaction costs: Since it's a decentralized network, Blockchain eradicates the need for middlemen in many processes for fields such as payments and real estate.
- Improved traceability: It helps track the journey of any transaction, improving traceability, and making it effective for purposes like auditing.
- Increased speed and efficiency: By automating and streamlining processes with the help of blockchain, transactions are made quicker and more efficient.
- Innovation: It opens the door for new business models and technologies especially in areas like IoT, AI, and decentralized apps (dApps).
Characteristics of Blockchain:
- Decentralized System: It does not rely on a central authority to approve transactions.
- Security: The use of encryption technology offers robust security against data fraud and hacking.
- Transparency: Every participant can view the transactions, ensuring accountability and trust.
- Immutability: Once the data has been written into the blockchain, it is extremely difficult to change it.
- Fast Transactions: The peer-to-peer nature of the blockchain results in quicker transaction verifications.
- Cost Savings: The absence of any intermediaries leads to significant cost savings.
- Auditable: All records are time-stamped and can be tracked back to their origin, creating a clear audit trail.
How does blockchain work?
At a high-level, blockchain works by recording individual transactions into a block, each block is then 'chained' to the next block, using cryptographic signatures. This makes the data structure highly secure. Verification and agreement on the data's state is reached by consensus across the participating nodes.
For Example, In the context of digital currencies like Bitcoin, if person A wants to send money to person B, this transaction is broadcasted to all the nodes. The nodes then validate the transaction. Once a block of transactions has been validated, the block is added to the chain, which provides a transparent and public record of the transaction. This removes the need for a central authority like a bank to validate transactions.
Please note that the examples are simplified and for the sake of clarity, some complexities of the process have been omitted.