Blockchain has become a buzzword these days. What exactly does it mean? Can I really trust it?

The term “blockchain” refers to a concept first proposed in 1991, which describes it as a distributed ledger system that allows transactions to occur without the need for intermediaries. In other words, no bank or financial institution is involved in the transaction. This makes it secure, transparent, and immutable.

In today's post I will be exploring what blockchain technology is, how it works, and why you should care about it.

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What is blockchain technology?

Blockchain technology is a decentralized distributed ledger that records all transactions in chronologically ordered blocks. These blocks are linked together forming a chain. Each block contains information about the previous one, making it impossible to delete or change data once written into the system.

Blockchains come in two types; Public blockchains and private blockchains.

Public Blockchains

A blockchain (the one we usually refer to) is a decentralized network that allows people to connect and collaborate. A public blockchain is one that anyone can join and contribute to. Examples include Bitcoin and Ethereum.

Bitcoin and Ethereum are examples of publicly accessible blockchains. They both use distributed ledger technology, a shared database that keeps track of transactions. This makes it possible for everyone to see what happens to money without having to rely on banks or governments.

The process of creating a token or coin on a public blockchain requires special software called a wallet. Anyone can download wallets and start making their own cryptocurrencies.

Private Blockchains

Are Not Decentralized, But Still Useful

The term "private blockchain" gets thrown around a lot, but what does it actually mean? In short, it refers to a distributed ledger technology (DLT) that is owned by one entity—and only that one entity. This type of system isn't decentralized, because there is no way to verify that the data stored within the network is accurate without trusting the owner of the network.

A private blockchain is controlled by one organization, and while it might seem like a good idea to keep sensitive information away from prying eyes, it's important to remember that the data stored within these networks is still public. Anyone can access the records, and anyone can use those records to do things like make transactions or even attack the network itself.

How Are Blockchains Used?

Blockchain technology is being used in many different ways today. Some companies use it to track products throughout their entire lifecycle, while others use it to verify identity. And some use it to make sure that data stays secure. In fact, there are even some people who believe that blockchain could replace the internet altogether. So what exactly does blockchain do?

Cryptocurrency

Blockchain is the backbone of cryptocurrencies. Blockchain acts as a digital currency ledger that stores all transactions made using cryptocurrency. When someone sends bitcoin to another person, the two parties record this transaction on the blockchain. If the recipient doesn't have any bitcoins, then the transaction will be added to the blockchain. Once the transaction has been verified, it becomes part of the permanent record.

This means that if someone tries to change the history of the blockchain,

In the beginning, cryptocurrency was just a fun experiment. People were trying to create digital currencies that would be completely anonymous and untraceable.

However, as time went on, these systems grew in popularity and since their inception these cryptocurrencies have seen their values rise dramatically. Today, we’re seeing more and more businesses using them to pay employees, vendors, and contractors.

While this may not sound very useful at first glance, it has huge implications for business owners. Because these types of payments are made directly between two parties, they don’t require any middlemen. This means that the cost of doing business is significantly lower than traditional methods.

Although many blockchain networks still have expensive fees today, there are many improvements going on to lower these costs to as low as they can get.

Banking

Blockchain technology is poised to disrupt banking. Here are some ways banks stand to benefit from integrating it into their operations.

The world of finance is changing rapidly. Blockchain technology, which underpins cryptocurrencies like Bitcoin, promises to change how we conduct transactions online and offline. In fact, there are already several companies offering blockchain solutions to banks and credit unions.

One of those companies is Ripple, whose software allows banks to transfer money around the globe quickly and cheaply. By leveraging blockchain technology, banks can eliminate the middleman—the bank—and move money instantly across borders.

This is possible because every transaction is recorded on a public ledger called a blockchain. This transparency ensures trust among participants. And since each transaction is verified by multiple parties, fraud is less likely.

In addition to eliminating the need for intermediaries, blockchain technology can cut costs. For example, the cost of clearing international payments is about $10 billion per day. With blockchain, that number could drop dramatically.

There are many benefits to the use of blockchain technology in the financial sector. But what does this mean for consumers?

For starters, it could mean faster access to funds. Right now, most people must wait days or weeks to receive their money from another country. If you deposit money in a foreign account, you might never see it again.

Asset Transfers

Blockchain technology allows us to record and transfer ownership of digital objects like music, movies, books, games and software.

Most commonly, these digital assets are known as NFT's. NFT's popularity boomed during 2020-2021 and arguably is still going well although some of the hype seems to have died down. Most people know them for allowing you to buy NFT's which represent funny unique images however the extend that NFT's can be used is often overlooked.

As NFT's represent a unique ownership of a digital asset, as mentioned above the digital assets can also be a range of things. Think a digital concert ticket where your ownership is tied to the blockchain. This would increase the security of the ticket system preventing potential fakes.

Blockchain vs. Banks

A blockchain is a decentralized digital ledger that keeps track of every transaction ever made. It is used to verify ownership of assets and prevent double spending. In short, blockchains are databases that store information about everything that happens in the world.

They are secure because no one person controls them; rather, they are maintained by a group of people called miners. Miners use special software to validate each transaction and add it to the chain. This process is known as mining and the miners are rewarded a small amount of the transaction over time.

Because of the nature of this mining, many people setup massive complexes full of GPUs or ASICs miners which can be profit producing machines assuming the cost of electricity is exceeded by the revenue produced.

In comparison, banks are centralized entities who hold large amounts of data about our transactions. They are trusted with keeping this data safe but if they were hacked, all of our accounts would be at risk. There is no way for external parties to verify the validity of these banking networks unless access to those networks is gained.

Pros of Blockchain

The blockchain provides many benefits over traditional banking systems. This section will cover some of the main benefits of a blockchain system.

Accuracy of the Chain

One of the biggest problems with traditional banking systems is that there is no way to ensure that the records are accurate as a whole. With a blockchain based system, we can trust that the records are accurate since anyone can view the entire history of the network.

The different ledger blocks replicate data across multiple nodes so that any changes made to the data are immediately reflected on other nodes. This means that an error made by one node can be identified as it won't align up with the rest of the duplicated nodes.

Decentralization

Blockchain is an open source software technology that allows people to build distributed applications. Decentralization is a way of doing things differently. In a centralized system, one person or group holds power over others. This central authority decides how things are done. For example, banks hold control over money, governments rule over laws, and large corporations dominate markets.

In contrast, decentralization is different because it doesn't rely on a single person or entity to do anything. Instead, everyone contributes to the success of a project. Everyone helps make decisions and take action. There is no leader or boss.

Decentralization benefits currency as well. When you have a decentralized currency like Bitcoin, no one single individual or organisation has control over all of the data. Everyone can see the system for what it is and understand it is a fairly calculated system that can't be tampered with "from the inside".

Secure Transactions

Blockchain technology uses cryptography to ensure that data cannot be altered once it leaves the sender and arrives at the recipient. This makes blockchain transactions extremely secure. However, this security comes at a cost. The decentralized nature of blockchain means that every computer participating in the network must verify each transaction. As such, blockchain transactions take longer than traditional ones. In addition, changes made to an existing block could cause all subsequent blocks to become invalid.

Cons of Blockchain

Although there are some great benefits with blockchain technology, there are also a few disadvantages.

Slow Transaction Speed

Transactions on blockchain networks are slower than those on traditional payment methods. This is because they require verification from many computers before a transaction can be completed. The more nodes involved in verifying a transaction, the longer it takes.

High Costs

Because blockchain transactions are slow and expensive, most companies don't use them for everyday purchases. However, some businesses still use blockchain technology. These include cryptocurrency exchanges, where users buy and sell digital currencies like bitcoin.

It is important to factor in the transaction costs of different cryptocurrencies depending on your needs. If it just for a store of value over a long period then high transaction fees aren't the worst. But if you are going to be depositing and withdrawing the crypto often then high fees could eat at your asset.

There are currently many innovations and improvements happening within the crypto world to try and fight these disadvantages. For example, Ethereum 2.0 is currently being worked on and is partially released. This new version of Ethereum (ETH) is essentially a network and architecture upgrade aimed at tackling the slow transaction speed and high costs associated with cryptocurrencies today.

Summary

In summary, blockchain technology has the potential to change the way we live our lives. By making it easy to create and share information, blockchain will allow us to interact more efficiently and securely. We'll see new applications emerge that will improve our daily lives.

It is entirely possible that the cryptocurrencies today and blockchain technology as a whole will evolve over the coming years so many improvements could influence it's adoption.

I am not a financial advisor and anything I say in my blog is not to be taken as financial advice. For any financial advice please contact a financial professional. My blog is based on my own opinions, research and understanding of the financial markets.

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FAQ

What Is a Blockchain?

A blockchain is a distributed database or ledger that is shared among the nodes of a computer network. As a database, a blockchain stores information electronically in digital format. Blockchains are best known for their crucial role in cryptocurrency systems, such as Bitcoin , for maintaining a secure and decentralized record of transactions. The innovation with a blockchain is that it guarantees the fidelity and security of a record of data and generates trust without the need for a trusted third party.

Source: investopedia.com

What is blockchain technology?

A blockchain is a decentralized ledger of all transactions across a peer-to-peer network. Using this technology, participants can confirm transactions without a need for a central clearing authority. Potential applications can include fund transfers, settling trades, voting and many other issues.

Source: pwc.com

How did blockchain technology evolve?

Blockchain technology has its roots in the late 1970s when a computer scientist named Ralph Merkle patented Hash trees or Merkle trees. These trees are a computer science structure for storing data by linking blocks using cryptography. In the late 1990s, Stuart Haber and W. Scott Stornetta used Merkle trees to implement a system in which document timestamps could not be tampered with. This was the first instance in the history of blockchain.

Source: aws.amazon.com

What are some advantages of blockchains?

They increase privacy: Cryptocurrency payments don't require you to include your personal information, which protects you from being hacked or having your identity stolen.

Source: coinbase.com

What is blockchain scalability?

Blockchain scalability is typically used as an umbrella term to refer to a blockchain system's ability to serve increasing demand. While blockchains have desirable properties (such as decentralization, censorship-resistance, immutability), these come at a cost.

Source: academy.binance.com