Blockchains are famous for their essential role in cryptocurrency systems such as Bitcoin, for maintaining a safe and decentralised record of transactions. The innovation of blockchain is built to guarantee the security of data records and fidelity and to create transparency without the need for a trusted third party. Therefore, blockchain can be defined as a distributed database shared among computer network nodes that store information electronically in a digital format.
What Is blockchain?
A blockchain is a digital transaction ledger controlled by computer systems to make it difficult to alter or hack. The technology creates a safe place for individuals to interact directly without a third party, bank or even government – this type of shared database stores data in blocks linked together through cryptography. The data cannot be altered once recorded since every transaction is verified independently by the peer to peer computer system, time-stamped and added to the growing chain.
Blockchain technology was popularised by the increasing use of Ethereum, Bitcoin and other digital currencies. Also, it has a significant application in medical records, property sales, and legal contracts and in other industries that requires authorising and recording a series of transactions.
How does blockchain work?
The concept of Blockchain technology initially appeared in academic writings from 1982. However, the theory was brought into real-world use in a 2008 paper by pseudonymous Satoshi Nakamoto titled “Bitcoin: A Peer-to-Peer Electronic Cash System”.
The goal of blockchain is to provide digital information to be recorded and distributed without being altered. Thus, blockchain is the stronghold for immutable ledgers or records of data that cannot be changed, destroyed, or deleted.
The Bitcoin system is used to demonstrate how blockchain or distributed ledger technology works:
Transaction of Bitcoin is entered and transmitted to a network of peer-to-peer computers scattered globally known as nodes.
This network of computers solves equations to confirm the validity of the transactions using computer algorithms. This process is known as Bitcoin mining. A miner who first completes a new block is rewarded with a coin, paid with a combination of newly minted Bitcoin and network fees, passed to the traders—the price fluctuates depending on the number of transactions.
Once the transaction is approved to be legitimate cryptographically, the purchase is added to a block into the distributed ledger where most of the network must approve the sale.
The blocks are chained together, developing a long history of all permanent transactions using a cryptographic fingerprint, called hash, and the transaction is complete.
Blockchain technology pros and cons
Here are some of the pros and cons of how blockchain technology works when applied to crypto currencies using Bitcoin as an example:
Pros
Transparency plus anonymity
The user transparently sees all transactions since the address and transaction history of Bitcoin wallets, which store the crypto, are publicly viewable. However, the owners of every wallet connected to the public addresses are anonymous and not recorded.
Additionally, the records of transactions stored in blockchain technology are encrypted. Therefore, only the owner of the transaction record can decrypt it to reveal their identity; thus, blockchain users can remain anonymous while preserving transparency.
Decentralisation
Blockchain stores data across its peer to peer network, thus eliminating risks that come with information held centrally. This type of network has no vulnerability point where computer crackers can exploit.
Unlike the United States dollar issued by the Federal Reserve, Bitcoin and other digital currencies are not government-issued or controlled. Therefore, the government or any other agency cannot determine the fate of the public blockchain. The lack of third parties reduces the cost and the fee associated with intermediaries.
Additionally, a by-product of blockchain technology is time efficiency; the chain is open 24 hours per day, all around the year, unlike banks, government agencies and other intermediaries.
Accuracy and security
A system approves transactions on the blockchain technology of thousands of computers; this removes any human involvement in the verification process,
There is a decreased risk of error since blockchain transactions have little human interaction. Many network nodes record every transaction and confirm it, making it difficult to change, destroy, or delete data. Also, this prevents individuals from using a Bitcoin more than once.
Public and private blockchain applications
This shared database creates efficiencies that extend far beyond digital currencies. For instance, Bitcoin is on a public blockchain system meaning any individual can join. However, users can integrate blockchain applications for businesses developed on a private blockchain network where the companies can have control over who enters:
Property transactions – proponents, believe that the distributed database technology can be functional in an extensive range of asset sales such as investment portfolios, autos or even real estate. For instance, this technology can remove the need to scan documents and track down files in a local recording office. If property transaction is stored and verified on the blockchain network, owners can trust that their deed is permanently recorded and accurate.
Healthcare records: Deloitte Consulting recommended a nationwide blockchain network for electronic medical records citing the technology can increase efficiencies and offer better health outcomes by securely storing patients’ data. Personal health records can be encoded and stored with a private key on blockchain where they will be accessed by specific individuals, thereby ensuring privacy.
Blockchain supply chain – Some companies, including IBM Blockchain, provide private network solutions using shared network technology to track product supply chains accurately.
Digital elections – governments can use blockchain technology to facilitate the modern voting system. Voting with blockchain carries the potential of eliminating election frauds and the possibility of tampering with the votes, thus maintaining transparency through the electoral process.
Smart contracts – you can facilitate, verify and negotiate a contract agreement using blockchain technology. Also, the contract terms can be routinely be updated or changed on striking a set of programmed conditions.
Opportunities for the underbanked
Cryptocurrencies based on Blockchain protocol allow the transfer and holding of the money that fraudulently passes through an intermediary in regions and countries with poor and corrupt financial institutions.
Cons
Blockchain cryptocurrencies are highly volatile
The choice of investing in crypto depends on your funding goal and your risk tolerance. The popularity of crypto skyrocketed in 2021, as Bitcoin hit all-time highs of nearly $65,000 in April. However, due to its extreme volatility, the Bitcoin price dropped by almost half of its value by early June and then climbed again.
Bitcoin blockchain is slow
Credit Card Giant Visa Company processes 24,000 transactions per second, unlike Bitcoin, which processes seven transactions per second, thus, presenting it with a scalable problem. However, other blockchain-based cryptos are working on the issue, with Ethereum anticipating an upgrade capable of handling 10,000 transactions per second up from its current 30 per second.
Bitcoin mining takes energy
The process of Bitcoin mining uses a lot of energy since it uses a network of high-speed computers. Creators of other blockchains have come up with less energy-intensive options. Can you imagine if the Bitcoin system were a country, it would be the 34th biggest electricity consumer globally?
Criminals like crypto
The Bitcoin investment scams have increased concurrently with its recent historic rise in price. Like many new technologies, the initial adopters of crypto were criminal enterprises that used digital currencies such as Bitcoin in their transactions because of its privacy and to target the holders of Bitcoin for fraud.
Crypto use is still niche
Despite most exchanges, brokerages, and payment applications selling Bitcoin, purchases using crypto remain the exception and not the rule. Many companies such as Microsoft and Paypal are accepted as a mode of payment.
Also, the sale of Bitcoin for trade on cash apps such as PayPal require the users to pay capital gains in taxes on Bitcoin sold, which is beyond local taxes paid for the product or the service.
The future of blockchain technology
There are a lot of cryptocurrencies built on blockchain technology but, the Bitcoin system is the most known. The application of this new technology is snowballing. The proponents believe it can lead to dramatic changes across industries; thus, it is predicted that Bitcoin will succeed in supplanting the traditional payment system.
Which online brokers offer cryptocurrency?
The following online brokerages and cryptocurrency exchanges currently offer Bitcoin:
- Binance US – access to trade more than 50 cryptocurrencies
- Coinbase – access to sell and buy more than 50 cryptocurrencies
- eToro – this trading platform has access to 18 cryptocurrencies
- Gemini – the ability to trade 40 cryptocurrencies
- Robinhood – it offers seven cryptos, including Ethereun, Bitcoin Cash and Bitcoin
- SoFi Active Investing – it provides 20 currencies for trading, including Ethereum, Litecoin and Bitcoin
- TradeStation – offers trading for five digital currencies, including Ethereum, Bitcoin Cash and Bitcoin.
- Weibull – offers four cryptocurrencies for trading: Litecoin, Ethereum, Bitcoin and Bitcoin Cash.
Blockchain is the most glorified innovation of the 21st century, and it is the central technology behind Bitcoin and thousands of crypto. Most significantly, it has a substantial potential beyond digital currency. Despite blockchain initially developed to support Bitcoin, it currently powers over a thousand virtual currencies. Its developers integrate its technology into other sectors, including business, finance, and art.
