Blockchain is a ledger-type technology that records transaction data. This digital ledger of transactions is maintained by a network of computers, making it highly difficult to hack. Blockchain technology enables users to deal directly and securely with each other without the need for a third party.
Using cryptography, a list of records called blocks is linked together in a blockchain. Each blockchain transaction is time-stamped and verified by a peer-to-peer network of computers. Blockchain data cannot be easily manipulated or altered.
Bitcoin, Ethereum, and other prominent crypto tokens have popularized blockchain technology. This technology has many promising applications across industries in decentralized finance, transport, medical records, and others.
How Does Blockchain Work?
Table of Contents
Blockchains combine three technologies: cryptographic keys, a peer-to-peer network based ledger, and a computing method.
Private and public keys are the two types of cryptographic keys. These keys are vital to successful transactions between users. Each user has two keys, which are their digital identity references. This identity reference is known as a digital signature and is used for authorizing blockchain transactions.
These digital signatures are used by participants to reach a consensus on blockchain transactions. The validity of these transactions is confirmed after a network of computers solves mathematical puzzles. Next, validated transactions are bunched together into blocks. These blocks are chained together to form a permanent history of blockchain transactions.
Types of Blockchains
Private Blockchain
These blockchains function on closed networks and are used by private organizations and businesses. Private blockchains are used to customize parameters for the blockchain network, accessibility preferences, and other security options.
Public Blockchain
Bitcoin, Ethereum, and other crypto tokens use public blockchains. These blockchains have played a vital role in popularizing distributed ledger technology (DLT). Public blockchains solve issues like centralization and security vulnerabilities. A consensus mechanism is used to verify blockchain transactions. Proof-of-work (PoW) and Proof-of-stake (PoS) are the two most popular consensus mechanisms used by blockchain networks.
Permissioned Blockchain
This type of blockchain is also known as a hybrid blockchain. This blockchain is a private blockchain that enables special access for authorized users. Companies use this blockchain to get the best of both blockchain networks. This type of blockchain helps to create a better structure for who can participate and for what type of blockchain transactions.
Consortium Blockchains
Consortium blockchains are similar to permissioned blockchains, but they allow multiple organizations to manage a single blockchain network. This type of blockchain may be complex to set up but can offer better security when compared to others. This blockchain is best for collaboration with multiple stakeholders.
Advantages and Disadvantages of Blockchain
Advantages
Decentralization
Fiat currencies like the US dollar are controlled by government agencies, but no single entity controls crypto tokens like BTC and ETH. Third-party-related costs are eliminated using a blockchain. Unlike banks, the blockchain is open 24 hours a day throughout the year.
Anonymity and transparency
All blockchain transactions are recorded on a network of computers across the globe. Blockchain transactions are transparent, as they are publicly viewable, but wallet owners remain anonymous.
Accuracy and security
The risk of error is low in blockchain transactions due to minimal human interaction. Each blockchain transaction is validated by a majority of network nodes, making it difficult to manipulate the data.
Disadvantages
Crypto tokens are volatile
Crypto tokens based on blockchain technology are volatile with respect to their price. Bitcoin rallied and reached its peak price in 2021 but quickly fell in 2022 with prices of other cryptos also falling.
The blockchain market is still niche
Today, many exchanges, apps, and brokerages are selling crypto tokens. Major companies like PayPal are accepting venturing into crypto, but crypto transactions are still rare and not the norm. It might take a while for blockchain to become mainstream.
Conclusion
The Bitcoin network is the best application of blockchain technology, but many other promising applications and use cases are being built on this emerging technology. Bitcoin and other cryptos are on track to challenge traditional payment methods. Innovative applications of blockchain technology are growing quickly and will lead to drastic changes across industries in the future.
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