Blockchains

Blockchain, also referred to as Distributed Ledger Technology (DLT), is essentially a digital ledger of transactions that can be duplicated and distributed across a network of computer systems. Although there is no universal definition for this technology, Harvard Business Review defines blockchain as “a ledger that documents transactions between parties through an open network that is both verifiable and permanent”. 

Let us understand it with a simple analogy. If we create a document on Google Docs, we have the option to share it with other people. This process entails distributing the document – not copying and transferring it – which allows decentralisation of the distribution chain. It also gives everyone access to the document at the same time. One does not need to wait for the modifications taking place in the document as they take place in real time. This analogy might be too simplified but it does give an overview of the blockchain technology. 

Blockchains are best known for their crucial role in cryptocurrency systems, such as Bitcoin, for maintaining a secure and decentralised record of transactions. 

How does Blockchain work? 

According to MIT, the whole point of using a blockchain is to allow people to share valuable data in a secure and tamper proof way – especially in cases of distrust amongst members. 

A blockchain is essentially a chain of blocks that holds properties which can enable decentralisation over the internet. Decentralisation here signifies the distribution of authority to the users (in this case, miners) instead of concentration of control over the network. Blocks essentially have three elements – data, a 32-bit whole number called a nonce and a 256-bit number wedded to the nonce, the hash. Whereas, miners create new blocks on the chain through a process called mining.

The five basic principles include: 

1. Distributed Database  

Everyone has access to the entire database and its complete history

2. Peer-to-Peer Transmission

A real blockchain is executed on a P2P network and instead of through a central node, the communication occurs directly between peers. 

3. Transparency 

Every transaction is visible to anyone with access to the system. Moreover, users have the option to either give proof of their identity or choose to stay anonymous. 

4. Irreversibility of Records

The records cannot be altered once a transaction is entered in the database. The recording on the database is permanent and chronologically ordered which is ensured by computational algorithms. 

5. Computational Logic

Blockchain transactions can be programmed as they can be tied to computational logic which further indicate the digital nature of the ledger.

Transparency 

Due to decentralisation and full time real access to the transactions, the blockchain process is completely transparent. This feature of blockchains also allows every action in the ledger to be easily checked and viewed. 

Security 

Blockchain technology offers decentralised security and trust. New blocks are always added to the “end” of the blockchain. This makes it extremely difficult to go back and alter the contents of the block. Each block contains its own hash, along with the hash of the block before it. Hash codes are created by a mathematical function that turns digital information into a string of numbers and letters. 

Major Roadblocks

Although blockchain promises a bright future, it has a few major issues preventing it from reaching its full potential.

• Cost

Blockchain appears to be a technology that is free which also saves transaction fees but there are other costs associated with it. For instance, the PoW system consumes vast amounts of computational power. Surprisingly, this power from the millions of computers on the bitcoin network is close to what Denmark consumes annually.

• Illegal Activity

Although blockchain offers security and confidentiality to users from hacks, it also allows for illegal trading and activity on the blockchain network. The dark web allows users to carry out illegal activity without being tracked 

• Regulation

There are many government regulations in place across nations when it comes to cryptocurrencies. In order for blockchain technology to be utilized on a wider scale, technological and governance barriers will need to fall to allow acceptance from the public. Although, as large companies continue to allow ownership and use of cryptocurrencies, their popularity and the consequent popularity of blockchain grows. 

• Inefficiency 

Blockchains (decentralised) suffer from high latency as it takes data longer to move throughout the network than in a cloud-based (centralised) system. 

Conclusion

As complex the technology is, blockchain’s potential as a decentralised form of record keeping is almost without limit. It provides user privacy, increased security and lower processing fees.No matter which industry or sector, there’s a strong possibility that blockchain will affect every business in the future. The pace of adoption and efficient processes will decide when this transformation takes place.