Understanding blockchain can be a bit tricky, but at the very basic level, a blockchain is just a kind of database. A database is a collection of data or information stored on a computer in electronic form. The simplest example of a database is a Microsoft Excel Spreadsheet. These small databases are used by individuals or small groups.
A blockchain is like a spreadsheet, a very big one, which keeps a record of financial transactions. However, unlike a spreadsheet, the data in a blockchain cannot be altered by anyone, and no one can enter bogus transactions in it.
HOW DOES A BLOCKCHAIN WORK?
A blockchain is designed to work using hash codes, nonce, and nodes to keep track of financial transactions in a way that is impossible to crack using the computational power we currently have. Let’s see how all of these components work.
- The Hash Function is a mathematical algorithm that encrypts the transaction information before it is stored on the blockchain servers. The hash function returns a string of letters, numbers, and characters of a constant length no matter what the input is.
- Nonce is a two-digit number that is added at the end of the string generated by the hash code to discreetly identify the position of an entry on the blockchain. It makes the blockchain impossible to tamper with or forge.
- Nodes are the servers where all the records of a blockchain are stored. Copies of a single record can be saved at hundreds of different locations. It not only makes the whole thing decentralized but also makes it impossible to change the data, as the blockchain constantly monitors all the saved copies, and the changes made to any one of them can very easily be identified.
- Blocks are the sets of data stored on these servers. Different blockchains use different limits for blocks. After a set number of transactions have been recorded on a block, it is closed and a new one is formed. The whole system of blocks is collectively known as the blockchain.
One of the main attractions for using blockchains for financial purposes like the bitcoin is decentralization. Unlike the databases of banks that are stored on a set of computers at a singular location, the blockchain computers are distributed over a number of places. It means that the record is open and available to everyone who wants to access it. If implemented on a global scale, blockchains can end the control of countries, governments, and other political entities on the money.
PROS AND CONS OF BLOCKCHAIN
Due to the decentralized and transparent nature of blockchain, it can be used to keep a record in a secure way, and by spending much less money than on traditional methods. Here are some of the pros and cons of using blockchain technology on a larger scale
- The process can be made more accurate by minimizing the human input needed in the whole process.
- Costs can be reduced greatly, as there is no need for third-party verifications.
- As it is decentralized, blockchain is harder to forge or tamper.
- The whole process is more secure, private, and efficient than other traditional methods.
- It can be used as a reliable banking alternative by the people of underdeveloped nations.
- A lot of technology cost is involved in making the whole thing completely decentralized.
- The number of transactions that can be processed per second is low due to the long times required for creating and decoding the hash codes.
- It is hard to regulate the flow of money, which is currently needed by the sociopolitical and financial model the world runs on.
- There’s a lot of potential for illicit use as there is no proper policing.
Blockchain technology is a promising aspect for the future of record keeping and financial reforms, but the technology has yet to develop to be used as a reliable medium. The possibilities are endless, but so are the potential disadvantages. If you want to keep reading more about the latest things happening in the world around you, everything from politics to technology, keep visiting Wall Street Media Company.