What is blockchain?

Blockchain is a revolutionary technology that enables the creation of decentralised and immutable records, primarily used in the financial sector but with applications across various other fields. It functions like a distributed digital ledger, where all transactions are recorded in blocks, which are then linked in a chronological order and secured through cryptography.

So, what is blockchain?

Simply put, blockchain is a distributed digital record-keeping system that stores information in a transparent and unchangeable manner. Each transaction or record is grouped into blocks that are interconnected in a chronological chain. Once a block is added to the system, it is permanently sealed and can be viewed by all participants in the network, but it can never be altered.

The most notable feature of blockchain is its decentralisation. Instead of relying on a central authority, like a bank or government, to validate and store information, this task is carried out by a network of computers (referred to as nodes) that share control of the system. All participants can see the transactions, and for a new one to be added, the majority of nodes must agree on its validity. This decentralised structure is the foundation of blockchain’s reliability and security.

How does blockchain work?

The functioning of blockchain can be understood through three main pillars: blocks, nodes, and consensus. Each of these components plays a crucial role in ensuring that transactions are secure and immutable.

• Blocks: Each block in the blockchain contains three main elements: transaction data, the block’s hash (a kind of unique digital fingerprint), and the hash of the previous block. This creates a link between the blocks, forming the chain. If any data within the block is altered, the block’s hash will change, breaking the link with previous blocks and alerting the network of an attempt to manipulate the data.
• Nodes: Nodes are the individual computers that form part of the blockchain network. They run the blockchain software and validate transactions. Each node has a copy of the blockchain, meaning there is no single point of failure or control. Any attempt to alter the data must go through all nodes in the network, making manipulation extremely difficult.
• Consensus: To add a new block to the chain, the network’s nodes must reach an agreement. This is done through consensus mechanisms, such as Proof of Work (PoW) or Proof of Stake (PoS). In PoW, the network’s computers compete to solve complex mathematical problems, and the first one to solve it earns the right to add the next block. In PoS, on the other hand, validators are chosen based on how many coins they hold, making the process more energy-efficient.

This tripartite structure makes blockchain extremely secure, as any attempt to hack or alter the network would require compromising more than half of the nodes simultaneously—something that is practically impossible in a decentralised network.

Advantages of blockchain

The rise of blockchain has been driven by a number of advantages it offers, particularly when compared to traditional centralised systems. Let’s explore some of these benefits below:

1. Transparency

Transparency is one of the most praised features of blockchain. Since each participant in the network has a copy of the ledger, everyone can see the transactions that have been recorded. This reduces the risk of fraud and makes it easier to audit transactions. The elimination of the need to trust a single entity increases the credibility and trust in transactions.

2. Security

Blockchain offers superior security due to its decentralised nature and immutability. Advanced encryption ensures that transactions are recorded securely, and once a block is added to the chain, it cannot be altered. To modify any block, all previous blocks would need to be changed, which would require an enormous amount of computational power, making it highly unlikely.

3. Decentralisation

Decentralisation is at the heart of blockchain. By removing intermediaries such as banks or government authorities, blockchain allows peer-to-peer transactions. This not only reduces the costs and time involved in transactions but also redistributes power, giving more control to individual participants.

4. Cost reduction

By eliminating intermediaries and automating processes, blockchain can significantly reduce transaction costs. This has important implications for industries like the financial sector, where the involvement of banks and brokers often increases operational costs.

5. Efficiency and speed

Transactions on a blockchain system are carried out in real time and can be verified and completed quickly, even between parties located in different parts of the world. In the traditional banking system, an international transfer can take days, whereas in blockchain, this can be done in minutes or even seconds.

Disadvantages of blockchain

Despite its promises, blockchain also faces some significant challenges that could limit its widespread adoption.

1. Scalability

One of the biggest issues with blockchain, especially with popular networks like Bitcoin, is scalability. As the number of users and transactions grows, the network can face bottlenecks, which can increase transaction processing times and transaction costs.

2. Energy consumption

Blockchain systems that use Proof of Work, like Bitcoin, consume enormous amounts of energy. The mining process, which involves solving complex mathematical problems, requires a massive amount of computational power, resulting in a significant environmental impact. This has led to ongoing debates about the long-term viability of such systems.

3. Technical complexity

While blockchain offers many benefits, it remains a complex technology for most people and businesses. Implementing a blockchain-based system can be costly and requires advanced technical skills, which can be a barrier to adoption for smaller or less tech-savvy businesses.

4. Regulation and legal acceptance

Blockchain regulation is still a developing topic. In many jurisdictions, there is no clear guidance on how the technology and transactions based on it should be regulated. Issues such as taxation of blockchain transactions, the legality of smart contracts, and consumer protection are still being debated.

Is blockchain secure?

In terms of security, blockchain is considered one of the most secure technologies available today, mainly due to its decentralised structure and advanced encryption.

As mentioned earlier, for someone to alter a transaction already recorded on the blockchain, they would need to control more than half of the network’s nodes, which is an incredibly difficult task in large and well-distributed networks.

However, this does not mean that blockchain is entirely immune to attacks. Some vulnerabilities can arise in applications that use blockchain, such as digital wallets and cryptocurrency exchanges, which can be hacked.

Ultimately, the security of blockchain depends on its correct implementation and the security practices followed by all participants in the network.

Other applications of blockchain

While blockchain became famous thanks to cryptocurrencies, its applications extend far beyond that. Some industries that are beginning to explore or are already using blockchain include:

• Healthcare: Blockchain can be used to create a secure system for medical records, allowing patients to have control over their information, and doctors to access records in a secure and efficient manner.
• Supply chain: Companies can use blockchain to track the origin and movement of products along the supply chain, ensuring product authenticity and preventing fraud.
• Real estate: Real estate transactions can be simplified and made more transparent with the use of blockchain, eliminating the need for intermediaries and making the process faster and more secure.
• Government: Governments are starting to explore the use of blockchain to create secure digital voting systems, ensuring that every vote is recorded immutably and transparently.
• Smart contracts: Blockchain enables the creation of self-executing contracts, known as smart contracts, which are programmed to automatically fulfil conditions once certain criteria are met.

Conclusion

Blockchain is an innovative technology that has the potential to transform how we conduct transactions and store data. Its advantages include transparency, security, and decentralisation, but it also faces challenges such as scalability and energy consumption.

With various applications beyond cryptocurrencies, blockchain is set to play an increasingly important role across multiple sectors, shaping the future of technology and business.