Let us understand Blockchain Technology by a simple example. When we create a Google document and share it with a group of people, the Google document is distributed instead of being copied. This creates a decentralized system in which everyone gets access to the Google document and can make changes in real-time.
The changes made by any person will be reflected in everyone viewing the document. Though blockchain is much more complicated, this analogy is apt to understand it.
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Blockchain Technology in cryptocurrency is the foundation of cryptocurrency and brings multiple innovations in the fields of finance, education, real estate, voting, data sharing, and more.
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Blockchain and Cryptocurrency
Blockchain and cryptocurrency are connected. Blockchain is a history of transactions that exists on a network. Cryptocurrency is a decentralized technology that helps users own money and make secure payments anonymously. It is independent of the government and is digital money not controlled by one person or government.
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The software program that powers blockchain technology is open-source and free, i.e., developers can use that program to build their decentralized applications on the blockchain (dapps).
This is a great advantage to the businesses as they can build on a free existing code. In 2008, Blockchain Technology was first applied to cryptocurrency with the introduction of Bitcoin. And since then, the cryptocurrency industry has been growing exponentially.
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Benefits of Cryptocurrency
Since cryptocurrency transfers are peer to peer, they need no centralized server, and the transaction costs are minimal. Also, decentralized systems do not charge currency conversion fees. The payments are instant, and the risk of fraud is negligible. With blockchain technology, the transactions are transparent, anonymous, and cannot be changed.
Cryptocurrency also provides access across the world; anyone can access cryptocurrencies from anywhere in the world without any interference from any central authority.
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Benefits of Blockchain Technology
There are several benefits of Blockchain Technology:
1. Centralized financial systems have certain limitations and loopholes that are easy to exploit. Problems like misallocation of funds can occur, and equity gaps may arise. All this can ultimately affect the consumers in negative ways.
With blockchain technology, the system becomes secure and more trustworthy. Blockchain Technology is the next generation business improvement tool. This collaborative technology can improve business processes and increase trust, which means it will offer a comparatively higher return of investment for every penny spent.
2. Blockchain has a decentralized framework, and the decision making power stays with individuals and not with central authorities like the government. Currently, central authorities dominate the financial world, and everyone has to rely on them and follow their set rules and regulations. However, these central entireties can be exploited; we see various cases where Financial Services perform illicit practices for their gain.
3. Blockchain Technology makes all the transactions transparent and anonymous. Therefore, there is negligible scope of exploitation. Also, since Blockchain transaction histories are distributed over a network of computers, there can not be a single point of failure. In blockchain technology, the data is encrypted by cryptographic hashing, and blockchain is also immutable; therefore, no one can tamper with the data inside it.
All these benefits of cryptocurrency and blockchain emerged from decentralization. Due to Blockchain Technology in cryptocurrency, users are in complete control of the transactions and do not fear interference or misuse by any central authority. Also so the more businesses and individuals who use blockchain technology, the stronger it will become.
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Also Read: Blockchain Project Ideas & Topics
Challenges with Centralized Systems
Before Bitcoin and BitTorrent, everyone used centralized services. In centralized systems, all the data is stored in one place, and everyone has to interact solely with that data center. One example of such a system is Google.
When we do a Google search, we send a query to the server, reverting us with the relevant information. Another example is banks that store all our money and when we have to pay someone, we have to contact the bank or go to the bank.
Centralized systems are easy targets for hackers to exploit. If a centralized data center has to go through a software upgrade, the whole system must be stopped. It is also possible that the data center gets corrupted or malicious; in this case, all the data inside will be compromised. If the centralized entity shuts down, no one will be able to access the information till it’s functional again.
Peer-to-Peer Network structure
Blockchain is maintained by a peer-to-peer network structure where all the nodes are interconnected to each other. The nodes main the individual computers that take input and perform a function on them and give an output.
The most common use of peer to peer network is torrenting. Ideally, when we use a client-server model for download, it is slow and completely dependent on how the server performs. Whereas in a peer-to-peer system, even if one network is not performing well, we still have more peers to download. And the idea of integrating peer to peer network and payment systems is a revolution in the finance industry.
Cryptocurrencies also use the same mechanism of networks and nodes, and there is no single governing body. Cryptocurrencies like Ethereum and Bitcoin use a Proof of Work consensus mechanism, and all the nodes are equal with the same privileges. However, their level of participation and functions may differ. When a transaction occurs, the network uses a gossip protocol to communicate this information to their neighbors. The information keeps spreading like gossip till every node is informed.
With this system, there is a problem that this design is not highly scalable. To resolve this, the new generation cryptocurrencies adopt a leader-based consensus mechanism where the nodes elect leader notes (also called Supernodes). The Supernodes are in charge of the overall network health and consensus. These cryptocurrencies are faster; however, they are not very decentralized systems. Some examples include Cardano, Neo, and EOS.
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Blockchain Technology in cryptocurrency has the potential to revolutionize numerous industries. It makes the history of digital assets unalterable and transparent using decentralization and cryptographic hashing. Cryptocurrency and Blockchain Technology are interconnected. The best part of cryptocurrency is that it is independent of one central entity or person.
Blockchain technology was first applied to Bitcoin in 2008, and since then, it has experienced exponential growth. The cryptocurrency transfers are peer-to-peer, for the transaction costs are minimal. In the case of centralized financial systems, certain loopholes and limitations are relatively easy to exploit. With Blockchain Technology, the system becomes more trustworthy and secure.
There is a rise in careers in blockchain technology and blockchain has tremendously changed the very face of the technology industry forever. If you’re interested to become a blockchain developer and build smart contracts and chaincodes, checkout IIIT-B & upGrad’s Advanced certificate program in blockchain technology.
What is the Consensus mechanism in Blockchain?
The methodologies that help a technology in gaining trust, confidence, agreement, and security on a decentralized network such as Blockchain is known as the Consensus mechanism. While talking about the Blockchain technology and Cryptocurrency, there are two main types of consensus mechanisms that help the technologies to function correctly. These two types of mechanisms are Proof of Work(PoW) and Proof of stake(PoS). PoS consensus mechanism is explicitly used by cryptocurrencies such as Bitcoin or litecoin, but this mechanism consumes a lot of power and has a long processing time. PoS is a low-cost, low energy consuming alternative to PoW, which has the same applications in the Blockchain field.
What is the use of Blockchain in day-to-day life?
Blockchain is widely used in day-to-day life. In supply chain management, Blockchain is used to reduce cost and risk throughout the supply chain. It also improves supply chain transparency. It is used to maintain track of patient information in the healthcare business. The ledger technology ensures that patient medical data is sent safely and monitored by the drug supply chain. The blockchain-based token-based approach ensures that each individual has just one immutable vote, providing a fair digital voting environment. In the real estate market, Blockchain is used to hold ownership and title information, which makes it easier to transfer and track ownership. Finally, the media uses it to maintain data integrity, allow advertisers to target the right customers, and ensure that musicians receive adequate royalties for their unique works.
How are centralized systems different from decentralized systems?
A centralized system is one in which one person, a group of individuals, or a corporation has complete control over the system's operation. In a centralized system, end users have no input in the design and architecture, feature accessibility, or application functioning. They have no say in how the systems should work. The end-users of centralized don't have any control over the information. Simply said, decentralized implies not centralized. The control, rather than being in the hands of a single company, is in the hands of the end-users. There are no single points of failure in decentralized systems. The network as a whole remains operational even if many nodes fail. There is no one person in charge of the network; hence it cannot shut down at any point.