A blockchain is simply a digital record of transactions replicated and distributed throughout the blockchain’s network of computer systems. Each block on the chain comprises several transactions. Whenever a new transaction happens on the blockchain, a record of that transaction is added to the ledger of every participant. Distributed Ledger Technology refers to a decentralised database administered by several individuals (DLT).
Blockchain is a distributed ledger technology in which transactions are recorded with an unchangeable cryptographic signature known as a hash.
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Characteristics of Blockchain
- Blockchain technology operates somewhat differently from traditional financial systems. Rather than depending on centralised authority, it secures the blockchain’s features through a network of nodes. The digital ledger is replicated on every node in the system. Every node must validate a transaction before adding it. If the majority agrees, it is recorded in the ledger. This increases transparency and makes it impervious to corruption. As a result, no one may add any transaction blocks to the ledger unless the majority of nodes agree. No one can go back and modify, remove, or update the transaction blocks after they are added to the ledger.
- The network is decentralised, which means there is no governing authority or one individual in charge of the structure. Instead, the network is maintained by a collection of nodes, making it decentralised. This is one of the most important aspects of blockchain technology. With blockchain, users can access the system via the web and store their assets safely.
- Conventional banking systems can be sluggish because they need a lot of settlement time, which might take days. This is one of the primary reasons why financial institutions are adopting blockchain. Blockchain technology helps settle money transfers rapidly. This eventually saves time and money for these organisations while also providing convenience to the customer.
- A blockchain is highly secure due to the general consensus algorithms. The architecture is well-designed, and consensus techniques lie at its core. Every blockchain features a consensus mechanism to aid the network in making choices. Simply said, the consensus is a decision-making procedure for network nodes. A consensus is crucial for a system to work smoothly when millions of nodes validate a transaction. While the nodes may not trust one another, they may trust the algorithms behind them. As a result, every network choice is a win-win scenario for the blockchain. It’s one of the advantages of blockchain technology.
- Typically, a public ledger will contain all relevant information about a transaction and its participants. It is all transparent. While the rationale for private or federated blockchain is slightly different, in a public blockchain, numerous individuals can see what is going on in the ledger. This is because all users on the system maintain the network ledger. Hence, the processing power spreads among the machines, creating a highly efficient and robust ledger system.
Types of Blockchain
Private blockchains run on closed networks and are best suited to private corporations and organisations. Companies may utilise private blockchains to tailor their accessibility and permission choices, network characteristics, and other critical security features. A single authority manages a private blockchain network.
Permissioned Blockchain Network
Permissioned blockchain networks, also known as hybrid blockchains, are private blockchains that grant privileged access to approved persons. Organisations generally build up these sorts of blockchains to get the best of both worlds, and it offers a better structure when determining who may join the network and which transactions can be made.
Public blockchains do not require access. They are entirely decentralised and open to all. Public blockchains provide all nodes on the blockchain equal access to the blockchain, the ability to produce new blocks of data, and the ability to validate data blocks. On these public blockchains, nodes “mine” for cryptocurrency on these public blockchains by solving cryptographic equations to create blocks for the network’s transactions. In exchange for their efforts, miner nodes receive a few cryptocurrencies. The miners effectively function as modern-day bank tellers, formulating transactions and receiving a fee for their work.
Consortium blockchains are permissioned blockchains managed by a consortium of organisations rather than a single corporation, as is the case with private blockchains. As a result, consortium blockchains have greater decentralisation than private blockchains, resulting in higher levels of security. However, forming consortiums may be difficult since it requires collaboration across several firms, which creates logistical obstacles and possible antitrust risk.
How does a Blockchain Transaction work?
- Every person will have their private key and a public key that is visible to everyone. Using both of these provides a secure digital identity that can be used to verify the user via digital signatures and ‘unlock’ the transaction they intend to complete.
- Once the users have agreed on a transaction, it must be authorised before being added to a block in the chain. The move to implement a transaction to a public blockchain is decided by consensus. This implies that the majority of the network’s “nodes” must agree that the transaction is genuine. People who own the machines in the network are rewarded for verifying transactions. This is termed as ‘evidence of work.’
- The proof of work mandates the network’s owners to solve a challenging mathematical problem to add a block to the chain. Mining is the process of solving a problem, and miners are frequently compensated in cryptocurrencies for their efforts. The mathematical issue can only be solved via trial and error, and the chances of success are around 1 in 5.9 trillion. Furthermore, it demands significant computational power, which further consumes a substantial amount of energy. This means that the benefits of mining must surpass the costs of the computers and the electricity used to power them, as a single computer would take years to solve the mathematical problem.
- Mining is the process of adding transactional information to the current digital/public ledger in blockchain technology. Though the phrase is most commonly linked with Bitcoin, it is also used to refer to other Blockchain technologies.
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