A blockchain is a decentralized database that is shared among computer network nodes. A blockchain acts as a database, storing information in a digital format. Blockchains are well known for their critical role in keeping a secure and decentralized record of transactions in cryptocurrency systems like Bitcoin. The blockchain's novelty is that it ensures the fidelity and security of a data record while also generating trust without the requirement for a trusted third party.
The structure of the data on a blockchain differs from that of a traditional database. A blockchain organizes data into groupings called blocks, each of which contains a collection of data.
Blocks have specific storage capabilities, and when they're full, they're closed and linked to the preceding block, producing a data chain known as the blockchain. All additional information added after that newly added block is compiled into a new block, which is then added to the chain after it is filled.
A database organizes data into tables, whereas a blockchain organizes data into chunks (blocks) that are strung together, as the name suggests. When implemented in a decentralized manner, this data structure creates an irreversible data chronology. When a block is filled, it becomes permanent and part of the chronology. When each block in the chain is completed, it is given a specific timestamp.
What Is a Blockchain and How Does It Work?
The purpose of blockchain is to enable the recording and distribution of digital data without the ability to modify it. In this sense, a blockchain serves as the foundation for immutable ledgers, or transaction records that can't be changed, erased, or destroyed. Blockchains are also known as distributed ledger technology because of this (DLT).
The blockchain concept was first presented as a research project in 1991, and it before its first popular use in use, Bitcoin, in 2009. The creation of numerous cryptocurrencies, decentralized finance (Defi) applications, non-fungible tokens (NFTs), and smart contracts has skyrocketed the use of blockchains in the years thereafter.
Decentralization of the blockchain
Consider a corporation that owns a server farm with 10,000 machines that are used to keep track of all of its clients' account information. This corporation owns a warehouse facility that houses all of these computers under one roof, and it has complete control over each of them and the data they hold. However, this creates a single point of failure. What happens if the power goes out at that location? What happens if its Internet connection is lost? What if it all goes up in flames? What if a bad actor uses a single keystroke to wipe everything clean? The data is either lost or corrupted in any case.
Transparency
Because of the decentralized structure of Bitcoin's blockchain, all transactions may be examined in real-time by running a personal node or using blockchain explorers. Each node has its own copy of the chain, which is updated as new blocks are added and confirmed. This means you could follow Bitcoin wherever it goes if you wanted to.
Exchanges, for example, have been hacked in the past, resulting in the loss of every Bitcoin held on the exchange. While the hacker may remain unidentified, the Bitcoins they stole are clearly traceable. It would be known if the Bitcoins stolen in some of these attacks were relocated or spent somewhere.
The records in the Bitcoin blockchain (and most others) are, of course, encrypted. This means that only the record's owner has the ability to decrypt it and expose its identity (using a public-private key pair). As a result, blockchain users can maintain their anonymity while maintaining transparency.
Is Blockchain a Safe?
In numerous ways, blockchain technology delivers decentralized security and trust. For starters, new blocks are always recorded in a linear and chronological order. That is, they are always added to the blockchain's "end." It is exceedingly difficult to go back and change the contents of a block once it has been appended to the end of the blockchain unless a majority of the network has agreed to do so. That's because each block has its own hash, as well as the hash of the block preceding it and the time stamp described before. A mathematical function converts digital data into a string of numbers and letters, resulting in hash codes.
If the data is changed in any way, the hash code will change as well.
Assume a hacker who also manages a node on a blockchain network wants to change a blockchain and steal cryptocurrency from everyone else. If they changed their single copy, it would no longer match the copy of everyone else. When everyone else compares their copies, they'll see that this one stands out, and that hacker's version of the chain will be discarded as invalid.
Blockchain vs. Bitcoin
Stuart Haber and W. Scott Stornetta, two researchers who aimed to develop a system where document timestamps could not be manipulated, initially proposed blockchain technology in 1991. Blockchain didn't have its first real-world application until almost two decades later, with the debut of Bitcoin in January 2009.
A blockchain is the foundation of the Bitcoin protocol. Bitcoin's pseudonymous developer, Satoshi Nakamoto, described it as "a new electronic cash system that is totally peer-to-peer, with no trusted third party" in a research paper introducing the digital currency.
The important thing to remember is that Bitcoin only uses blockchain to create a transparent ledger of payments; however, blockchain can theoretically be used to immutably record any amount of data items. As previously said, this might take the shape of transactions, election votes, goods inventories, state identifications, home deeds, and much more.
Blockchain vs Banks
Blockchains have been hailed as a game-changer in the financial sector, particularly in the areas of payments and banking. Banks, on the other hand, are not the same as decentralized blockchains.
Let's compare the banking system to Bitcoin's implementation of blockchain to observe how it varies from the blockchain.
The Advantages of Blockchains
Transaction Accuracy on the Blockchain A network of thousands of computers approves transactions on the blockchain network. This virtually eliminates human intervention in the verification process, resulting in lower human error and a more accurate record of data. Even if one of the computers on the network committed a computational error, it would only affect one copy of the blockchain. For that error to spread to the rest of the blockchain, at least 51 percent of the network's computers would have to make it—a near-impossibility for a big and rapidly developing network like Bitcoin's.
Reduced Costs
Consumers typically pay a bank to verify a transaction, a notary to sign a document or a preacher to marry them. The blockchain eliminates the need for third-party verification, as well as the fees that come with it. When a business accepts credit card payments, for example, it pays a tiny charge to the banks and payment-processing businesses to handle the transactions. Bitcoin, on the other hand, has no central authority and only has a small number of transaction fees.
Decentralization
Blockchain doesn't save any of its data in a single location. Instead, a network of computers copies and spreads the blockchain. Every computer on the network updates its blockchain to reflect the addition of a new block to the blockchain. Blockchain makes it more difficult to tamper with data by disseminating it across a network rather than holding it in a single central database. If a hacker obtained a copy of the blockchain, only a single copy of the data would be compromised, rather than the entire network.