Blockchain and Crypto technology
Blockchain and Crypto technology are two related but distinct concepts. Blockchain is a digital ledger technology that stores information electronically in digital format1. It is best known for its role in cryptocurrency systems, such as Bitcoin, in maintaining a secure and decentralized record of transactions. Cryptocurrency is a digital medium of exchange that uses cryptographic techniques and blockchain technology to verify the transfer of funds and control the creation of monetary units. It is decentralized and not owned by any particular authority, making it difficult for governments to manipulate.
Blockchain and Crypto technology have many advantages, such as:
They're global: which means that cryptocurrencies can be sent across the planet quickly and cheaply.
They increase privacy: Cryptocurrency payments don't require you to include your personal information, which protects you from being hacked or having your identity stolen.
They're open: Because every single transaction on cryptocurrency networks is published publicly in the form of the blockchain, anyone can scrutinize them. That leaves no room for manipulation of transactions, changing the money supply, or adjusting the rules mid-game. The software that constitutes the core of these currencies is free and open-source so anyone can review the code.
Blockchain and Crypto technology also have some challenges, such as:
They're volatile: The price of cryptocurrencies can fluctuate significantly due to market forces, speculation, hacking, regulation, and other factors.
They're complex: Understanding how blockchain and crypto technology work can be difficult for beginners and even experts. There are many technical terms, concepts, and protocols involved in these systems.
They're risky: Investing in cryptocurrencies involves a high degree of risk, as there is no guarantee of returns or protection from losses. There are also many scams, frauds, and cyberattacks that target cryptocurrency users and platforms.
How blockchain works?
Facilitating a transaction: A new transaction enters the blockchain network. All the information that needs to be transmitted is doubly encrypted using public and private keys.
Verification of transaction: The transaction is then transmitted to the network of peer-to-peer computers distributed across the world. All the nodes on the network will check for the validity of the transaction like if a sufficient balance is available for carrying out the transaction.
Formation of a new block: In a typical blockchain network there are many nodes and many transactions get verified at a time. Once the transaction is verified and declared a legitimate transaction, it will be added to the mempool. All the verified transactions at a particular node form a mempool and such multiple mempools form a block.
Consensus Algorithm: The nodes that form a block will try to add the block to the blockchain network to make it permanent. But if every node is allowed to add blocks in this manner then it will disrupt the working of the blockchain network. To solve this problem, the nodes use a consensus mechanism to ensure that every new block that is added to the Blockchain is the one and only version of the truth that is agreed upon by all the nodes in the Blockchain, and only a valid block is securely attached to the blockchain. The node that is selected to add a block to the blockchain will get a reward and hence we call them “miners”. The consensus algorithm creates a hash code for that block which is required to add the block to the blockchain.
Addition of the new block to the blockchain: After the newly created block has got its hash value and is authenticated, now it is ready to be added to the blockchain. In every block, there is a hash value of the previous block and that is how the blocks are cryptographically linked to each other to form a blockchain. A new block gets added to the open end of the blockchain.
Transaction complete: As soon as the block is added to the blockchain, the transaction is completed and the details of this transaction are permanently stored in the blockchain. Anyone can fetch the details of the transaction and confirm it.
How secure is blockchain technology?
Decentralization: Blockchain networks are distributed among many nodes that participate in validating and storing transactions. This means that there is no single point of failure or central authority that can be compromised or corrupted. It also makes it harder for attackers to manipulate or falsify the data on the blockchain, as they would have to control more than half of the network's computing power.
Cryptography: Blockchain networks use cryptographic techniques to protect the data and the identities of the participants. Each transaction is encrypted using public and private keys, which ensure that only the intended parties can access the information. Each block also has a unique hash, which is a mathematical fingerprint that links it to the previous block and proves that it has not been altered. The hash also serves as a proof of work, which shows that the node that added the block to the chain did some computational work to earn a reward.
Consensus: Blockchain networks use consensus mechanisms to agree on a shared version of the truth among all the nodes. Consensus mechanisms can vary depending on the type of blockchain network, but they generally involve some form of voting or competition among the nodes to determine which block is valid and should be added to the chain. Consensus mechanisms ensure that only valid transactions are recorded on the blockchain and that any conflicting or fraudulent transactions are rejected.
However, blockchain technology is not immune to human errors, bugs, or malicious attacks. Some of the potential risks and challenges that blockchain technology faces include
Scalability: As more transactions are added to the blockchain, it becomes larger and more complex, which can affect its speed and performance. Some blockchain networks have faced congestion and high fees due to limited capacity and high demand. Scaling solutions such as increasing block size, using side chains, or implementing sharing are being explored to address this issue.
Interoperability: Blockchain networks are often isolated and incompatible with each other, which limits their ability to communicate and exchange data. This can create silos and inefficiencies in the blockchain ecosystem. Interoperability solutions such as cross-chain protocols, bridges, or wrappers are being developed to enable different blockchain networks to interact and cooperate with each other.
Regulation: Blockchain technology operates in a largely unregulated and uncertain legal environment, which poses challenges to its adoption and compliance. Different jurisdictions may have different rules and standards for blockchain technology, which can create confusion and inconsistency for users and developers. Regulation solutions such as self-regulation, industry standards, or government guidelines are being sought to provide clarity and legitimacy for blockchain technology.
Education: Blockchain technology is still relatively new and complex, which makes it difficult for many people to understand and trust. There is a lack of awareness and education about how blockchain technology works and what benefits it can offer. Education solutions such as courses, workshops, or media campaigns are being conducted to increase the knowledge and skills of users and developers of blockchain technology.