What is Blockchain Technology and How does It Work?

Blockchain technology can be described as a distributed ledger that records transactions or stores data and contracts. Blockchains are decentralized, and thus lack a central regulatory or other authority that can control, freeze or manipulate your assets. This also allows blockchain-based platforms to not be limited by government bodies and national regulations.

Notably, blockchain is a database system that is extremely difficult to manipulate or hack. Due to this specific reason, blockchain technologies are highly preferred for financial transactions and high-value investments. The transactional capacity of a blockchain network is limitless and one can use cryptocurrencies to buy or sell assets in large amounts, by way of a crypto wallet. 

Blockchain development has taken the world by storm and many financial institutions have started imagining a potential future with blockchain technologies at the forefront. Blockchain networks make it possible for large transactions that would take days to be completed in real-time. Financial institutes can also avoid hefty commissions with the help of the fast transactional protocols of blockchains such as the Polygon network.

Blockchain networks promote complete transparency and verifiable transactional information. Open blockchain networks are rapidly being adopted by companies to maintain and host financial transactions with or without involving other financial institutions. For instance, some people might wish to withdraw their funds from a blockchain network and deposit the money in their bank while many would simply hold it in their crypto wallets. The latter ones can continue transacting from their crypto wallets for various purposes, such as buying assets or digital products.

A financial institution like a bank must cooperate with other financial organisations and services when transferring money internationally through payment systems such as SWIFT. When the money is wired, your bank must manually communicate with its partner in the country of the beneficiary. When it comes to blockchain transactions, there are no geographical limitations, thus being able to send money from anywhere to any crypto wallet.

Some blockchain networks such as Bitcoin and Ethereum do charge gas fees for each transaction, but there are also networks like Polygon and Solana that allow assets to be minted or transferred without gas fees.

What are gas fees? Gas fees are charged by the network to compensate for the effort of miners who contribute to each new block that is formed in the blockchain when a transaction is completed. Blocks are created in the network whenever any new information is grouped together against any asset transfer, transaction, or flow of data.

Each blockchain transaction is recorded with an irreversible cryptographic signature that is known as hash, thus making it impossible to be modified by external or even internal entities. Blockchain networks are run with the help of multiple nodes in the system that allow each transaction to be verified. This extensive decentralisation of database networks can also be referred to as Distributed Ledger Technology or DLT. 

Overview of Blockchain Technology 

Blockchain technologies are database systems that store data in a distributed manner. Initially invented for crypto transactions, blockchains, however, can work with all kinds of data such as media files. One can use blockchain technology to mint videos, images, and audio so that the media file becomes verifiable through the network.

Once your data or digital asset is minted on the blockchain network, you become the ‘origin’ or the original owner. When any new data is stored on the blockchain, a contract is created that notes down the involved parties and the time of creation. The ledger network authenticates every single transaction with the help of hash and cryptographic keys, thus verifying each entry.

The network is a peer-to-peer ecosystem where each system that is part of the network is referred to as a node. Due to just this aspect of the network, blockchains are more secure than almost any database technology that is publicly available to us. However, there are also other key benefits such as hash encryptions securing the data with algorithms like SHA256.

The blockchain is always kept safe and can never be brought down with attacks such as DDOS due to the lack of centralised infrastructure that can be hacked or attacked. There is barely any scope for tampering with these networks and the structural integrity of any application, website, or program that uses blockchain cannot be hampered by the end-user.

Blockchain ledgers are extremely safe, ensuring that each and every transaction is verified and real. Each node in the system has its own digital signature that helps in verifying a block once it is generated by the network. Also, the data inside these ledgers is hosted over multiple servers globally, removing the chances of the network crashing completely.

During blockchain transactions, multiple nodes verify the contract, rather than a single one, thus removing the possibility of manipulation. This setup is referred to as a POS or ‘proof of stake’ model which promises the legitimacy of each transaction. This helps in guaranteeing the valuation and properties of financial assets, thus being incredibly helpful for investments and in the transfer of finances.

Before delving into why blockchain was created and who invented blockchain technology, let’s go back to the conceptualisation of this network. First conceptualised in 1982 by David Chaum, a cryptographer, the concept was developed further by W. Scoot Stornetta and Stuart Haber. In 1992, the duo proposed that a system can be built where document timestamps cannot be manipulated with the help of a cryptographically secured chain of blocks. By incorporating Merkle trees into the network model, they were able to further improve the efficiency of the chain by allowing multiple document certificates to be collected in a single block.

However, this was still far from the decentralised blockchain that we know today. It was Satoshi Nakamoto who invented blockchain decentralisation in 2008 and the person behind the design and model of the Bitcoin network.

The entire point of Nakamoto’s network was to build a decentralised network for the Bitcoin cryptocurrency. How was this made possible? By introducing a hash method that does not require signing by a centralised system or trusted part. 

Ever since Bitcoin took off, more blockchain-based technologies were introduced for financial transactions, asset transfer, contract generation, and digital investments. While the first blockchain was a layer one network without any integration, we now have integrated layer two blockchain networks that have drastically improved minting and transaction speeds.

How Blockchain Works and the Underlying Technology Being Used to Enable it

Blockchain is functional due to the three main components of the network. These are – 

• Blocks: They are permanent records of any transaction that was completed or any transfer/creation of an asset that was initiated. Older blocks contain information about all the transactions in the network while newer blocks contain details about the newest transactions that have not been permanently added to the ledger records yet. All the blocks together contribute to making the chain that forms the network. 

Blocks cannot be removed, modified, or replaced and the previously generated blocks become a part of the main network as soon as new blocks enter the network to be verified. Finished blocks can be defined as a record of permanently attached transactions. Blocks can become permanent only when other nodes in the system verify the block.

• Nodes: They are systems or devices (computers) that are part of the blockchain network. Each node maintains a copy of the distributed ledger which is open to the public to see. Due to no single system being able to control the network, every single node in the network must verify every single transaction in order to make it a part of the network.

This helps the network be transparent and remove centralisation. Nodes are assigned unique alphanumeric identification numbers that help identify and view transactions that belong to each member of the network.

• Mining: It can be defined as a peer-to-peer process of validating new transactions. The process of mining can help secure and verify blockchain transactions, thus also helping miners get rewarded for it in the form of gas fees. Blockchain miners add and verify data with the help of mining algorithms over a secure network. 

One can mine with the help of tools that can generate accepted hashes. These tools use node systems in the network to execute an automated flow of mathematical calculations which keep generating rewards for the miner as well.

Benefits of Blockchain Technology

• These networks are decentralised and cannot be controlled by a single group, individual, or authority.
• Blockchain networks are mostly public and open, thus retaining their data integrity.
• Transactions over blockchain networks can easily be verified.
• Assets minted or created over the blockchain can be traced to their owners or origin.
• These networks cannot be manipulated or hacked into.
• Blockchains have a limitless capacity in terms of scalability and data retention.
• Each node has a copy of all the transactions, thus a node shutting down or crashing will never affect the network.

Disadvantages of the Blockchain Technology

• There is still a lack of understanding of the true potential of blockchain.
• Blockchains are misunderstood and many individuals still avoid having to do anything with blockchain networks or cryptocurrencies.
• Though secure, losing your credentials or wallet address would mean that you never get access to your assets and finances again.
• Blockchains cannot be tampered with but if a victim of a phishing activity is properly social engineered, he or she can get locked out of his/her own wallet.
• Most blockchain networks require heavy processing power.
• Popular blockchain networks such as Bitcoin charge ridiculous gas fees.
• Blockchains cannot be regulated by government authorities and the law mostly cannot help those who have been scammed over blockchain platforms.

Current Use and Adoption of Blockchain 

Blockchain is extremely important for many companies and these networks are not just being used for financial transactions anymore. Companies and organisations are coming up with new and innovative ways to utilise the benefits of decentralisation and secure networks. 

Here are some ways blockchain is being used:

• Investments: Blockchain networks are being used for investing in cryptocurrencies in platforms such as WazirX, CoinDCX, and CoinSwitch Kuber. There are also blockchain-based wallets like Coinbase and Metamask that allow you to buy and store crypto.

• Financial institutions: Many banks and financial firms have begun to adapt blockchain technologies into their architecture. This will help reduce commissions and the time required to complete large transactions.

• Games: Many games are being hosted over the blockchain with play-to-earn models where users can earn cryptocurrencies by playing games and achieving targets. Some games also offer in-game items as assets.

• NFTs: Non-fungible Tokens or NFTs are the next big thing for investors and artists. With the help of blockchain, enthusiasts can buy and sell original artwork and media that follow POS concepts. This allows one to easily prove the origin and the legitimacy of the asset.

• Database: Due to the scalability and transparency blockchains offer, many corporations have begun using blockchain-based databases.
• Websites: There are many blockchain-based websites and applications that are decentralised and allow users to anonymously interact with various communities and projects in a secure manner.

Potential Future Use of Blockchain and Different Applications

The potential future uses of blockchain will be seen in government agencies, banks, and domains such as gaming or entertainment. So, what is the future of blockchain technology? It is extremely promising.

Banks will start utilising the flexibility of blockchain networks to carry out their day-to-day transactions while more serious investors will start buying properties and assets over blockchain. There are already many big-budget investments that have been conducted over blockchain. Millions of dollars have been spent on single pieces of artwork through Bitcoin, Ethereum, and other cryptocurrencies.

A single Bitcoin takes thousands of dollars to buy, thus, investors will eventually start following a more standardised format where they manage and collect their wealth over the blockchain itself. Rather than withdrawing the amount to their bank accounts, they can convert their profit into other cryptocurrencies. Neo-banks might also come into the scene and offer to hold on to their money in the form of national currency without needing to withdraw the money to a real bank.

Government bodies will be using the blockchain to make data more accessible to employees, representatives, vendors, and partners while still keeping this data secure and unmodifiable. By 2023, the new blockchain projects are expected to generate more than $10 billion in revenue.

Another place where blockchain will be extensively used is metaverse. Due to the flexibility blockchain networks offer, companies will be able to house millions of end-users and their digital assets over a standardised virtual world. 

In about 10 years, blockchains will become the norm, finally not allowing the general population to ignore the many benefits decentralisation offers. 

Evolution of Blockchain

The evolution of blockchain was mostly geared towards better encryption methods and more complex cryptographic keys rather than the networks themselves. Due to how the blockchain works, the more transaction-heavy the network becomes, the slower it becomes in creating blocks. Networks such as Bitcoin take a long time to run enough calculations to generate one single block, thus requiring a lot of time for miners to earn Bitcoins. 

Older blockchains demand more computing resources such as processing capacity and memory from mining systems as well. Newer networks are planning to remove these kinds of problems and provide a faster network. How? In order to understand this, we must first understand what is a blockchain. 

As explained earlier, blockchains are simply network architectures. Now, let us consider a network such as Ethereum or Bitcoin as the first network layer or the skeleton that supports the database. In blockchain development, this is known as layer one network. 

Now, when we artificially integrate a third-party protocol to a layer one network, we become successful in overlaying a second network architecture on the original one. The initial underlying blockchain architecture simply becomes the passive main chain that supports the second layer in dealing with transactions. Notably, transactions carried over the layer two networks are faster and cost lower gas fees or none at all.

The second layer also helps in reducing the load on the main network. The main blockchain simply becomes the base network that sets the parameters, algorithms, block properties, and rules of the network. For example, the base network determines the kind of hash that will be generated upon the completion of any data transaction.

The future of blockchain technology is a bright one, especially in countries that are highly involved with technology. Many processes will be hosted over decentralized networks and blockchain technologies will replace many legacy software and standard data solutions.

The future of blockchain technology in India has been predicted to have immense prospects. This is especially due to the internet-savvy crowd and the growing dependency on online payments. More than anything, in a country with billions of people, transparency and decentralisation are keys to progress and reduction in political intervention.