In the simplest terms, a Blockchain technology is a diary that is almost impossible to forge. In more advanced terms, the blockchain can be thought of as a distributed database. By these means, Blockchain is a particular type or subset of the so-called distributed ledger technology or DLT. DLT is a way of recording and sharing data across multiple data stores. All of these distributed and individual data stores together make up the database.
The first blockchain was created in the year 2009 by an anonymous person/group known as Satoshi Nakamoto. The purpose of the blockchain was to facilitate digital transactions using Bitcoin, but later the potential uses of blockchain technology quickly became apparent to developers and entrepreneurs in various other industries. Looking back in the past decade, a silent revolution called “Blockchain technology” resulted in significant innovations. Bitcoin is the first and most well-known blockchain innovation.
It was a proof-of-concept digital currency that launched in 2009. Although its price has fluctuated widely, bitcoin’s market capitalization now hovers between $10 billion and $20 billion. With the help of Acorns, millions of users use blockchain technology for various transactions, including remittances. Blockchain technology is a revolutionary technology that helped people earn and make money online, but what are some of today’s most popular blockchain applications?
The Blockchain Technology
The blockchain is most popular in the financial sector and people can use blockchain to streamline their financial transactions and reduce associated costs. Other popular applications of blockchain technology include:
- Non-fungible tokens or NFTs
- Logistic and supply chain network
- Data Storage
- Casino and gambling industry
- Money transfers
- Digital royalties
Blockchain can exhibit different features and covers a wide array of systems that range from being fully open and permissionless to being permissioned. In practice, blockchain is a technology with many faces that may cause audit implications as well. Let’s discuss this in more detail.
On an open, permissionless blockchain, a person can join or leave the network at will, without having to be approved by any entity. All that is needed to join the network and add transactions to the ledger is a computer on which the relevant software has been installed. There is no central owner of the network and software, and identical copies of the ledger are distributed to all the nodes in the network. The vast majority of cryptocurrencies currently in circulation are based on permissionless blockchains. This includes cryptocurrencies such as Bitcoin, Litecoin, and others.
Secondly, there is the Permissioned Blockchain. On a permissioned blockchain, transaction validators are the nodes and have to be pre-selected by a network administrator. The network administrator sets the rules for the ledger to be able to join the network. This allows us to easily verify the identity of the network participants. However, at the same time, it also requires network participants to put their trust in a central coordinating entity to select reliable network nodes.
In general, permissioned blockchains can be further divided into two subcategories:
On the one hand, there are open or public permissioned blockchains, which can be accessed and viewed by anyone, but where only authorized network participants can generate transactions and update the state of the ledger.
On the other hand, there are closed or permissioned blockchains, where access is restricted and where only the network administrator can generate transactions and update the state of the ledger.
What is important to note is that just like on an open permissionless blockchain, transactions on an open permissioned blockchain can be validated and executed without the intermediation of a trusted third party. Some cryptocurrencies, like Ripple and NEO, utilize public permissioned blockchains.
Blockchain technology is praised by experts due to its security and the fact that blockchain technology is decentralized which makes it more secure. This is because there is no central point of control and failure. Hackers would not find it easy to attack because every node in the network shall be required to be attacked to tamper with the data.
Blockchain technology is secure because of the way the data is stored in a traditional database, the information is stored in a single location which is a limitation and leads to hackers getting access easily to the confidential information. However, the data is spread across the network with blockchain technology, making it more protected from tampering.
Unless the availability of more powerful computers is ensured, any attempts to manipulate the data will automatically be dismissed. This is the reason which makes the blockchain unchangeable. One of the most promising aspects of blockchain technology is its ability to create a trustless system. In a trustless system, two parties can interact without the need for a third party to mediate the transaction.
This system could potentially reduce the cost of doing business and make it easier to conduct transactions online. Another potential use of blockchain technology is in the domain of data security. For example, users can use blockchain technology to create a decentralized database that is secure and free from hacks or data breaches.
So essentially, the Blockchain can be thought of as a distributed database. Additions to this database are initiated by one of the members, which are the network nodes. These nodes usually exist in* the form of computers. Each node maintains a copy of the entire Blockchain.
The nodes also create new blocks of data, which can contain all sorts of information. Among other information, the block contains a hash. A hash is a string of numbers and letters and each new block generates a hash. The hash does not only depend on the block itself but also the previous block’s hash. This is one of the reasons why the order of the blocks matters and why blocks are added to the Blockchain in the order that they occurred. Even a small change in a block creates a completely new hash.
After its creation, a new block is broadcasted to every party in the network in an encrypted form so that the transaction details are protected. The nodes of the network check the validity of each new block that is added. Once a block reaches a certain number of approved transactions then a new block is formed. The determination of the block’s validity happens following a pre-defined algorithmic validation method. This is commonly referred to as a “consensus mechanism”. The nodes check the hash of a block to make sure a block has not been changed.
Once validated, the new “block” is added to the blockchain. As soon as the nodes have approved the new Block, the Blockchain or ledger is updated with it, and it can no longer be changed or removed. It is therefore considered to be impossible to forge it. You can only add new entries to it and the registry is updated on all computers on the network at the same time.
The blocks are also signed with a digital signature using a private key. Every user on a blockchain network has a set of two keys: Firstly, A private key, which is used to create a digital signature for a block, And secondly, A Public key, which is known to everyone on the network. A public key has two uses. On the one hand, it serves as an address on the blockchain network. On another hand, it is used to verify a digital signature and validate the identity of the sender.
A user’s public and private keys are kept in a digital wallet or e-wallet. Such wallets can be stored or saved online and offline. Online storage is often referred to as hot storage and offline storage is commonly referred to as cold storage.
In conclusion, the advent of blockchain technology has not only revolutionized the financial industry but has also paved the way for innovative solutions in various sectors such as logistics, data storage, and digital rights management, among others. The security it provides through decentralization and encryption, as well as its potential for facilitating trustless interactions, underscores its transformative potential. However, as we delve deeper into the world of permissioned and permissionless blockchains, we must recognize the challenges it poses, especially in terms of audit implications.
Nonetheless, with its wide array of applications and inherent robustness, the Blockchain represents a key technological advancement in our digital era, affirming its role as a silent revolution of the last decade. As we look ahead, the continued exploration and refinement of blockchain systems promise a future of more secure, efficient, and transparent digital transactions and interactions.