Getting to know blockchain, the innovative digital ledger technology

With its innovative database technology, blockchain has revolutionized the world of data security and transparency.

Blockchains can record information about virtually anything of value, from tangible assets (a house, car, land, etc.) to intangible assets (intellectual property, patents and copyright). All information can be tracked and traded on the network, reducing risks and cutting costs for all involved.

All the nodes in the network have a copy of the data on a blockchain. Miners are nodes that are responsible for adding new blocks to the blockchain. Although similar, validators are nodes that verify the transactions in blocks and ensure the blockchain is secure.

There are also full nodes, which store the entire blockchain and relay transactions to other nodes. Light nodes, on the other hand, are only responsible for a subset of the blockchain. They do not participate in the consensus process.

It means that if someone tries to alter something in the database, the other nodes can detect the change and prevent it from happening. This process makes the network immutable or very difficult to tamper with.

Blockchain has been known for cryptocurrency use since Bitcoin’s introduction in 2009. Besides crypto, blockchain has a wide range of useful functions for various sectors.

Understanding how blockchain works

Just like its name, blockchain comprises individual blocks of data. One block contains transaction information, just like a cell in a spreadsheet.

Once the block is full, it will go through an encryption algorithm called “the hash.” Then, it is sent to a memory pool, waiting for the miners to pick it up.

When a miner picks up the block, the entire network will work together to “solve” the hash. This process is called mining.

The nodes will verify the transactions before adding the new block to the chain. Once confirmed to be legitimate, it will be linked or “chained” together. The whole process creates a long history of irreversible transactions on the network.

“Once there is consensus, the block is added to the chain and the underlying transactions are recorded in the distributed ledger,” said C. Neil Gray, a partner in the fintech practice areas at Duane Morris LLP.

The block is only confirmed once five more blocks are added to the blockchain. The process typically takes about an hour, as new blocks are added to the blockchain every 10 minutes on average.

For a cryptocurrency, the nodes must ensure the new transactions are not fraudulent. They also need to check if the coins have only been spent once.

Some miners typically receive rewards in the form of the blockchain’s native currency for their efforts. For example, they will receive bitcoins when working on the Bitcoin blockchain.

The functions of blockchains

Blockchain technology’s applications today vary from financial services to administering medical records.

The most common use of blockchain is to record cryptocurrency transactions, like Bitcoin or Ethereum. Today, more than 23,000 cryptocurrency systems are running on a blockchain.

Patrick Daugherty — a senior partner and lead of the blockchain task force of Foley & Lardner — noted that cryptocurrencies are not yet widely used to purchase goods and services due to their volatile nature. Things might change soon as PayPal, Square and other money service businesses make digital asset services available to vendors and retail customers.

The second sector that utilizes blockchain is banking. Blockchain processes transactions in fiat currency, such as dollars and euros.

The technology can verify transactions more quickly and securely than traditional methods, such as wire transfers or credit card payments. Blockchain is also accessible 24/7, saving businesses and consumers time and money.

Meanwhile, supply chain management uses blockchain to improve supply traceability. This makes it possible to track the movement of goods throughout the supply chain. For example, IBM’s Food Trust uses blockchain technology to track food from harvest to consumption.

The healthcare industry also uses blockchain to store medical records securely. Blockchain provides patients with proof that the records cannot be changed. Only specific individuals can access the records, so they remain confidential.

Aside from facilitating multiple industries, there is also an innovation on blockchain that many industries are using. It is self-executing contracts or smart contracts.

These contracts can be triggered automatically when certain conditions are met. For example, a smart contract can release the payment for goods once the buyer and seller have both agreed to the terms of the sale.

“A properly coded smart legal contract on a distributed ledger can minimize, or preferably eliminate, the need for outside third parties to verify performance,” said Gray.

Pros and cons of blockchain

Blockchain technology offers several advantages. Firstly, it ensures higher accuracy in transactions. Since blockchain transactions need to be verified by multiple nodes, there is less error. When one node makes a mistake, the others will catch it.

There is no need for intermediaries, as transactions on the blockchain are peer-to-peer. This results in faster processes, lower costs and higher efficiency.

Business runs on information. The faster and more accurate the information is shared, the better. Blockchain is ideal for delivering this point because it provides immediate and completely transparent information.

Blockchain also has extra layers of security through encryption and decentralized storage. This point makes blockchain highly resistant to hacking and fraud.

Despite all the advantages, there are also disadvantages to consider. The first limitation is the lower number of transactions per second that a blockchain can handle. This issue can be substantial for large-scale applications.

Blockchain might cost less in cash, but the mining process consumes high computational power and energy. This leads to increased energy costs, a concern many have shared. There is also a risk of asset loss if private keys are lost or stolen, as transactions are irreversible.

Unfortunately, the confidentiality of blockchain networks can be used for both good and bad purposes. While it protects users from hacks and preserves privacy, it also allows for illegal trading and activity.

The most cited example is the Silk Road. According to an FBI report, thousands of drug dealers and other vendors used the Silk Road to distribute hundreds of kilograms of drugs and other unlawful goods to over a hundred thousand buyers.

It operated on the dark web, and users could access it through TorBrowser. The dark web allows users to buy and sell illegal goods without being tracked and make illicit purchases in Bitcoin or other cryptocurrencies. The FBI shut it down in October 2013 after two years of operation.