Let’s start with the very basics. A blockchain is a very specific type of database. Therefore, in order to better understand what is a blockchain you need to first know what a database is.
For those of you who don’t know, a database is a collection of information that is stored electronically on a computer system. The information/data that is stored on these databases is usually very large that is structured in table formats to allow easy access, filtering and searching.
Large databases achieve this by housing data on servers that are made of powerful computers and have the storage capacity for thousands or millions of users.
While all records secured on a database are centralized, each participant on the blockchain has a secured copy of all records and changes so each user can view the provenance of the data. This is good when the system identifies an inconsistency and the blockchain technology can immediately identify and correct them.
For this very reason, participants are intrinsically able to trust it since the data can automatically identify and correct itself based on coded business logic (smart contracts).
When two businesses work together, they almost never share the same database because they are monitored by an appointed person who takes care of it. That person is getting paid to do that, however one of the two companies can pay off that person in order to make a change that will benefit them with the result that the other company will not know.
This is where blockchain technology steps in and makes it possible for two companies to get along. It ensures that when one of the participants makes a change it is immediately corrected by the other participants. After the data is corrected, the record changes will also specify which participants were the one who tried to make the changes.
A blockchain collects data in groups also known as blocks. Each block has a specific amount of storage capacity and when a block is filled, are chained onto the previously filled block forming a chain of data known as blockchain. All new information that comes through will then form a new block that will then be added to the chain once the storage capacity is full.
On the other hand, a database is structured in tables. This system also inherently makes an irreversible timeline of data when implemented in a decentralized nature. When a block is filled it is set in stone and becomes a part of this timeline. Each block in the chain is given an exact timestamp when it is added to the chain.
Decentralization is better explained when viewed in the context of how it has been implemented by Bitcoin. Like a database that we explained above, Bitcoin needs a collection of computers to store its blockchain. Each computer or group of computers is managed by an individual or a group of individuals.
Imagine that a company just purchased a server comprised of 60,000 computers with a database holding all of its clients’ information. Now let’s imagine that this company has all its computers together under one roof and not in different places around the world, like Bitcoin. The company has full control of these computers and all the information contained in each one of them. For bitcoin, these computers that make up its network are called nodes.
In Bitcoin, each node has a full record of all the transactions history that has been made since its inception. Therefore, if one node has an error it can use the hundreds of thousands of other nodes as a reference point to correct itself. This is also why each block that makes up Bitcoin’s blockchain is irreversible.
In order to change how that system works, or the information stored within it, a majority of the decentralized network’s computing power would need to agree on said changes. This ensures that whatever changes do occur are in the best interests of the majority.
The key thing to understand here is that Bitcoin merely uses blockchain as a means to transparently record a ledger of payments, but blockchain can, in theory, be used to immutably record any number of data points. For instance, there are many blockchain-based projects out there that are looking to implement blockchain in other ways to further help society in keeping records of other transactions too.
Look at the President’s Elections mess that there is in the United States. Did Biden win by choice of the American people or is Trump right by saying that he cheated? Or is Trump actually saying that because there is no way to ever know what really happened?
But what if we actually had a blockchain system to vote. The nature of blockchain’s immutability means that fraudulent voting would become far more difficult to occur. And then, no Biden or Trump will complain!
So think of each citizen across countries not just U.S. that we used as an example. Each one of them is given a specific wallet address with a single token and each person needs to transfer this token to the candidate they wish to vote for. The transparent and traceable nature of blockchain will eliminate fraudulent activity from humans and also no human vote counting will be required. If somebody tried to cheat the system won’t let them. Fair enough ha?
Let’s start with the advantages that are many!
Due to the nature of the blockchain on keeping a record of the information, it removes all possibilities for human error and a more accurate record of information. Even if a computer was to do a mistake that is not detectible it would be made to one copy of the blockchain and it would need to make at least 51% of the network’s computers-almost impossible for the size of Bitcoin- to spread around the rest of the blockchain.
Every time you are using your card or bank to make a payment transaction you are paying a fee because it is acting as a third party between you and the person or service you want to pay. Blockchain eliminates the need for a third-party interaction and therefore eliminates its fees, since it does not have a central authority and has limited transaction fees.
Decentralization is happening by spreading around the world in different geographic locations and computers without storing its information in one central location. Whenever a new block is added to the blockchain all computers change and get updated. This makes it almost impossible if not impossible for hackers to steal a large portion of information since if a copy of a blockchain fell into his hands, only a single copy of the information, rather than the entire network would be compromised.
When someone wants to place a transaction with their bank on a Friday it might take few days over the weekend to be completed. Whereas the blockchain system is a 24/7 system that can be used literally whenever you want. Transactions can be completed in as little as ten minutes and can be considered secure after just a few hours. This is particularly useful for cross-border trades, which usually take much longer because of time-zone issues and the fact that all parties must confirm payment processing.
Transactions are much more secure since they are run and need to be confirmed by the blockchain network that is managed by thousands of computers. Changes are extremely difficult to be made once a transaction has been verified for all the reasons we explained above and the different blocks and autocorrection the network does.
There is no real authority who controls Bitcoin’s code or how it is edited. This means that if a large group of people agrees on the same changes or upgrades of the system the Bitcoin is worthwhile to update. Anyone can suggest changes or upgrades to the system and in order to be done, it needs to be agreed upon.
The computer use of the millions of computers that are used for Bitcoin consumes vast amounts of computational power. The amount of power used in the million computers is close to what Denmark is consuming annually. Assuming electricity costs of $0.03~$0.05 per kilowatt-hour, mining costs exclusive of hardware expenses are about $5,000~$7,000 per coin.
Despite the costs of mining bitcoin, miners continue mining bitcoins while rising their electricity bills up. At the end of the day, it is worth it enough.
While confidentiality on the blockchain network protects users, it brings also some side effects. People that want to move money around for illegal activities such as drugs, guns, human trafficking and other stuff can use cryptocurrency.
The most cited example of blockchain being used for illicit transactions is probably the Silk Road, an online “dark web” drug marketplace operating from February 2011 until October 2013 when it was shut down by the FBI.
However, many have argued that the good uses of cryptos outweigh the bad ones.
Since Bitcoin is only increasing in value and its decentralized value grows governments could theoretically make it illegal to own a cryptocurrency or participate in these networks since they cannot find a way to control them. However, with PayPal and Visa allowing cryptocurrency transactions on its platform, these concerns are growing smaller.
Bitcoin is a perfect case study for the possible inefficiencies of blockchain. Bitcoin’s “proof of work” system takes about ten minutes to add a new block to the blockchain. At that rate, it’s estimated that the blockchain network can only manage about seven transactions per second (TPS). Although other cryptocurrencies such as Ethereum perform better than bitcoin, they are still limited by blockchain. Legacy brand Visa, for context, can process 24,000 TPS.
Solutions to this issue have been in development for years. There are currently blockchains that are boasting over 30,000 transactions per second.