We have all heard of blockchain being used for cryptocurrency and data storage, but the technology itself isn’t as new as it presents itself to be. Blockchain was first outlined back in 1991 for a timestamp system where the data could not be altered. However, it wasn’t until 2009 that blockchain had its first real world use case with the launch of Bitcoin. But what is it? And why are companies leaning towards it?
In traditional applications, data is stored in a single location — either a cloud or in a database on a localized computer. This data is then secured using many techniques such as cryptography, password protection, multi factor authentication or other methods. In addition, the data must be protected against cyber attacks, which requires extensive measures.
Even after all the efforts, the data is in a centralized location, controlled by a third party. If the cloud provider decides to stop working or has a glitch, the data is not accessible. Similarly, if the data is on a local storage, risks like short circuit, natural calamity, or loss of data by human error, are always there. In addition, the data is vulnerable to third party interference and hence can be used for malicious purposes including manipulation and blackmail. For instance, the use of search history by social media platforms to show relevant ads.
The problems listed above are the primary reason behind the appropriateness of Blockchain in modern society.
Blockchain creates a secured ecosystem where the integrity of data is maintained along with the trust among the participants.
What is Blockchain
Blockchain is a distributed ledger technology. The data stored in Blockchain is immutable, auditable, credible, and unhackable. In essence, Blockchain maintains a single record of all the interactions between the participants on the network. This record or ledger is shared among specific participants called nodes. Each node has the same copy of the ledger and can be referenced at any point of time to establish the authenticity of the data.
There are four main components of blockchain that make this possible:
Consensus is the heart of Blockchain. It is a protocol which is used to reach mutual agreement between two non-trusting parties without the need for a third governing party. For instance, if two people want to do a financial transaction, they can do it without the bank by making direct transfers on the Blockchain.
These are the core components of Blockchain. Nodes are the machines that maintain the data of Blockchain. These machines are distributed across the globe and share the same copy of ledger belonging to a specific Blockchain. There are different types of nodes in a Blockchain including miners, light nodes, and full nodes.
The data stored in the Blockchain is stored inside a block. Each block contains a private key which can be used to view the data inside the block. This block is connected to the next cryptographically. This cryptographic link is created by including the hash of one block in the next block and then a hash of the new block is created. The hash of the new block is then sent to the next block, combined with its data and then a new hash is created. Therefore, every block has the hash of the previous and if any small modification is done in the data of any block, the hash does not match. This essentially means that the data is immutable once it is entered in the blockchain.
The implementation of any business logic on Blockchain is achieved through smart contracts. These are pre-written codes that dictate terms and conditions for an interaction between the participants of the Blockchain. Smart contracts allow the network to be free from any third party intervention.
Types of Blockchains
There are three major types of Blockchains:
- Public Blockchain
A public Blockchain is a network that can be accessed by anyone. This Blockchain does not require any permission or authorization. It provides a trusted and transparent ecosystem. They are completely decentralized.
- Private Blockchain
Private Blockchains are restricted to a specified ecosystem. If a person wants to be a part of the private Blockchain network, they need authorization or access to the network given explicitly by the network owners. Private Blockchain are used to establish limited transparency and have the utmost security for the sensitive data. They are more popular in the enterprise space due to their restricted access.
- Hybrid Blockchain
Hybrid Blockchain is a network that can be used both as public as well as private Blockchain. A hybrid Blockchain allows the network to secure the sensitive data while the rest of data can be made public.
Apart from this, Blockchains are also sometimes characterized as permissioned and permissionless. There is also a concept of side chains which allows the creation of a child Blockchain connected to the main network for reaching more scalability among other reasons.