Blockchain
Blockchain may be among the buzziest technologies to disrupt the world of finance, tied to the rise of cryptocurrency, but it’s refashioning perhaps the most archaic of all financial tech: the ledger. Yes, the system that originated from the clay tablets ancient Mesopotamians used thousands of years ago to record transactions and balances.
This latest iteration, however, has bells and whistles that make the ledger capable of overturning the entire financial environment that once brought it into existence.
How does blockchain technology work?
The critical aspect that separates blockchain from all other ledgers and databases is that it’s designed to distribute and record information on a peer-to-peer basis that, once completed, is unchangeable and incorruptible.
Immutable verification is one of blockchain’s key features. All data contents are “set in stone,” so to speak, but digitally. And blockchain networks accomplish this goal using strict consensus verification procedures. So, how does it work?
- Digital transactions are stored in a digital “block” (sort of like a ledger entry) that’s added to a previous “chain” of blocks; hence the term blockchain.
- Each block has a unique “hash,” like a signature or identification code, and a time stamp to show the exact time it was validated or mined.
- Each block contains the previous block’s hash, forming the chain.
Once a block is added to the blockchain, all nodes (participating computers) update their copy of the blockchain. This is what makes the blockchain a secure system. Any changes to the contents of a single block have to be recorded in a new block, making it nearly impossible to rewrite a block’s history.
If a hacker tried to tamper with an existing block, then they would have to change all copies of that block on all participating computers in the network. That’s virtually impossible—the number of participating computers across the globe can number in the high thousands. Unless every single node in the network agrees with a change to a block, the change is discarded.
How can blockchain be used?
Any industry that can use a peer-to-peer transaction system with an immutable ledger can benefit from blockchain technology. It’s easy to imagine how expansive blockchain applications can be.
The cryptocurrency industry made blockchain something of a household term; decentralized and traditional finance may soon follow crypto’s cue. Other fields that may adopt blockchain technologies include non-fungible token (NFT) markets, supply chain and logistics, energy, health care, e-commerce, media, voting systems, and government and public sector operations. A key to innovation may be smart contracts—blockchain-based computer programs or transaction protocols that function as digital contracts—and the decentralized applications (dApps) that use them.
Again, we’re still at the beginning stages of blockchain development. Although its potential use cases are many and various, it’s important to remember that wide-scale adoption hasn’t quite begun.
What are the risks?
Every unique technology comes with its own unique set of risks. Blockchain is no exception.
Although the blockchain itself may not be hackable—remember, it’s an immutable ledger—the systems surrounding the blockchain can be hacked.
The simplest example is that of a bad actor obtaining passwords and credentials to access digital assets. Unsecured and exposed goods can be stolen.
A more sophisticated risk is that of a 51% attack. In cryptocurrency applications, this means a single entity could gain control of more than 50% of all cryptocurrency mining or staking. Once in control, the entity may not be able to alter previous blocks on the chain, but it can alter future blocks. For instance, it may be able to prevent or reverse transactions, possibly even double-spending any cryptocurrency pending a slot in the block.
For large networks like Bitcoin and Ethereum, a 51% attack may be too difficult and too costly to attempt. But for smaller networks, it may be possible.
Blockchain technology has taken the world by storm, and its potential impact cannot be overstated.
Blockchain is the technology behind cryptocurrency, but it’s also more than that.
Let’s take a look at what blockchain technology does, how it works, and why everyone from big banks to multinational shipping companies to non-profits is suddenly so interested in this revolutionary new technology.
