A blockchain is a type of database that stores data in blocks that are then chained together. Blockchains differ from a standard database because of the way the data is structured. A blockchain collects information together in groups or blocks.
Each block has a certain storage capacity and once reached it is chained onto the previously filled block. This forms a chain of data known as the blockchain. This system of recording information creates an irreversible timeline of data when implemented in a decentralised way.
As each block is filled it is given an exact timestamp of when it was added to the chain and is set in stone to become part of the timeline. Blockchain is the underlying technology that many cryptocurrencies operate on.
How blockchain works
A blockchain is a type of distributed ledger. Distributed Ledger Technology enables record keeping across multiple computers, also known as nodes. Nodes verify, approve and store data within the ledger and require a lot of computer power to operate.
With transactions being verified and approved by a network of nodes, it removes almost all human involvement and therefore human error.
As a block is created it has its own unique identifier which is a cryptographic hash. The hash protects the information in the block from anyone without the required code and also determines the block’s place in the chain.
After information is added to the blockchain and it is encrypted with a hash, it becomes permanent and unchangeable. Even if one computer or node is hacked and the data is manipulated, it wouldn’t alter the information stored by other nodes and can quickly be identified and corrected as it will not match the majority.
Given the use of blockchain when investing in cryptocurrencies such as Bitcoin or Ethereum here is an example of how blockchain is used to verify and record Bitcoin transactions.
- A trader buys Bitcoin.
- The transaction data is sent across Bitcoin’s decentralised network of nodes.
- Nodes validate the transaction.
- Following validation and approval, the transaction is grouped with other transactions to form a block, which is added to the chain of transactions.
- The block is then encrypted with a hash and the transaction record becomes permanent.
Types of blockchain
There are four main types of blockchain technology:
A public blockchain is one that is open to the public and can be joined with specific permissions. All that’s required is an internet connection for users to access the network and begin validating blocks and sending transactions. The public network is completely immutable meaning it cannot be tampered with.
These are blockchains that live in a restrictive environment such as a closed network and are under the control of a single entity. These tend to be much smaller than public blockchains and nodes require permission to join the network. But just like public blockchains they are decentralised.
This is a type of blockchain technology that combines aspects of both public and private blockchains. A hybrid blockchain can offer better scalability which can be attractive to organisations.
Also known as a federated blockchain, a consortium blockchain also contains elements of a public and private blockchain, but allows multiple organisational members to collaborate on a decentralised network. This type of blockchain provides higher levels of security and scalability and is more efficient than a public blockchain network.
Advantages of blockchain
The advantages of using blockchain technology include:
If a computer on the network were to make a mistake it would only be made on that one copy of the blockchain. For it to spread to the whole blockchain, it would need to be made by at least 51% of the computers on the network.
Lower third-party verification costs
Eliminating the need for third-party verification also eliminates the associated costs. For example, business owners pay a transactional fee when they receive payments using credit cards to cover the costs of banks and payment processing companies who have to process those transactions. But Bitcoin does not have a central authority and therefore has limited transaction fees.
The majority of blockchains are entirely open-source software, meaning that anyone can view its code. This transparency gives auditors the ability to review cryptocurrencies such as Bitcoin for security. It also means that anyone can suggest changes or upgrades to the system to improve it.
Disadvantages of blockchain
The disadvantages of using blockchain technology include:
High implementation costs
The cost of implementing blockchain can be huge. While most blockchain software tends to be open source it can require a lot of investment from the organisation, on top of this there is the cost of hiring developers and managing a blockchain team.
Can be slow
If there are a lot of users on the network the blockchain can be slow. This can significantly reduce how many transactions per second the blockchain can manage and can prove to be inefficient.
Can consume a lot of energy
Blockchains can have a higher level of energy consumption. In a world where climate issues are prevalent, blockchain isn’t a viable solution for some energy conscious organisations.