What is Blockchain Technology, and How Does it Work?

Over the last few years, the phrase “blockchain technology” has most likely been associated with cryptocurrencies such as Bitcoin. You might even be curious about blockchain technology and how it works. Blockchain has been around for a decade, and many people are still confused about what it is and how important it is in the digital world.

Blockchain has evolved from a cryptocurrency foundation to the backbone of many other digital sectors around the world. However, as blockchain technology evolves, there is a need to keep up and learn about the fundamentals of blockchain and how it works. Let’s go over how blockchain technology works and how it relates to the evolving digital world.

What Is Blockchain Technology?

Blockchain is a data storage technique that makes it difficult or impossible for the system to be changed, hacked, or otherwise abused. A blockchain is a type of distributed ledger technology (DLT) that distributes and copies transactions across a network of computers. Blockchain technology is a framework for storing public transactional records (also known as “blocks”) across multiple databases in a network of peer-to-peer nodes. A “digital ledger” is a term used to describe this type of storage. Blockchain is a decentralised, permanent ledger that facilitates asset tracking and transaction recording across a network of businesses. A physical asset (a house, a car, money, or land) or an intangible asset (intellectual property, patents, copyrights, branding). On a blockchain network, almost anything of value can be recorded and traded, lowering risk and increasing efficiency for all users. Every transaction or activity in this ledger is verified and protected from fraud by the owner’s digital signature, which is especially important in Bitcoin transactions. As a result, the information in the digital ledger is extremely secure. The digital ledger is a network of computers that share a Google spreadsheet where transactional data is kept based on actual purchases. The data is available for public viewing but cannot be changed, which is intriguing.

Why is blockchain so Important?

Blockchain is gaining popularity in this new era, but why is it so important in the digital world? Blockchain technology has applications in a variety of industries, including supply chains, manufacturing, and banking. Blockchain technology can be used for the following purposes:

#1 Enhanced Security

Blockchain reduces fraud and illegal behaviour by creating an immutable record that is encrypted end-to-end. The blockchain can also improve privacy and security by using permissions to restrict access and encrypting personal data. To prevent hackers from accessing data, particularly digital currencies, data is distributed across network nodes rather than on a single server.

#2 Greater Transparency

Without blockchain, every business must maintain a distributed database with no assurance of transparency. Because blockchain technology employs a distributed ledger, transactions and data are now identically recorded in multiple locations. Because any network user with permissions can see the same data at the same time, full transparency is provided. Each transaction is time and date stamped to ensure its immutability. As a result, because members can see the entire history of a transaction, there is virtually no room for fraud.

#3 Instant Traceability

A blockchain-based audit trail records each step of an asset’s origin as it moves through its life cycle. This aids in providing proof in industries where customers are concerned about the environmental or human rights implications of a product, or in industries plagued by fraud and counterfeiting. Blockchain enables direct communication of provenance information to customers. Traceability data can reveal flaws in any supply chain, such as where goods may be stored on a loading dock while being transported.

#4 Increased Efficiency and Speed

Paper-based processes take a long time, are prone to human error, and frequently necessitate third-party mediation. By automating these operations with blockchain, transactions can be completed more quickly and effectively. The blockchain enables the storage of documentation alongside transactional information, removing the need for paper exchange. Because multiple ledgers do not need to be reconciled, clearing and settlement can occur much more quickly.

#5 Automation Capacity

Smart contracts have the potential to automate transactions, increasing your productivity and speeding up the process even further. When pre-specified requirements are met, the next stage of a transaction or process is automatically initiated. Smart contracts require less human intervention and rely less on third parties to ensure that a contract’s provisions are followed.

Types of blockchain

There are four types of blockchain, depending on the network on which they operate. Among the various types of blockchain are:

#1 Private blockchain networks

A private blockchain network is one in which the ledger and transaction data are controlled by a single authority. Private blockchains perform well for private companies and organisations on closed networks. Private blockchains enable businesses to configure network characteristics, access and permission options, and other critical security features.

#2 Public blockchain networks

Public blockchains gave rise to cryptocurrencies such as Bitcoin and others, as well as contributing to the advancement of distributed ledger technology. Public blockchains help to alleviate some difficulties and problems, such as centralization and security flaws. Rather than being kept in a single location, data is distributed across a peer-to-peer network using DLT. Proof of stake (PoS) and proof of work (PoW) are two widely used consensus algorithms for validating information.

#3 Permissioned blockchain networks

Permissioned blockchain networks, also known as hybrid blockchains, are private blockchains that provide exclusive access to approved users. Organizations frequently set up these blockchains in order to achieve the best results for both users, and they provide better structure when determining who can join the network and participate in which transactions.

#4 Consortium blockchains

Consortia blockchains, like permission blockchains, have both public and private sections, but they will be managed by multiple organisations rather than just one. Although establishing these blockchains may be more difficult at first, once operational, they can provide greater security. Consortium blockchains are the best for collaborating with multiple organisations.

How Does Blockchain Technology Work?

You may have noticed that several companies have recently begun to use blockchain technology. But how exactly does blockchain work? Let’s take a look at how blockchain works to find out. Blockchain is a conglomeration of three leading technologies: Cryptographic keys, A peer-to-peer network with a shared ledger and a means of computing to store the network’s transactions and records Cryptography keys are classified into two types. They are known as the Private key and the Public key. The use of private and public keys makes two-party transactions easier. These two keys are personal to each individual and are used to establish a secure digital identity reference. This secure identity is the most important aspect of blockchain technology. In the cryptocurrency community, this identity is known as a “digital signature,” and it is used to approve and manage transactions. Many authority figures use the peer-to-peer network and digital signatures to agree on transactions and other matters. When they approve a transaction, it is mathematically verified to ensure its validity, resulting in a successful secured transaction between the two network-connected parties. Cryptography keys are used by blockchain users to conduct various digital exchanges across the peer-to-peer network.

The Process of Transaction

Transaction confirmation and authorization are two key features of blockchain technology. For example, if two people want to use their private and public keys in a transaction, the first person would attach the transaction data to the second person’s public key. This information is compiled into a block. The block contains a timestamp, a digital signature, and other important information. It should be noted that the block contains no information about the identities of the transaction’s parties. The block is then distributed throughout the network, and the transaction is completed when the authorised user uses his private key to match it with the block. In addition to financial transactions, the blockchain can store transactional information about homes, cars, and other items. Here’s an example of how blockchain can be used:

#1 Hash Encryptions

The SHA256 algorithm is most commonly used in blockchain technology to secure data via hashing and encryption. The SHA256 method transmits data about the sender’s (public key) address, the recipient’s address, the transaction, and the private key. After being verified, the hashed data is sent around the world and encryptedly added to the blockchain. The SHA256 algorithm’s virtually impenetrable hash encryption simplifies sender and receiver authentication.

#2 Proof of Work

In Proof of Work, users who own the network’s machines must first solve a difficult mathematical puzzle before adding a block to the chain. In blockchain, there are various types of headers. Many people use computer procedures to try to find the best hash value to satisfy a predefined criterion. The transaction is completed when the predetermined condition is met. Blockchain miners, in essence, attempt to solve a proof of work problem, which is a mathematical puzzle. The person who solves it first wins a prize.

#3 Mining

Mining is the process of adding transactional information to the current digital/public ledger. Despite its association with Bitcoin, the term is also used to describe other blockchain technologies. Mining is the process of creating the difficult-to-forge hash of a block transaction without the use of a centralised system.

Impact of Blockchain Technology on the Digital World

There have been significant changes in how financial transactions and other sectors around the world operate since the introduction of blockchain technology. This implies that blockchain technology has a significant social impact. One of the most visible applications of blockchain technology is in digital currency, particularly Bitcoin. Because of Bitcoin blockchain technology, financial services such as digital wallets have benefited many people, which is its primary use case and the motivation behind its creation. Microloans and micropayments have been made available to people in less-than-ideal financial situations in order to revitalise the global economy. On a blockchain platform, all transactions on the chain can be tracked from start to finish. Blockchain technology has had a significant impact on the concept of trust, particularly in international transactions. Hiring lawyers to assist two parties who did not trust each other used to take more time and money. Nonetheless, the introduction of cryptocurrency has fundamentally altered the trust formula. Blockchain greatly benefits individuals and businesses in such situations by allowing users to avoid the traps set by dubious third-party mediators. The Internet of Things (IoT) is a brand-new world that is already brimming with smart gadgets that can do everything from turn on your household appliances to operate your automobiles, manoeuvre your ships, and control traffic safety in your neighbourhood, among other things! In this case, blockchain technology comes in handy. Any business can improve processes and keep more precise records in all of these situations by utilising blockchain technology to create Smart Contracts (and more). When it comes to safeguarding sensitive patient data, blockchain technology can provide a secure platform for the healthcare industry. Health-care organisations can use blockchain technology to create a centralised database and distribute information only to those with the necessary permissions.

Conclusion

Blockchain Technology in Malaysia is quickly becoming well-known, owing primarily to bitcoin and cryptocurrencies, with numerous real-world applications currently being adopted and researched. Blockchain technology has the potential to reduce the number of intermediaries while improving the accuracy, efficiency, security, and cost-effectiveness of corporate and government processes.

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