What is Blockchain? How Does it Work? – Explained!

You might have heard about blockchain if you are following cryptocurrencies. A big misconception going about bitcoins and blockchains is that they are the same. This is false. Blockchain is a technology that supports bitcoin. But blockchain's use is not restricted to bitcoin or cryptocurrencies. It is a revolutionary technology whose applicability is well beyond cryptos. Before we learn about its usage, let's understand what blockchain is.

What is a Blockchain?

Blockchain is an arrangement for transferring information globally. It is a secure and unshakeable network. In technical terms, blockchain is an unchangeable digital ledger of records. These ledgers are connected via cryptography and stores verified transactions. As of 2018, the blockchain technology market had a total valuation of US$ 1.2 billion. This is expected to grow to more than US$  23.3 billion by 2023.

How does blockchain work?

We will understand this with a very simple example. Imagine a page consisting of 30 transactions chronologically. The first transaction is recorded first and so on. Now, it is very simple to manipulate these records on a piece of paper. One can overwrite, scribble and tamper with the entries. Someone might make a replica and replace the original paper. But that wouldn’t be the case if all these transactions are recorded using a special code language. Say, for example, a combination of letters and numbers. To make it even stronger, every new code created is related to the previous transaction code. If a transaction is approved by a majority of these computers, this page becomes a part of a diary. This diary has the capacity to save a maximum of 50 pages. Once the diary reaches its capacity, we start to maintain a new diary. Imagine this entire process to be online. That is what blockchain technology is. Let those 30 records you imagined be 30 digital transactions. Every transaction is secured with a  hash. Every transaction generates a hash which is a string of alphabets and numbers. The hash created depends on the previous transactions which makes it unique. Those 30 different computers are called nodes. Every node has to verify every transaction. The nodes check to make sure a transaction is valid by inspecting the hash. A single diary consisting of a finite number of records are the blocks. And the group of diaries are nothing but the blockchain. Each block refers to the previous block and together make the blockchain. It is effective as it is spread over many computers, each of which had a copy of the blockchain. There are four to five layers of security to every single transaction. Hacking even a single layer is almost impossible. Once a transaction is recorded and updated on the Blockchain, it cannot be altered. No one can turn off a Blockchain.

Understand its features:

Blockchain is like a universal ledger. You can trace back any event. No one can tamper with the past entries. No one owns the chain. A blockchain has a finite length containing a finite number of transactions. The number of transactions increases over time with every block. Identical copies of the blockchain are stored in every node previously involved. This software network is decentralized i.e., no authority dictates.

Advantages of using blockchain:

If used to its full potential, blockchain is here to disrupt and transform traditional business models. Many significant benefits can be achieved by implementing this technology. Let’s look into these benefits and learn more about blockchain -

1. Reliability and Transparency

In our previous example, we saw that it is impossible to tamper with a recorded transaction on a blockchain. To change a single transaction would require modification of all subsequent records of the entire network. Being a public distributed ledger, all the participants share the same documentation. This shared version can only be updated when agrees on it. Thus, data on a blockchain is reliable and accurate. It is consistent and transparent.

2. Security

Blockchain is more secure than other record-keeping systems. In any industry where protecting data is important, blockchain has the ability to shield that information. Every recorded transaction is linked to the previous one. Code languages, encryptions, and passwords are used. This is formed by a network of computers collectively. It becomes nearly impossible to hack into a blockchain’s system.

3. Reduces Cost

Using blockchain helps reduce the cost to a great extent. For example, middlemen are eliminated for financial transactions. Since the problem of security is solved by blockchain, there is no separate need for a security unit. It also reduces IT costs and the cost of infrastructure required by replacing it with a universal storage.

4. Increased Efficiency and Speed

The traditional book-keeping system involves a ton of paperwork. It is a time-consuming process that is prone to human error. By replacing this process with blockchain, transactions are achieved faster and more efficiently. The digital ledger simplifies the entire process by sharing it among participants. Plus, accessing the same data becomes easier. This allows the settlement to occur much quicker and efficiently.

Other uses of blockchain:

Blockchain’s use is not limited to cryptocurrencies. Its distributed ledger technology has applications in a variety of sectors. Blockchain has applications in industries who need to store information or transfer data. For example -

1. Elections and Polls

Using Blockchain technology is one of the best ways to put an end to election frauds. Sunil Arora, Chief Election Commissioner, stated that the Election Commission of India is working with IIT-Madras for using blockchain technology to make the election process more convenient. The blockchain will enable app-based e-voting by 2024. Introducing blockchain in elections will provide complete transparency of results. Additionally, there will be no tampering once the vote is cast. It will ensure complete anonymity of who voted for whom. Being the world's largest democracy, this could revalorize Indian's Voting System!

2. Warranty Claims

Usually settling warranty claims is expensive and time-consuming. An individual verifies for all the details which may lead to human errors as well. By using blockchain here, we can make the entire process easier and quicker. Blockchain would come with a predetermined set of rules and criteria. Only when these criteria are met, the process can move on to the next step. The blocks can be used to store warranty-related information and statistics. If all the requirements are met and fulfilled, the final warranty pay-out can be triggered. This saves human power, time, and resources!

3. Identity Verification

In 2020, Startup India launched a blockchain-based certification verification system. The main aim was to maintain the authenticity of the certifications awarded to startups. The government said that this new feature introduces an extra layer of security. The same can be accessed by stakeholders to verify the credibility of these start-ups. With the use of blockchain here, the entire process of verifying will be much quicker. Since blockchain is almost impossible to hack, the data will always be safe. The hackers will have a hard time breaking into the system thus maintaining security.

4. Healthcare

Healthcare is a very important sector that needs to be looked upon with priority. Normally, a person’s health history is maintained in a file or a computer. This can be easily misplaced or tampered with. Maintaining individual healthcare records can be overwhelming as well. If a person visits a new doctor, the doctor needs to fetch their medical history. Instead, what if we create a universal database? Using blockchain technology, directly accessing a patient’s history could be possible. This will eliminate all the middlemen. The patient’s records can be accessed from anywhere in the world. It will save time as well as resources if everything is recorded in the chain ethically.

5. Land Records

Land registries are full of paperwork. The biggest disadvantage is that they can be lost, destroyed, or manipulated. If someone wants to sell an old property but has lost their deeds, the process becomes difficult. The seller will have to prove the basis of their claim without the relevant paperwork. The existing process is very insecure and time-consuming. It offers no transparency and is prone to human errors. The implementation of a blockchain here can solve most of these problems. Any structural changes to the building can be updated to the blockchain. If the property is sold, all the relevant documentation can be transferred to the new owner. Every transaction is traceable, timestamped, and accurate. It is straightforward and more accessible. It provides us a way to secure records of ownership that cannot be manipulated. This application enables us to know how, when, where types of questions about the land title. We can visit the previous changes to the land title by checking these records. It gives us easy accessibility to life not only for us but also for the future generation. 6. Finance Blockchain can be used to quickly identify individuals through digital IDs. Many financial institutions have already started using blockchain to optimize their services. It helps eliminate fraud practices and reduces fees for customers. For example, a cross-border transaction takes a couple of days and is expensive. The use of blockchain can make this process faster, more reliable, and less expensive. The accurate recording capability of blockchain can be of great use for clearing and settlement positions. It will not only result in faster transactions but also reduce costs. Blockchain-enabled IDs will allow banks to identify individuals. It will make tracking and maintaining identities both secure and efficient.

End note:

These were just six examples out of many where blockchain can be used. This technology is here to stay. It is now on us how we can use it for our greatest good. With its unique features, blockchain has already impressed many. Now that you understand what a blockchain is, what do you think about the technology? Will blockchain be the next big technical evolution after the internet?