What is Blockchain? What are its Pros and Cons?
Blockchains. Well, if you’re looking for a simple definition blockchains are a system that allows users to record information in a manner that makes it extremely difficult, if not impossible to change or hack.
However, like many networks in this new wave of technology, like Web3, blockchains go far beyond just this simple definition.
In essence, blockchain technology now allows us to buy, sell and trade online without third-party contenders. For example, if you’re selling your computer on eBay, you are not directly selling your computer to the buyer, instead, you must go through a third party (eBay).
Often this third party will present both the buyer and seller with additional fees. When making a post on eBay, sellers must pay a small publishing fee, and when that product is sold, the buyer must pay additional fees to eBay.
Now, with blockchain technology, there are platforms that essentially remove this third party, so there is no need to pay additional fees on both ends while simultaneously guaranteeing security and trust within the transaction.
You may be familiar with the term blockchains from bitcoin. However, what you may not have realized is that blockchain technology began way before in the late 1980s.
Founded in 1989 by David Chaum, DigiCash (which arguably was too early for its time), aimed to give users a platform where they can make anonymous, untraceable transactions.
In fact, this was a common theme seen throughout the ’90s and into the early 2000s. Many companies attempted to create a platform for users to make anonymous transactions however, many viewed this as a platform for money laundering and several companies became bankrupt.
The First Blockchain
So, what changed? How did a platform that few trusted and caused several companies to go bankrupt evolve into a multi-billion-dollar platform?
The answer is Bitcoin. In January 2009, the Bitcoin software was released. With its original release, Bitcoin was an open-source software meaning anyone could examine and reuse the software. This allowed companies like Litecoin and Name coin to build upon the original Bitcoin software and add their own improvements.
How Did Bitcoin Become So Big?
Since the creation and publishing of the Bitcoin software, several new applications have led to the widespread use of Bitcoin technology. From cryptocurrency, decentralized finance (DeFi), non-fungible tokens (NFTs), and smart contracts the use of blockchains can be seen all over and allows digital information to be recorded and distributed, but not edited.
How Does This Technology Work?
So, we know this technology has been around for decades and has aided in the widespread use and popularity of Bitcoin – but how exactly does it work?
1. A new transaction is entered into the system
2. This transaction is then transmitted to a network of peer-to-peer computers that are scattered across the world
3. This network of computers then solves equations that confirm the validity of the transaction
a. Determines if users have enough funds for the transaction
b. Ensures that funds are legitimate and only be used once
4. Once the legitimacy is confirmed, they are clustered together in a block
5. These blocks are then chained together to create a long history of transactions
a. Hence the term blockchains
b. All transactions remain permanently recorded
6. The transaction is now complete!
Security in Blockchain
Historically banks and other companies have held all their information in a network of personal computers. Keeping all this information in a small network of computers allows it to be more fragile and vulnerable. What happens if the database is breached? Or a bad actor can erase everything? Then all that data is now either lost or corrupted.
By storing information in blockchains this information is now scattered among several different networks at various locations.
For example, if someone tries to alter Bitcoin's record of transactions, it will only be altered in one specific node and the other nodes will cross-reference with each other and can locate where the misinformation is.
This network establishes a transparent sequence of events for information to be safely stored.
A Few Catches to Blockchain
Almost five years after the publishing of Bitcoin, a 2013 startup called Ethereum published a paper that outlined a promise to allow coders to create their own blockchain-based software without having to start from scratch or rely on the original Bitcoin software.
In 2015, this same startup released a platform to create “smart contracts”. Smart contracts gave way to the possibility of making agreements and contracts nearly completely virtual.
For example, suppose someone tries to alter Bitcoin's record of transactions. In that case, it will only be altered in one specific node and the other nodes will cross-reference with each other and can locate where the misinformation is.
With the trust that the software was written correctly, smart contracts use blockchain technology to provide a decentralized network for users.
In 2016, a still unknown hacker walked away with about $50 million worth of Ethereum’s custom currency due to poorly written code. This coding error allowed the hacker to make off with the virtual cash that investors pooled.
Pros and Cons
While blockchains may not be perfect, they still are able to give way to several forms of decentralization that are proven to be helpful in a new wave of technology.
Cost reduction by reducing third parties
Regulations vary by jurisdiction
History of being used on the dark web
Provides secure, private, and efficient transactions
Decentralization makes it harder, if not impossible to tamper
The Future of Blockchain
The adoption of blockchain technology allows businesses to change the way they do business drastically. The future of blockchain will go far beyond cryptocurrency and finance – it can be used in healthcare, insurance, and even voting.
The Bottom Line
Blockchain technology has been around for a while and has quickly increased in popularity. By utilizing blockchain technology, companies and businesses can give their customers a decentralized platform to make transactions and store information. Within the next few years, we will be seeing blockchain technology used in a much broader sense.
NFA: Not Financial Advice. IYOPS or the author(s)/editor(s) are not registered investment advisors or brokers/dealers. All investment opinions expressed are from the personal research and experience of the author/editor and are intended as educational material. Despite our best efforts to make the information available as accurate as possible, occasionally, we err, as humans do.
DYOR: Do Your Own Research before making any investment decisions based on your personal circumstances. We recommend taking professional advice before making any investment decision.
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Olivia Meak is a content writer at the International Youths Organization for Peace and Sustainability. She's also a first-year BA, Political Science and Government student at the University of Washington.
Inputs and edits by Aswin Raghav R.