What is Blockchain?
Blockchain is a technology that enables the secure sharing of information. Data is stored in a database and the transactions are recorded in an account book called a ledger.
A blockchain is a type of distributed database or ledger — one of today’s top tech trends — which means the power to update a blockchain is distributed between the participants or nodes of a public or private computer network. This is known as Distributed Ledger Technology (DLT).
Blockchain allows for the permanent, unchangeable and transparent recording of data and transactions. This, in turn, makes it possible to exchange anything that has value, whether that is a physical item or something less tangible.
It has been predicted that by 2027, up to 10% of global GDP could be associated with blockchain-enabled transactions.
A blockchain has following three central attributes.
- A blockchain database must be cryptographically secure. That means in order to access or add data on the database, you need two cryptographic keys: a public key, which is basically the address in the database, and the private key, which is a personal key that must be authenticated by the network.
- A blockchain is a digital log or database of transactions, meaning it happens fully online.
- A blockchain is a database that is shared across a public or private network.
One of the most well-known public blockchain networks is the Bitcoin blockchain. Anyone can open a Bitcoin wallet or become a node on the network.
Other blockchains may be private networks. These are more applicable to banking and fintech, where people need to know exactly who is participating, who has access to data and who has a private key to the database.
Other types of blockchains include consortium blockchains and hybrid blockchains, both of which combine different aspects of public and private blockchains.
Working Process of Blockchain:
When data on a blockchain is accessed or altered, the record is stored in a “block” alongside the records of other transactions. Stored transactions are encrypted and the new data blocks don’t overwrite old ones; they are appended together so that any changes can be monitored.
And since all transactions are encrypted, records are immutable — so any changes to the ledger can be recognized by the network and rejected.
These blocks of encrypted data are permanently “chained” to one another and transactions are recorded sequentially and indefinitely, creating a perfect audit history that allows visibility into past versions of the blockchain.
When new data is added to the network, the majority of nodes must verify and confirm the legitimacy of the new data based on permissions or economic incentives, also known as consensus mechanisms. When a consensus is reached, a new block is created and attached to the chain. All nodes are then updated to reflect the blockchain ledger.
In a public blockchain network, the first node to credibly prove the legitimacy of a transaction receives an economic incentive. This process is called “mining”.
Example: Imagine that someone is looking to buy a recycled textile material from the market. This person has been scammed before by someone selling fake recycled textile material, so she decides to try one of the blockchain-enabled decentralized recycled textile material websites. On these sites, every recycled textile material is assigned a unique, immutable, and verifiable identity. Before the purchase, the majority of the nodes on the network validate the seller’s credentials, ensuring that the recycled textile material is in fact real. She bought her genuine recycled textile material.
Benefits of Blockchain for a business:
Research suggests that blockchain and DLTs could create new opportunities for businesses by decreasing risk and reducing compliance costs, creating more cost-efficient transactions, driving automated and secure contract fulfilment and increasing network transparency. Some of the immediate benefits are listed below.
a) Reduced risk and lower compliance costs:
Banks rely on “Know Your Customer” (KYC) processes to bring customers on board and retain them. But many existing KYC processes are outdated. A new DLT system might require once-per-customer KYC verification, driving efficiency gains, cost reduction, and improved transparency and customer experience.
b) Cost-efficient transactions:
Digitizing records and issuing them on a universal ledger can help save significant time and costs.
In a letter-of-credit deal, for example, two companies opted for a paperless solution and used blockchain to trade nearly Rs. 50,00 crores worth of recycled textile material. By doing so, a process that previously took up to ten days was reduced to less than four hours — from issuing to approving the letter of credit.
c) Automated and secure contract fulfilment:
Smart contracts are sets of instructions coded into tokens issued on a blockchain that can self-execute under specific conditions. These can enable automated fulfilment of contracts.
For example, one retailer of recycled textile material wanted to streamline its supply-chain-management efforts, so it began recording all processes and actions, from vendor to customer, and coding them into smart contracts on a blockchain. This effort not only made it easier to trace the source of recycled textile material supplier but also required less human effort and improved the ability to track lost products.
d) Safe data storage:
With blockchain, companies can create an indelible audit trail through a sequential and indefinite recording of transactions. This allows for systems that keep static records (of land titles, for example) or dynamic records (such as the exchange of assets).
e) Easy data tracking:
Blockchain allows companies to track a transaction down to its current status. This enables companies to determine exactly where the data originated and where it was delivered, which helps to prevent data breaches.
Blockchain for better data security:
- Blockchain creates a decentralized identity which helps in providing greater security over personal data.
- Assets get secured on the blockchain when multiple devices confirm their transactions on the network. Therefore, the security provided by blockchain is better compared to others.
- Hash function-based security of blockchain strengthens authentication and can help resolving problems associated with the technology.
- Transactions in blockchain are permanently stored
