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What is Blockchain Technology? How Does Blockchain Work?

What is Blockchain Technology? How Does Blockchain Work?
Reshma Mandal
November 8, 2017

The Blockchain technology is a transparent, secure data storage and transfers technology that works without a central system. The blockchain database is a distributed database that contains a record book of all the transactions carried out between two parties from the time it is set up. It’s shared by its various users, with no middlemen, which means each member can check the validity of the chain.

How does blockchain work?

It is a growing list of records called blocks, which are linked using cryptography. Each block contains a hash pointer which links to the previous block, a timestamp and transaction data. Blockchain distributed database is an example of a distributed system with high fault tolerance and is secure by design.

As digital information is distributed and not copied, blockchain technology creates the backbone of the internet with new definitions.

The above video will explain you about the blockchain technology.

Blockchain as a Distributed Database

Blockchain distributed database is typically managed by the peer-to-peer network with a protocol for validating new blocks. Blockchain contains information as a shared and continually reconciled database. The blockchain database is not stored in a single location, its public and genuinely verifiable. A hacker cannot corrupt the information. And a million of computers simultaneously hosts it, and its data is accessible to anyone on the internet.

Blockchain like Google Docs for Documents

Microsoft word document is used as a traditional way of sharing documents, but the drawback in this scenario is that you need to wait until receiving the return copy for making any changes to the document. It is because you are locked out of editing it until the other person is done with the same. Two owners cannot mess with the same document, and this is now database works today. But with Google Docs, both the parties can access the same document at the same time, and the single version of the document is always visible to both of the parties. Blockchain ledger largely shared record book, but it is a shared document. The distributed part plays its role when sharing involves a large number of people. Instead of transferring the whole business document back and forth, you can share the document, and shared document analogy is always the powerful one.

Blockchain Durability and Robustness

Blockchain has a built-in robustness, By storing blocks of information that are identical across the network, the blockchain cannot:

  • Controlled by a single entity.
  • No single point of failure.

The internet itself has proven its durability for almost 30 years. It's a track record that bodes well for blockchain technology as it continued to be developed.

How Blockchain Helps?

The blockchain is a mechanism to bring everyone to the highest degree of accountability. No more missed transactions, human or machine errors, or even an exchange that was not done with the consent of the parties involved. The blockchain technology helps guarantee the validity of a transaction by recording it not only on the main register but to a connected distributed system of connected registers through a secure validation mechanism.

Transparent and Incorruptible

The blockchain network lives in a self-auditing state where it checks its transaction, itself in every 10 minutes. Each transaction is referred to as a "block". As the definition itself says it is public, that means transparency data is embedded within the network as a whole. It cannot be corrupted and altering any unit of information on the blockchain is proportional to use a huge amount of computing power to override the entire network. Blockchain solves the problem of "manipulation".

A Network of Nodes

The blockchain is a structure of a network of computing "nodes". Node is the computers connected to the blockchain network using a client that performs the task of validating and relying upon transactions. Each node is an "administrator" of the blockchain and joins the network voluntarily. Each one has an incentive for participating in the network and chance of winning.

The Blockchain is a Decentralized Technology

Decentralized means the network operates on a peer-to-peer basis. And decentralized networks will be the next huge wave in technology.

Who will use the Blockchain?

You don't have to get knowledge about the blockchain for it to be useful in your life. Finance offers the most reliable use cases for the technology in the current scenario. The World Bank estimates that over $430 billion US money transfers were sent in 2015 and at the moment there is huge demand of blockchain developers.

The blockchain potentially cuts out the middleman in these types of transactions. Personal computing has now been accessible to the general public with the invention of Graphical User Interface(GUI) in the form of a desktop. Similarly, the GUI devised for the blockchain is "wallet" applications, which every people can use to buy things, and they can store it along with other cryptocurrencies.

The Blockchain Security

Many risks can generate from data being held centrally, by storing data across its network and the blockchain technology eliminates it. Today internet has security concerns, and it is familiar with everyone. We all rely on "username/password" system to protect our identity, and blockchain security methods use encryption technology. "Public and private keys" are the basic. A public key(a long, randomly-generated strings of numbers) is a user address on the blockchain. The private key is like a password that gives its owner access to the digital assets. So store your data on the blockchain, and it will become incorruptible.

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Blockchain Business Applications

What would new business application results after successful blockchain implementation? Please go through the following results:

Smart contracts
The distributed blockchain ledger enables the coding of simple contracts which will execute when met specifies conditions.

The sharing economy
The blockchain clears the way to direct interaction between parties by enabling peer-to-peer payments. So overall a decentralized sharing economy results.

Crowdfunding
The blockchain creates crowd-sourced venture capital funds.

Governance
As the blockchain database is a distributed database, the results are fully accessible and transparent which can bring full transparency towards elections or any other kind of poll taking.

Supply chain auditing
The blockchain technology results in transparency based on timestamping of a date and location. It provides an easy way to certify that the things we buy are genuine.

File storage
Decentralized file storage prevents project files and data from being hacked or lost.

Prediction markets
The blockchain technology is called as the "wisdom of the crowd" technology which will no doubt predict other future applications.

Protection of intellectual property
Smart contracts blockchain can protect copyright and eliminates the risk of file copying and redistribution.

Internet of things(IoT)
The automation of remote systems management is possible by smart contracts blockchain. The combination of software, sensors, and the network facilitates an exchange of data between objects and mechanisms.

dentify management
Distributed blockchain ledger provides you with the enhanced methods to prove your secure identity which will help you for online transactions like sharing economy.

AML and KYC
Anti-money laundering (AML) and know your customer (KYC) have the strong potential for being adapted to the blockchain.One can reduce KYC cost through cross-institution client verification, and it can increase monitoring and analysis effectiveness.

Blockchain Financial Examples

Cash replacement/complement - Issue digital cryptocurrency. example UScoin, Ustoken.

Blockchain Treasury securities operations:

  • Securities: Treasury bonds, bills, notes, TIPS.
  • Register and administer as blockchain-based smart assets via smart contracts blockchain.
  • DACs: issuance, exchange, redemption, tracking, audit, attestation, interest payments.

Secure accounting ledger operations:

  • Internal and governmental operations like Federal Reserve, Government-sponsored Enterprise (FNMA, FHLMC, SLMA).
  • Back-office: clearing, settlement, compliance, audit, QA
  • Front-office: cash, payment, securities operations, contracts.

The Conclusion

The blockchain technology is not only used in finance, but it is also an incorruptible digital ledger that can practically record anything that can be digitized like marriage licenses, birth and death certificates, ownership titles and deeds, educational degrees, medical records, contracts, and votes. As per Vivek Wadhwa, it has the power to transform the billions of lives of people who don't have bank accounts and access to the legal and administrative infrastructure.

Blockchain technology offers non-repudiation, persistence, fault-tolerant operation, security and low-cost, decentralized management. The blockchain forms the ideal organizational framework for identifiers assigned by the distributed system of affiliated organizations. The blockchain is the ideal technology for the digital identifiers working in the public space.

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