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What Is Blockchain Technology And How Does It Work?

Blockchain technology

What is Blockchain Technology?

Blockchain technology, also known as Distributed Ledger Technology (DLT), uses cryptography and decentralisation to make stored data transparent and immutable.

Decentralisation is a core feature of blockchain technology that allows identical copies of information to be simultaneously stored on multiple computers or nodes within a network.

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Cryptocurrency transactions, NFT ownership, smart contracts, and pretty much any kind of data can be stored on a blockchain.

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History of Blockchain Technology

Blockchain has no single inventor; however, in 1991, Stuart Haber and W. Scott Stornetta published a research paper on how to time-stamp a digital document.

This research focused on making digital documents immutable with a Time Stamping Service using digital signatures.

In 1998, a computer scientist named Nick Szabo came up with Bit Gold, a decentralised digital currency idea that will function using a time-stamped hash chain.

The first public adoption of blockchain was in 2009 with the arrival of bitcoin – the first cryptocurrency underpinned by blockchain technology.

How does Blockchain Work?

A typical blockchain transaction follows the following steps:

  • Blockchain digital ledgers are like chains linking various individual data blocks or transactions together. Transaction requests by intending nodes on the network are made to add new data or transactions to this chain.
  • These new transactions are sent out to participating nodes on the network to verify and confirm their legitimacy before they can be added to the existing blocks in the ledger.

This rigorous process of information vetting every time new transactions are added to the blockchain ledger is the reason why the technology is considered highly secured.

Types of Blockchain Networks

Public Blockchain

Public blockchain networks are permission-less distributed ledger networks where anyone can join and do transactions. It is a non-restrictive version where each participating peer has a copy of the ledger.

Anyone with an internet connection can access the public blockchain network. The bitcoin blockchain is an example of a public blockchain network.

Private Blockchain

A private blockchain network is also known as a permissioned blockchain. This is a type of blockchain that works in a restrictive environment, or that is under the control of an entity.

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Private blockchain networks are most suitable for private organisations that use them for internal purposes. Under this condition, access is only granted to selected participants.

Consortium Blockchain

Consortium Blockchains are also known as federated blockchains, and they have some aspects of their operations made public, while others remain private. These blockchains, unlike private blockchains, are administered by a collection of organisations.

This type of blockchain network has more decentralised features than private blockchains, hence offering increased security.

Setting up a consortium blockchain network can be challenging due to the logistical issues involved in resource provision and allocation within the organisations collaborating.

Hybrid Blockchain

A hybrid blockchain network is a combination of a private and public blockchain as it combines the best of both worlds.

How to Apply Blockchain Technology

Decentralised Finance (DeFi)

Blockchain is the ultimate leveller for decentralised access control and supervision. For example, decentralised finance blockchain applications give users direct control over their financial transactions in ways and manners that do not require a bank’s intermediary role.

For instance, people can engage in lending activities with each other using their cryptocurrencies and other digital assets through peer-to-peer lending.

The loan terms can be enforced by smart contract algorithms and digitally binding on all parties involved.

Smart Contracts

Smart contracts are pre-determined digital agreements between two or more people stored on the blockchain ledger.

These contracts self-execute agreed-on transactions without recourse to any third party once the stated conditions contained therein are met. Cardano ADA is an example of a smart contract platform.

Any party cannot alter the contracts without the consent and validation of each other.

Election Voting

The application of blockchain in electronic voting eliminates voter fraud as votes cast cannot be altered. This is so because results legitimacy is hinged on the fact that all votes cast will be verified and validated by all participating nodes in the blockchain network to be accepted.

Blockchain-derived election voting system guarantees fraud-free, transparent, and voter privacy election outcomes.

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Data Security

The single point of failure phenomenon, an “Achilles heel” of regular data storage infrastructures, is eliminated by adopting blockchain technology.  This is because of its decentralised framework and its end-to-end encryption architecture.

Supply Chain Management

Data of goods stored on the blockchain’s secured ledger can be easily tracked as they move through supply chain networks.

Data tracks are real-time, accurate, and available to all partners simultaneously. As a result, ease of communication is fostered among all stakeholders while efficiency in service delivery is improved.

Examples of Blockchain Technology

Bitcoin Blockchain

This is the first public decentralised blockchain network that allows users to transact crypto assets directly, peer to peer, without a middle entity to manage the exchange of the transactions.

Ethereum Blockchain

Ethereum is a decentralised open-source blockchain platform with smart contract functionality utilising a peer-to-peer network to execute and verify applications securely.

IBM blockchain

IBM blockchain platform is a public cloud service platform designed to empower businesses to digitise their transactions through a secure, shared, and distributed ledger improving efficiency among public and private sectors.

Aeternity

Aeternity is an open-source blockchain network that enables high-speed transacting, purely-functional smart contracts.

Is Blockchain Technology the Same Thing as Cryptocurrency?

Blockchain technology is not the same thing as cryptocurrency. Blockchain as a decentralised digital ledger is the technology that underpins cryptocurrencies transactions.

Cryptocurrencies are digital currencies that can be used to exchange goods and services and run on blockchain technology.

Cryptocurrency is only one of the applications of blockchain technology. So, blockchain technology can be applied to solve multiple challenges in other areas of life, like – medicine, supply chain, logistics, financial services, etc.

Difference Between Blockchain and a Bank

The key difference between blockchain networks and the regular banking system is decentralisation.  The regular banking system works on centralised operations, often supervised and controlled by central banks. Blockchain, on the hand, runs on decentralised networks with no central monitoring or supervisory.

Advantages of Blockchain Technology

Decentralisation.

The decentralised feature of blockchain technology means faster transactions validation time. No central intermediary is required to authenticate and validate transactions except the network users/participants.

Single Point of Failure Elimination

Blockchain technology is not under the control or ownership of anyone.  Its network distribution architecture allows different users to have multiple copies of the same information in real-time. And this makes it resilient and resistant to a single point of failure.

It is practically impossible to experience any single point of failure on the network because data distribution and updates are real-time among different network nodes or users.

Immutability

Blockchain records are tamper-proof as transactions on the decentralised ledger cannot be altered or deleted.

Open And Verifiable Transactions

Anyone can become a participant in the contribution to blockchain technology. One does not require any permission from anybody to join the distributed network.

Participants can verify the correctness of the information shared on the distributed network by applying zero-knowledge proof.

Disadvantages Of Blockchain Technology

High Energy Consumption

Blockchain transactions consume a significant amount of electric energy. This is because they keep a real-time distributed ledger that communicates back and forth with each node on the network.

High Implementation Costs

Deploying blockchain technology at the enterprise level is a costly venture. And this contributes to the delays in its mass adoption and implementation across various industry sectors.

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How Small Businesses Can Benefit From Blockchain Technology

Secure Form of Currency Transaction

Financial services adoption of blockchain technology through cryptocurrency is more developed than other industries’ adaptation of the technology.

Cryptocurrency’s superior advantage of free transfer flow unobstructed by third-party intermediaries is a game-changer for small businesses.

Businesses can now conduct secure financial transactions with their customers and partners worldwide at little cost without any third-party intermediary.

The Utilisation of Smart Contracts

Small businesses can leverage blockchain technology to create smart contracts. Smart contracts are self-executing based on pre-defined rules and agreements set by the contracting parties beforehand.

For instance, contracting parties A and B can agree to draw up a smart contract stating that a 30% mobilisation fee be released on day 1 to party B for the repainting of Party A’s office building.

Another 40% of the contract sum be released on day 15, and the remaining 30% be released on work completion – day 30.

Once these contract terms are fed to a blockchain application, this smart contract will monitor work progress, verify, and enforce the fulfilment of agreed terms all by itself.

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Logistics and Supply Chain Management

For small businesses in the logistics and supply chain end of the business spectrum, adopting blockchain technology in their operations will promote greater efficiency in service delivery.

A blockchain app will keep end-to-end secured tracking of goods within the delivery channel providing real-time monitoring while avoiding paperwork delays.

Healthcare Delivery

Blockchain technology can be leveraged to store patients’ medical records by healthcare providers securely.

Once a medical record is generated, signed, and written into a blockchain ledger, it remains unalterable. This gives patients confidence and privacy that unauthorised persons cannot manipulate their records.

Data Storage

Blockchain storage solutions utilise the unused hard drive space of users across the globe to store files at a cheaper price when compared with regular cloud storage options.

The decentralised feature of blockchain networks guarantees both the security and privacy of these data and their owners.

Payroll Management

Small businesses can leverage the automation capabilities of blockchain technology in digital payments to power and execute their often-complicated payroll processes – salaries, benefits, tax deductions, etc.  This can be done promptly, eliminating delays and reducing third-party service costs.

Frequently Asked Question (FAQs) About Blockchain Technology

1. What is Proof of Work?

Proof of work (PoW) is a type of blockchain decentralised consensus mechanism that requires users in a network to expend effort solving various mathematical puzzles to validate transactions within the system.

Proof of work is widely used in cryptocurrency mining.

2. What is Proof of Stake?

Proof of stake (PoS) is another consensus mechanism used to validate cryptocurrency transactions. In this system, cryptocurrency owners can decide to stake their coins for the right to check and validate new blocks of transactions before they can be added to the blockchain.

3. What is the Difference Between Bitcoin and Blockchain?

Bitcoin is a digital currency, while blockchain is the technology upon which bitcoin as a cryptocurrency works.

4. How Can I invest in Blockchain Technology?

One of the first steps is to tap into the cryptocurrency boom presently by purchasing some crypto assets either for short- or long-term investment purposes. Please see our article (What is Cryptocurrency and How Does it Work?) for a detailed guide.

You can also purchase stocks in a company developing blockchain solutions, for instance, IBM.

How Will Blockchain Technology Impact The Future?

Blockchain technology is now an integral part of our lives, from financial services and secure communications to healthcare, e-commerce, and ride-sharing; blockchain technology is now defining our future.

Significant advances in technological development have produced a fallout of uncertainties and trust issues in our society. The attendant consequences of this are huge losses in production and revenue.

This is where the usefulness and relevance of blockchain technology’s robust security architecture come in handy.

Decentralised blockchain records are stored across multiple network nods with real-time certification, validation, and transparency of new transactions. This feature makes it impossible to manipulate fraudulently.

I welcome you to the new age of digital accountability. Welcome to the future!

What are your thoughts on blockchain technology? Will you be employing blockchain technology in your business? We will like to hear from you in the comments. Talk to us.

Entrepreneurs.ng is an entrepreneurial support platform. We help entrepreneurs start, market and grow sustainable businesses. Reach us directly on WhatsApp- 08038874148.

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