What is Blockchain Technology and How Does it Work?

 

Blockchain: A New Era of Data Management

Anyone who has recently read about technological innovation or digital transformation has probably been exposed to the hype surrounding blockchain technology. So if you have heard some of the ambitious claims

blockchainthat declare blockchain marks the beginning of a new era of information technology – or that it is set to revolutionize a whole set of industries in the not-so-distant-future – you will probably be interested in understanding what exactly blockchain technology is and how it works.

Blockchain technology is a record-keeping system designed so that it is virtually impossible to hack or alter the information stored in it. And although initially, it can be rather challenging to explain and understand, we will see that the principle at its core may be easier to grasp than it may seem.

If we should choose a single word to describe how blockchain works, decentralization would probably be the most accurate. Blockchain allows data to be copied and distributed across an entire network of different computers. Its capacity to tackle security and trust issues makes it a system with extraordinary potential, even far beyond the multiple uses today. Improved security, greater privacy, cost reductions, and fewer errors are only some of the advantages of blockchain leveraged by companies across different areas. But before we go into details of the current and potential blockchain technology applications, we should first understand how exactly it works.

 

Blockchain Technology and Databases

Essentially, blockchain is a type of database. Although this concept is probably more familiar, it is vital to have a clear notion of it to understand how blockchain technology works – and in what sense it is supposed to be a crucial milestone in the history of data management.

A database is basically a vast amount of information stored in servers that are powerful enough to house those large quantities of data. To achieve their extraordinary storage capacity, these servers require hundreds or even thousands of computers. This allows many users to access the database at the same time. A standard database is usually owned by a company or a government agency that controls every aspect of it. One of the consequences of this – and we will soon see how important this is regarding blockchain – is that these traditional databases may be vulnerable targets for hackers.How does blockchain work

So, what type of database is blockchain?

While the information in a database is traditionally centralized and organized in tables, a blockchain structures information, as its name suggests, in different blocks or chunks of data. All of these blocks hold a specific storage capacity. Once this capacity has been filled, each block is chained to another one that has been previously filled. From this point on, all new information goes into a new block that will, at its time, be added to the chain as well. When a block is added to the chain, it receives an exact and indelible time stamp. This way, the system creates an immutable timeline of data that can easily track every block.

 

But what about decentralization?

In addition to the way information is structured, blockchain allows multiple copies of the database to be made within a computer network. Whenever a new chunk of data is added to the timeline, this information is copied across every network node. The effect of this is total transparency, and it is precisely transparency that protects these databases from potential attacks. But let’s see a practical example of how blockchain technology is used in a very particular business model.

 

Blockchain in Action: the case of Bitcoin

The primary use for whicBlockchain Technologyh blockchain has become notorious has been the storage of cryptocurrencies’ history. Although associating blockchain technology exclusively with cryptocurrency is a usual misguidance, an explanation of its use in this particular field can serve as an instructive example to understand how it works and why more and more companies are finding it useful and valuable.

Even though the basis of blockchain technology had already been outlined as early as 1991, it wasn’t until the launch of Bitcoin in January 2009 that it had its first practical application.

But why was blockchain technology so crucial for Bitcoin? Mainly transparency and security.

The data Bitcoin needed to record was an extensive list of transactions. Since the blocks of information that are handled by blockchain are always traceable, even if a hacker could anonymously steal bitcoins from users, they would always remain visible whenever they were used in a transaction. Across all of the Bitcoin networks, each user holds his own copy of the blockchain. Once a block has been added at the end of the chain, its place in the chain as a whole remains irreversible. This means any eventual alteration can be easily recognized by cross-referencing the adulterated copy with all the others. And once the difference has been identified, the adulterated copy can be set aside as illegitimate.

The Bitcoin example shows how blockchain technology allows tackling security and trust issues in an extraordinarily effective manner. But by now, more than a decade after the launch of Bitcoin, applications of blockchain technology have gone far beyond cryptocurrency transactions.

 

Other Blockchain Technology Applications

More than a few other blockchain applications that, although not so well-known, have been helping companies improve their database administration for years now.

  • Smart contracts: Smart contracts are transaction protocols built into a blockchain to verify or negotiate a contract or agreement between parties. They operate under a set of conditions previously agreed by the users, and they can automatically execute when these conditions are met.
    This offers two significant advantages for contract processing:
    1) cost reduction since it eliminates the fees associated with the role of a notary or mediator,
    2) speed, since automatization saves hours of processes.
  • Supply chains: the food and the shipping industry have benefited from the possibility blockchain offers them of keeping track of each step of a product’s journey from its origin to its final destination. It can, for example, help trace the sources of outbreaks caused by microbial contamination. The ability to identify the root of a problem of this kind in a fast and precise manner can potentially save lives.
  • Healthcare: healthcare providers can use blockchain to store medical records safely. Whenever a new medical record is made, it can be added to the blockchain, offering the patient the confidence that it won’t be altered in any way. A private key can be used so that the records remain accessible only to a limited group of individuals.
  • Financial institutions: banks and other financial institutions can leverage blockchain technology to speed up their operations significantly. Transactions, funds exchange, and stock trading could all be performed considerably faster using blockchain-based applications. This could result in huge savings both for customers and for banks themselves.

 

A New Era

Even though blockchain technology is only at an initial phase and it may be a while until we see its potential fully unleashed, we can safely say that those claims that identify it as the foundation of an upcoming revolution on the way information is stored, distributed, and shared, are not at all exaggerated. It would be unreasonable to implement blockchain technology for the sole purpose of using innovative and ground-breaking technology. But suppose your business has goals that blockchain technology can help you achieve. In that case, we firmly believe that its implementation could mean a huge step into entering a new era of data management.

Blockchain Technology

If you want to keep learning about blockchain, you can read more articles in our blog.

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