What is Blockchain Technology?
People often use the term Blockchain Technology in combination with Cryptocurrency, but what is it?
How does it work?
And how can it benefit a product or service?
In order to answer these questions, it’s important to look at the origin of the technology and the purpose behind its development.
How Blockchain Technology Works
Blockchain was originally developed to manage virtual currency or as it’s commonly known – Cryptocurrency. This technology enables the exchange, and verification of virtual currency transactions over the Internet. Through creating blocks, which are joined together by cryptography, blockchain creates a database that stores transactions.
Each block acts as a non-modifiable record to create a secure chain or ledger of the transaction between two parties; thus, removing the need for a mediator or central organization of authentication in the process.
Uses and Development
Although the primary use of this technology has been for cryptocurrencies, Blockchain is now used in other sectors as well. The benefit of blockchain technology is that it allows to scale down the number of mediators required for virtual transactions.
According to Coindesk, some of the areas in which Blockchain technology can be applied include digital identity verification, a system for audit trails. The technology is also getting traction in smart contracting and other industries due to the nature of its encrypted agreement cycle that aims to provide a higher level of autonomy and security in authentication and verification processes.
For this reason, financial services and government establishments appear to be the main benefactors of this technology. However, commercial businesses are also starting to assess blockchain technology in industries such as shipping and supply chain management.
Disadvantages of Blockchain Technology
The most notable risk or disadvantage of using Blockchain lies in the reliability of its security. Data pools in the network or “Blocks” need to be constantly monitored. This ensures ensure that a false piece of data does not influence the chain. When this occurs, the nodes or users in the network will continue to build upon the inaccuracy. Eventually, it can become a fact in the chain – an effect known as the “51% attack”.
This disadvantage is closely related to the technology’s requirement for a robust network with a diversified group of nodes or users – increasing the number of users that could be affected by a flaw in the system.
Other disadvantages include human errors that may be carried through the network. The first Block in the chain needs to be error-free in order to ensure continuity of accuracy. Further, disagreements between some users vs. others in the network can lead to a split in the blockchain itself.
Blockchain has the potential to change the way transactions are conducting on a wider scale in future and it certainly has the capacity to offer a product or service a competitive edge through the simplification of C2C or B2C transactions; however this significant advantage brings with it the challenge of ensuring the data in the chain is accurate, secure, and has received the majority consensus from the outset.
Moreover, the use of Blockchain in financial industries and identity verification systems needs further development due to the risks associated with the scale of users the technology requires to function.
Overall, Blockchain does offer a different solution to minimizing the number of parties required in a given transaction but there are definitive strides to be made in the reliability of the technology.