What You Need to Know
Whether you’re just introducing yourself to the world of blockchain, or you’re here to refine your knowledge around some key blockchain info, this blockchain 101 guide is for you.
As more businesses in Australia and around the world are adopting the technology, and crypto trading is becoming more accessible to newcomers, understanding the ins and outs of blockchain becomes more important. So, let’s dig into an easy-to-understand guide to blockchain, covering what it is, how it works, why we use it, and more.
What is blockchain technology?
A blockchain is a shared, immutable digital ledger that stores data and transactions. It’s decentralised (in a similar way to Wikipedia), meaning no single entity controls it. Instead, blockchain technology runs on a distributed ledger accessed by multiple participants across multiple nodes, who are all working together towards the same conclusion. Each block is chained to the next using a signature and, because of this, the data stored can’t be tampered with.
This is blockchain explained in pretty simple terms. You can delve deeper into what blockchain is for a more thorough definition.
Blockchain explained: How does it work?
The principle technologies that work together to create a blockchain are cryptographic keys, a distributed network with a shared ledger, and a system of record.
Here’s a brief overview of how blockchain works:
- Each transaction that takes place is recorded as a block of data. These data blocks can contain any necessary information, depending on the application. For example, a medical patient’s personal details, or the temperature of a shipment of food.
- All blocks connect to the blocks on either side of them. This forms a chain of data as assets move between places or people. This chain cannot be altered, and time stamps show exactly when transactions occurred.
- Blocks can be added. We now have a blockchain. When new blocks are added, this further verifies the previous block, making for a tamper-proof blockchain.
What can blockchain technology do?
You’ve probably already heard that blockchain is here to disrupt industries – but how? There are a few things blockchain technology is allowing us to do that we couldn’t do before. At least, not very well.
- Establish digital identity. Public and private cryptographic keys identify who owns a particular set of data, with digital “fingerprints” often being hashed into the blockchain.
- Create an immutable database. It’s very difficult to edit any data in a blockchain because it would require changing data on every node in the chain.
- Provide a platform. Blockchain technology can serve as a platform for many other use cases – from cryptocurrencies to smart contracts.
What do we mean by “distributed ledger”?
A distributed ledger describes a database that is independently updated by individual participants (or nodes). Nodes process and verify each transaction, and conclusions are the result of a shared voting system.
Each node holds its own identical copy of the ledger, and whenever a change is made, this is copied to all participants within minutes.
What are the benefits of blockchain?
There’s good reason for all the hype around blockchain, with more benefits of blockchain springing up as we learn more about the technology.
Some reasons businesses are turning to blockchain in Australia and around the world include:
- More trust. Data cannot be accessed by anyone outside of the blockchain network, nor can it be manipulated by a third party.
- Enhanced security. Verified transactions are immutable and can’t be removed, and consensus is required by all nodes to ensure the accuracy of data.
- Smart contracts enable transactions to be stored on the blockchain and executed automatically.
What does blockchain mean for the finance industry?
A blockchain 101 guide could never ignore the finance industry, as it’s one of the primary spaces being disrupted by technology.
There is a heap of ways blockchain could impact the finance industry, for example:
Better infrastructure for cross-border transactions
Sending money overseas currently relies on the complex infrastructure established by banks; it’s unnecessarily slow and expensive. Blockchain allows for direct links between financial institutions, with no intermediaries, to get things moving quicker.
Faster, more secure payments
Establishing a decentralised ledger for payments (i.e., Bitcoin) means that processing times are much faster than traditional bank transfers. It cuts down bank transfers to a matter of minutes (or hours, in more extreme cases.)
Digital assets have become a class
Bitcoin saw the birth of digital property. Before this, “digital” was not associated with scarcity, since digital assets could easily be copied and shared. Bitcoin was the first example of digital code that could not be copied, giving value to digital code.
Customer KYC & fraud prevention
The KYC (know your customer) process for banks to onboard a new customer can traditionally take months. It involves lengthy tasks such as verifying photo ID, proof of address, and biometrics. Blockchain could cut down the time and money the banking industry spends on KYC, and when data is stored on the blockchain, a much higher level of fraud protection is in place.
What are the drawbacks of blockchain?
While all the blockchain info we’ve thrown at you so far has been largely positive, as with all technological revolutions, there are some drawbacks and limitations. Of course, developers are working to overcome most of these issues, to enable us to seamlessly use blockchain in our day-to-day lives.
Some of the limitations include:
- Complex jargon. With new technology comes new buzzwords, and many people struggle to get their heads around the highly specialised terms out there.
- Transaction costs & speed. In the early days, many thought of Bitcoin transactions as being virtually free and instantaneous. However, that’s not the case. Since 2016, Bitcoin is only able to process around 7 transactions per second, at a rate of $0.20.
- Security questions. The “51% attack” describes a situation where more than half of the nodes in one network tell a lie, in which case, the lie becomes the accepted truth.
- Human error. Like anything, blockchain is not immune to human error. The technology relies on high-quality, accurate data to be inputted by humans if it’s to run with maximum efficiency.
- Energy consumption. Lately, concerns have been raised in relation to the amount of energy that blockchain consumes. The Cambridge Centre for Alternative Finance (CCAF) estimates that Bitcoin consumes around 0.55% of global energy production. In a time where industries are facing pressure to limit the consumption of non-renewable energy resources, the Bitcoin mining process has come under fire.
What are soft forks & hard forks?
A blockchain fork is essentially a split in the blockchain network. Since blockchains run on an open-source network, anyone is allowed to come in and change or update the code. Forks occur when different miners propose different software, which becomes misaligned. In this instance, miners must vote to decide which software to use.
What is a hard fork?
A hard fork occurs when a change in protocol renders older versions invalid, and if these older versions continue to run, this can significantly confuse things. When a hard fork occurs, all users must upgrade to the latest version of the software, as nodes running on the old version will no longer be accepted.
What is a soft fork?
A soft fork doesn’t stop older versions from running. It is more of a cosmetic change that refines a protocol, by adding a certain function without changing the overall structure. In other words, nodes that don’t get updated can still access the new blocks. This is known as being “backwards compatible”.
An introduction to SegWit
We already mentioned that the blockchain space comes with a new collection of jargon, and SegWit is one example of that. But what is SegWit?
Short for Segregated Witness, it’s an upgrade to a protocol that changes how that protocol stores data. Developer Peter Wiuelle was the first to introduce the idea, as a way to address Bitcoin’s scalability issues. Since there is a limit to how many transactions Bitcoin can process each second, there is a barrier in place stopping it from becoming a viable high-volume payment system.
SegWit helps to overcome this by removing signature data from blockchain transactions, to free up space to add more transactions to the chain.
Where to keep up with the latest blockchain news
For the latest blockchain news and more about what’s happening in blockchain in Australia, check back regularly to Bullish. We spend our days following the industry and make it our mission to convert the jargon into easy to digest articles, so you know what’s happening in this exciting technological revolution.
Some more handy sources you can use to keep up with blockchain in Australia include: