What Are You, Blockchain?

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Update date: 31.12.2024
Author of the update: Tadeusz Sławik

Blockchain has become a buzzword often associated with cryptocurrencies, but there is much more to it. Let’s take a deeper look.

What Is Blockchain?

Blockchain is a type of database that stores data in a chain of blocks. Information is grouped into digital blocks, and when a new block is generated, it connects to the existing chain. From that moment, the new block and its data become part of the database.

Decentralization

Blockchain is decentralized, meaning multiple nodes in a peer-to-peer network store copies of the chain (the database) and participate in managing its content. There is no central authority over the data. Blockchain protocols enable nodes to reach a consensus on decisions (e.g., accepting new blocks) and maintain data consistency. Decisions are only valid when consensus among nodes is achieved.

Immutability

Blockchain is immutable. New blocks can be added, but existing data cannot be modified or removed. Each block is linked to the previous one, creating a dependency chain. Altering a single piece of data would require recalculating all subsequent blocks, which is nearly impossible and would lead to errors and fraud. Once a transaction is recorded, it is permanent.

Smart Contracts

Blockchain is not limited to cryptocurrency. One of its standout features is smart contracts, which allow users to create rules, automate operations, or build systems on the blockchain. These contracts are like programmable databases.

Once deployed, a smart contract cannot be modified due to blockchain’s immutability. If the code contains bugs, they will persist indefinitely. This feature demands precision and robust development practices.

Mining

Mining is the process of creating new blocks, not generating cryptocurrency directly. Mining involves solving complex computations to build a Merkle tree (a tree of hashes), which requires significant computational power.

In public blockchains like Bitcoin, mining is often misunderstood. Miners do not create new Bitcoins but validate and add new blocks to the chain. Successful miners are rewarded with transaction fees and additional incentives provided by the blockchain system. For example, Bitcoin has a fixed supply, so once the maximum is reached, no new coins will be issued, and miners will rely solely on transaction fees.

Advantages of Blockchain

Immutability

Blockchain guarantees that recorded data cannot be altered. For instance, if a document’s checksum is stored in a blockchain, you can verify its authenticity later by comparing the checksum in the blockchain to the current checksum. If they match, the document remains unchanged.

Code Is Law

In blockchain, code governs all operations. There is no influence from external authorities or regulations, ensuring transparency and consistency.

Security

Blockchain uses strong cryptography and is distributed across multiple nodes, making it highly resistant to tampering. A potential hacker would need enormous computational power or control over at least 51% of the network to make changes.

Decentralization

Blockchain operates without a central authority. Decisions are made collectively by the network, ensuring fairness and resilience. No single point of failure exists, as the network relies on multiple nodes.

Transparency

Blockchain provides transparency by making all operations and wallet balances publicly visible, although wallet ownership remains anonymous.

Automation

Smart contracts enable automated processes such as payments, data transfers, and contract executions, enhancing reliability and efficiency.

Disadvantages of Blockchain

Energy Consumption

Public blockchains, especially Bitcoin and Ethereum, consume vast amounts of energy due to the mining process. For example, Bitcoin’s annual energy consumption is comparable to a mid-sized country, resulting in significant CO2 emissions. Although efforts are underway to reduce energy usage, this remains a major challenge.

Code Immutability

While immutability is an advantage, it also means that buggy smart contracts cannot be modified or deleted. This limitation requires developers to be extremely careful during deployment.

Decentralization Challenges

Blockchain’s decentralized nature demands complex infrastructure, including more hardware and higher operational costs. Additionally, resolving conflicts without a central authority can be challenging. For instance, Ethereum experienced a hard fork in 2016, leading to the coexistence of two networks: Ethereum (ETH) and Ethereum Classic (ETC).

Using Blockchain for Business

Yes, blockchain can be used for business purposes. While public blockchains like Bitcoin and Ethereum are widely known, private blockchains offer restricted access, suitable for companies and their partners.

Private blockchains consume less energy and require simpler infrastructure. They can also integrate with applications written in popular programming languages like Java, Python, and Scala.

Conclusion

Blockchain is a secure, transparent, and reliable technology with immense potential. However, its energy consumption and the challenges posed by decentralization and immutability should be carefully considered. As the technology evolves, it promises to address these challenges and unlock new possibilities for businesses and beyond.