What is Blockchain? [Definition, Components, Pros, and Cons]

what-is-blockchain

With database technology making headways, we see the trends favoring the blockchain. What was birthed to cradle a cryptocurrency is all set to make inroads into all imaginable sectors and industries. Celebrate it or vilify it, but you can’t ignore it. It’s too significant.

Empirical evidence suggests an exponential rise in the adoption rates. The annual growth rate was 35.2 per cent in 2017, which catapulted to 42 per cent in the following year. From 2019 to 2025, it has been a staggering 69 per cent with the global market assuming a worth of USD 20 billion. Though transactions per second dipped lately, it is still healthy at 2.28. 

Wondering what blockchain technology actually is? So, fasten your seatbelts and join us on a whirlwind tour of all things blockchain. We are spilling the beans to beef up your knowledge!

Blockchain Spelled Out

Call it a new-age database technology. It’s shared, extensible, unchangeable, verifiable and decentralized. Traditional databases are created and stored by a centralized administrator at a single location. Conversely, blockchain involves a network of systems, read nodes, with disparate locations. All nodes maintain duplicate copies of the data simultaneously.

Blockchain is also unique in the way it structures data. It relies on gathering and clubbing data in groups while the typical database uses tables for the same. The information is held in blocks, each with defined storage capabilities. Once filled to capacity, the block is locked and hooked to the previous one to form a chain. That speaks for the name of the technology.

The unique data structuring results in a timeline that cannot be reversed or tampered with. Each block features a cryptographic hash corresponding to its predecessor. A timestamp is introduced to a block to testify the presence of recorded data in the block at the time when it was integrated into the chain. That ensures the fidelity and accuracy of the data stored.

The primary use case of blockchain is staying on top of the cryptocurrency transactions but it can also track assets. They can be either tangible (property, vehicle, inventory, equipment or cash) or intangible (logos, software, licenses, patents, NFT or intellectual property). With the need for trust and transparency increasing, the use case is bound to extend further.

Blockchain Components

A blockchain network is a potpourri of components, each with a role and limitations. Together, they ensure the network stays alive and kicking. Here’s your checklist:

1) Node

It’s the building block of the blockchain. It can be a PC, server, or any device with a certain level of computational and storage capability. You can categorize nodes into two types:

  1. Full Node: True to the name, it holds a full copy of a given data. With high storage and computation capabilities, it can receive, reject and authenticate a transaction.
  2. Partial Node: Vouch on these nodes to hold a transactional information’s hash function, through which the entire transactional data can be viewed and verified.

2) Ledger

It’s the digital record of transactions made by nodes across the entire blockchain network. The blockchain ledger can be public, private, permissioned or consortium.

  1. Public: Any network participant can access it anytime. The prime example is Bitcoin. Being open, this ledger lacks transactional confidentiality and security and mandates significant computational abilities. Obviously, the business application of the public ledger is limited.
  2. Private: It mimics the public ledger, for the most part, give or take better security, privacy and wider business use case. Though a decentralized peer-to-peer network, it is governed by a body that implements consensus protocols and decides who will be a part of the network.
    With a decision-maker in place and limited participants, the network is quick and efficient with a higher number of transactions per second. You can even host it on-premise.
  3. Permissioned: It’s the most favored network for businesses. As the name says it all, you require an invitation and permission to be a participant. The number of participants is limited and so is their participation in transaction recording and tracking. Mind you, a public blockchain network can also operate on a permissioned model.
  4. Consortium: It’s exactly what it means, a consortium of businesses collaborating for the creation and operation of a blockchain network. Deciding who can access the database or present transactions is the prerogative of the member organizations.
    As the resources and responsibilities are shared by the members, it’s a cost-effective way to jump into the blockchain bandwagon. Instead of starting from scratch, a new member can put her resources into an existing network to curtail development expenses and time.

3) Wallet

Where do you park your cryptocurrencies? Of course, in a digital wallet! It’s an integral part of every node across the network. From exchanging funds to ease of use, the blockchain wallet works like any digital wallet, but only for cryptocurrencies. The confidentiality is well catered to with two key pairs, one private and the other public.

Think of the public key as your email id, which can be shared to receive funds. The private key, on the other hand, is your email id’s password, providing you access to your funds. Obviously, you need to keep the private key discreet to ward off fund thefts.

The wallets are either “hot” or “cold,” subject to their nature, functions and security levels.

  1. Hot Wallet: The hot wallet is for regular transactions via the internet. So, it is vulnerable to cyber attacks. It’s used more frequently, and hence, the name. A hot wallet can be either online (web-based) or offline (software). The former requires a cloud service to operate while the latter can be housed on your office/home computer or smartphone.
  2. Cold Wallet: These blockchain wallets have nothing to do with the internet, which makes them immune to hackers. You are required to buy them. The prime example of a cold wallet is the hardware wallet. It’s the most secure wallet option out there.

Regardless of the type, these wallets focus on providing the required level of security, ease of use and confidentiality. Mind you, your requirements should dictate the choice of wallet.

4) Nonce

The term stands for “Number Only Used Once.” This number is randomly generated when you develop a fresh block or authenticate a transaction. The idea is to usher transparency and security into transactions. It is introduced to a hashed block, at times, along with a timestamp to discourage replay attacks.

Once rehashed, it has to conform to the difficulty level of restriction. The creation of a nonce is cumbersome, involving a hit-and-miss method. Only if the miner preempts the right nonce, he/she is granted the block.

5) Hash

Call it a digital footprint of a given data. It is central to cryptography, helping sort out the blockchain computation. Hashing allows you to map the given piece of information to a pre-determined size, from 32-bit to 256-bit or higher. The hash output is repeatable. Insert the same data as many times you like, the hash value will always be the same. 

The cryptographic hash is characterized by three factors:

  1. Wards Off Collision: A single input hash delivers a single output hash value. When the number of inputs exceeds the number of outputs, collisions occur.
  2. Obscured: Predicting the input value from the output isn’t impossible but tough. You can solve for the hash in polynomial time though, it is too hard to interpret.
  3. Puzzle-Friendly: You will have a hard time zeroing in on an input that will deliver a given output. Your input options come from an extensive distribution database.

Cryptographic hash functions make regular hash functions impregnable. As it’s virtually impossible to access the message contents, these hashes can help rev up online security.

Why Blockchain Makes Sense?

Blockchain is an advantage that no business can let pass up. Here’s why it makes sense.

  • Transactional Fidelity

As all nodes need to verify a transaction in a given network, the errors are minimized. The nodes can identify a faulty node in the ledger and prevent it from seeping into the network and violating its integrity.

Also, with each asset separately recognized and tracked, the risk of double-spending is negated. Encryption furthers the blockchain’s fidelity as well. On the contrary, a conventional database can neither identify errors nor restrict double-spending.

  • Intermediaries Eliminated

Usually, you require a third party, say a bank, to authenticate a transaction, and that costs money and time. Blockchain, on the other hand, pushes third-party authentication out of the equation.

Imagine making transactions through your credit card. Your bank charges a fee to process the transaction. Lacking a central authority, the blockchain can process transactions at a lower cost while also ushering in convenience and transparency.

  • Enhanced Security

Increased security comes by default, thanks to the way block-chain operates. It creates an immutable database featuring blocks of data strung in a chain with end-to-end encryption. With all bases covered, breaking into the database is virtually impossible. Every node needs to be altered if you wish to alter a single node. It’s one for all and all for one proposition!

The decentralized nature of blockchain adds another security layer to the network. With data scattered across multiple systems and locations, introducing fraudulent transactions in the network is not an option. Also, blockchain anonymizes the data and restricts access, subject to the requirements. This level of security is a luxury with the traditional systems.

  • Better Control Over Data

Growing in speed, diversity and volume, data is the new currency in this digital age. You require a helping hand to handle it. Blockchain is that helping hand, giving you greater control over your data.

From which piece of information you need to share to how long and with whom, it’s all your prerogative. Plus, your control is reinforced by smart contracts that trigger into action only when certain predetermined conditions are met.

  • Speedy and Efficient Transfers

Contemplating an international transfer? Be ready to deal with delays and hassles caused by the involvement of banks or government agencies. They are likely to verify each step of the process manually.

But with blockchain, it’s altogether a different ball game. Operational round the clock, block-chain authenticates through a consensus protocol with participants incentivized for their participation in the process. That translates into speed and efficiency.

Blockchain Trade-Offs

Blockchain is a revolutionary database technology though, it has its share of trade-offs. Before coming to a conclusion about your tryst with block-chain, you should know them.

  • Restricted Transactions per Second

Blockchain’s decentralized nature is a mixed blessing. On one hand, it ups data security and transparency, and on the other, takes time to validate and approve transactions.

The speed depends on the blocks’ capacity, network traffic and other factors though, the rate at which transactions happen per second is sluggish. The transactions per second rate for Visa is 1700. And, for Bitcoin, it is 4.6. As such, scalability is an issue, which needs addressing.

  • Escalating Energy Costs

Let’s face it; block-chain is an environmental hazard. The nodes consume power to stay operational, which accounts for a significant carbon footprint. With blockchain technology gaining traction, the emission rates are bound to skyrocket, putting the ecology at risk.

As a response to the situation, certain industry leaders have distanced themselves from some blockchain technologies. Take, for instance, Tesla, which no longer accepts Bitcoin due to the heavy toll that it imposes on the environment for mining bitcoins.

  • Asset Vulnerability

Usually, a private cryptographic key is involved in securing assets. You better guard this key with all your resources, or else consequences kick in. Without the key, accessing your wallet isn’t possible. You can do nothing but watch your assets vanish into thin air.

Worst still, a centralized body is missing, which can otherwise be reached out to regain access. Until we find a way to recover the lost key and assets, the vulnerability will deter adoption rates.

  • Prone to Illicit Activities

Anti-social elements are awakening to the privacy and security associated with blockchain. With anonymity ensured across the board, keeping a track of illegitimate transactions is a challenge on this new-age ledger.

That provides lucrative avenues to invest and move the ill-gotten wealth. On the other hand, bank transactions are traceable. You can pin them down to the source. And, preventing shady transactions is also a reality.

Wrapping it Up

Blockchain is a futuristic database technology that’s eliminating fraud, mitigating risks and ensuring transparency in applications across sectors. Well past the trial threshold though, it is presently a work in progress.

Wider adoption is subject to how early the stakeholders plug in the inherent loopholes, up the efficiency levels, reduce mining costs, and put up a composite regulatory structure in place. To this end, policy initiatives will be crucial.

However, with the top corporations increasingly embracing live blockchain operations, the future looks promising for this emerging technology. Likely, it will emerge as a disruptor, changing the way we transact and interact.

1 thought on “What is Blockchain? [Definition, Components, Pros, and Cons]”

  1. There’s no doubt that blockchain is a futuristic technology that will help the world to shift towards decentralized systems. The concept of blockchain is explained very well in this article.

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