Bitcoin, the cryptocurrency created by an individual or group using the pseudonym Satoshi Nakamoto, operates on blockchain technology. As a result, blockchain has become an integral part of the global economy in the 21st century. To fully understand this topic, it's important to first address the question: "What is blockchain?"
What is blockchain technology and how does it work?
Blockchain enables digital data to be distributed rather than copied. In essence, when we ask "What is blockchain technology?", we are exploring the foundation of a new and distinct type of internet. While the primary purpose of this technology was originally for Bitcoin, the business world has found numerous potential applications for it. Since its creation in 2008, Bitcoin has operated smoothly thanks to the blockchain system behind it. Any issues that arise are typically due to user mistakes or hacking attempts, rather than flaws in the system itself. Although it's not necessary to understand the technical workings of this technology—much like how you don't need to know how phones or computers work to use them—over time, as you become more familiar with this technological revolution, it becomes clearer why blockchain is considered one of the most significant inventions of our time.
Distributed database
Imagine a room filled with computers, each holding a copy of a spreadsheet that is distributed and replicated thousands of times across a network. This network is designed to update the spreadsheet regularly. This concept helps explain blockchain. In a blockchain, the information is stored in a constantly updated and shared database. There are several advantages to this approach. Since the blockchain database is not stored in a single location, the records are publicly accessible and easily verified. In other words, there is no centralized version of the data that could be hacked or corrupted. Hosted on millions of computers simultaneously, the data in the blockchain is freely accessible to anyone on the internet.
Is Blockchain Trustworthy?
Blockchain possesses an inherent dynamism and resilience similar to internet technology. Because duplicate data blocks are stored across the entire network, control of the blockchain cannot be centralized in the hands of any single organization, person, or group. Additionally, there is no single point of failure.
Indestructible structure and transparency
Blockchain is a system designed to automatically update itself every 10 minutes. This self-monitoring digital network continuously updates each transaction at regular intervals, with each transaction referred to as a block. As a result, transparent data is embedded throughout the entire network, accessible to the world.
One of the most crucial features of blockchain is that altering any data would require more processing power than the entire network combined. Since no computer currently has the capability to break this network, it remains unbreakable in practice, even though it may be theoretically possible. For instance, if someone were to take control of the entire system to collect Bitcoins, they would ultimately cause the value of Bitcoin to drop to zero.
Knotted network
The blockchain system consists of nodes that are responsible for performing computations. You might be wondering, "What is a node?" A node is a computer that runs a client connected to the blockchain network, tasked with approving transactions and transferring them to the appropriate locations. When nodes join the blockchain network, they automatically download the most up-to-date copy of the blockchain. These nodes come together to form a powerful, secondary network that operates independently of the internet. Each node that joins the network acts as an administrator and joins voluntarily, which is why the network has no central authority. However, nodes are incentivized by the system with the opportunity to earn Bitcoin.
In reality, nodes compete with each other to solve complex computational puzzles. It’s important to note that while Bitcoin was originally at the core of blockchain, it is now just one of many applications of this technology. The following diagram with arrows helps illustrate what happens when a transaction is made.
What is the working principle of blockchain based on?
- A user initiates a transaction request.
- The transaction request is broadcast to a peer-to-peer (P2P) network of computers, known as nodes.
- Verification: The nodes use algorithms to validate the transaction and the user's identity.
- The verified transaction may include data such as cryptocurrency, contracts, records, etc.
- Once verified, the transaction is combined with others to form a new data block for the ledger.
- The new block is permanently and immutably added to the existing blockchain.
- The transaction is completed.
Blockchain and cryptocurrencies
There are currently over 1,000 cryptocurrencies. Since blockchain operates without a central structure, every action within the blockchain impacts the entire system.
Blockchain, as a new method of verifying transactions, challenges some aspects of traditional trade by creating new applications. For example, stock exchange transactions can be completed in seconds on the blockchain, and documents such as land registries, title deeds, and more can be made fully public. The database that records cryptocurrency transactions is managed collectively by a vast network of computers using blockchain technology. In other words, the network itself governs Bitcoin, and the decentralized system operates on a user-to-user (P2P) basis.
Conclusion
In conclusion, in the simplest terms, blockchain technology enables internet users to create value and authenticate digital information through an automatic, incorruptible, decentralized system. So, who uses this technology? Currently, the most widespread application of blockchain is in the financial sector. The World Bank reports that money transfers in 2015 surpassed 430 billion US dollars.
Blockchain is gaining increasing attention as it removes the need for intermediaries. Thanks to Graphical User Interface (GUI) desktop technology, which makes internet and computer use accessible to everyone, a graphical interface called "Wallet" is now widely used for blockchain applications.
These wallets allow users to make cryptocurrency purchases online or use them for investment purposes. Identity verification, a vulnerable aspect of online transactions, is addressed by the blockchain’s embedded ledgers, which offer methods to prove identity and the ability to digitize personal records. Online transactions rely heavily on these identity verification processes. It is predicted that in the coming years, wallet applications will lead to a new form of identity verification and management.
Cryptocurrency investment is one of the primary areas where blockchain technology proves most effective.
