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Blockchain is the fundamental technology that powers bitcoin and many other cryptocurrencies, and it has exciting potential outside of digital currency.
One of the breakthroughs of the 21st century that has received the most attention is blockchain technology. Blockchains, which were initially created to support Bitcoin, now power dozens more cryptocurrencies, and developers are seeking to incorporate the technology into industries including medical, the arts, and banking.
It can be useful to comprehend how blockchain functions, why it has value, and how it differs from other internet technologies in order to comprehend the growing interest.
Blockchain: Definition
A blockchain is a digital ledger of transactions protected from hacking and modification by a network of computers. With the help of technology, people can transact with one another securely without the need for a middleman like a bank, government, or other third party.
Blocks, a growing collection of records, are connected through cryptography. Peer-to-peer computer networks independently verify each transaction, time-stamp it, and add it to a growing chain of data. Data cannot be changed once it has been recorded.
Blockchain technology has gained popularity with the increasing use of Bitcoin, Ethereum, and other cryptocurrencies, but it also has promising uses in the legal sector, real estate transactions, the medical field, and any other sector that requires the authorization and documentation of a series of actions or transactions.
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Blockchain Technology Working Explained
Below is an explanation of blockchain technology with bitcoin as an example.
- At First bitcoin transactions are entered and sent to a network of strong computers called nodes.
- Using computer algorithms, this network of thousands of nodes competes to confirm the transaction. Bitcoin mining is what this is called. Bitcoin is awarded to the miner who first successfully completes a new block. The network fees, which are charged to the buyer and seller, are used to pay for these benefits, together with freshly created Bitcoin. The amount of transactions will determine whether the fees increase or decrease.
- The sale is recorded as part of a block on the distributed ledger after the purchase has been cryptographically verified. The transaction must then be approved by the vast majority of the network.
- Using a cryptographic fingerprint known as a hash, the block is permanently connected to all prior blocks of bitcoin transactions, and the sale is completed.
Blockchain: Advantages And Disadvantages
Below we have discussed are some of the major advantages and disadvantages of how blockchain technology works when applied to cryptocurrencies:
Benefits
1) Decentralization
While the Federal Reserve issues the U.S. dollar, no government body is in charge of or issues Bitcoin or any other cryptocurrency. Additionally, this means that no government or organisation will longer be able to decide the future of a public blockchain. The absence of middlemen lowers costs because there are no third-party transaction fees. Time efficiency is another benefit of how blockchain operates; unlike banks and other middlemen, the blockchain is available for business around-the-clock, every day of the year.
2) Anonymity and Transparency
On computers spread throughout the network, the Bitcoin blockchain keeps a record of every transaction. The ownership of each wallet associated with these public addresses is anonymous and not documented, but the address and transaction history of these wallets, which store the bitcoin, make transactions totally transparent.
3) Accuracy And Security
There is a lesser chance of error because there is little human interaction during the transaction. It is vanishingly difficult to falsify or alter information since each transaction must be verified and logged by a majority of the network nodes. Additionally, this stops someone from using a Bitcoin more than once.
4) Public And Private Blockchain Applications
Efficiency gains brought about by blockchain technology could go well beyond virtual currencies. For instance, anyone can join the public blockchain network where Bitcoin is located. However, a variety of commercial applications can be developed on private blockchain networks, where businesses can manage who joins:
- Blockchain supply chain: Organizations are already offering private network solutions that use blockchain technology to more precisely trace product supply chains, including IBM Blockchain. For instance, businesses can utilise the technology to swiftly determine where delivered and sold recalled food products.
- Electronic medical records: According to Deloitte Consulting, a national blockchain network “may increase efficiencies and support improved health outcomes for patients.”
- Smart contracts: Using blockchain technology, contract terms can be updated or changed automatically in response to the fulfilment of a predetermined set of criteria.
- Elections conducted digitally: Some developers are developing blockchain technology for use in elections.
- Property sales: Supporters claim that blockchain technology may be used for a variety of asset sales, including those involving real estate, automobiles, and investment portfolios.
5) Opportunities For The Underbanked
Cryptocurrencies based on the blockchain system enable the transfer and custody of money without the involvement of dishonest third parties in nations and regions with weak or corrupt banking institutions.
Drawbacks
1) Criminals Like Cryptography
A number of new technologies have their early adopters among criminal organisations. Due to the privacy they offer, they use cryptocurrencies like bitcoin for both payment and to prey on bitcoin holders. Customers of Silk Road, a black market online marketplace for unlawful goods and services that the FBI shut down in 2013, offered Bitcoin as an example. Colonial Pipeline was recently the victim of a ransomware assault, and to unlock its computer systems, the corporation paid $4.4 million in cryptocurrency.
While this has been happening, the number of investment frauds involving Bitcoin has increased dramatically. According to the Federal Trade Commission, programmes promising quick profits cost roughly 7,000 people $80 million between October 2020 and March 2021, a nearly 1,000% increase in reported losses year over year.
2) Cryptocurrencies on the Blockchain Are Extremely Volatile
Is blockchain a wise investment, ponder some. That depends on your risk tolerance and objectives. In 2021, cryptocurrency’s appeal skyrocketed, with Bitcoin reaching a record spot price of about $65,000. However, the cost of Bitcoin and several other cryptocurrencies had decreased by more than half by the spring of 2022.
3) Crypto Use Is Still Niche
Bitcoin is currently available for purchase on a large number of exchanges, brokerages, and payment apps, and many businesses, like PayPal and Microsoft, accept it as payment. However, using blockchain currencies like bitcoin to make purchases is still uncommon. Additionally, in addition to any state and local taxes already paid on the good or service, users who sell bitcoin for purchases on payment platforms like PayPal must pay capital gains taxes on the bitcoin sold.
4) Bitcoin Mining Takes Energy
A network of fast computers that utilise a lot of energy is used in the bitcoin mining process. According to the University of Cambridge Electricity Consumption Index, if the bitcoin system were a nation, it would be the 34th largest electricity consumer. Elon Musk, the CEO of Tesla, declared in May 2021 that the automaker would stop accepting bitcoin unless that cryptocurrency found a means to lessen its carbon footprint. Other blockchains’ creators have proposed less energy-intensive alternatives.
5) Bitcoin Blockchain Is Slow
Approximately seven new transactions can be added to the bitcoin blockchain per second. In contrast, the industry leader in credit cards, Visa, claims to be able to process 24,000 transactions per second. This creates a scalability issue for the bitcoin system. On this issue, other blockchain-based cryptocurrencies are working. Ethereum 2.0, a much-awaited improvement to the Ethereum system, is estimated to be able to process 10,000 transactions per second, up from its current rate of 30 transactions per second.
The Future Of Blockchain Technology
There are thousands other cryptocurrencies that are based on blockchain technology although the bitcoin is the most popular. While it is yet unclear if bitcoin will be able to replace other types of conventional payment systems, blockchain technology applications are expanding quickly, and supporters claim they might bring about significant changes in a variety of industries.
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