About five years ago, Bitcoin was a cryptocurrency primarily known for purchasing illicit goods on online black markets, like the former Silk Road. More recently, mainstream consumers and investors have been using Bitcoin and other virtual currencies.
This spike in popularity caused the price of Bitcoin to skyrocket to a high of about $19,000, turning some Bitcoin owners into overnight millionaires. What’s more impressive than the cryptocurrencies’ value is the technology behind them, referred to as blockchain.
What is Blockchain?
Blockchain is a ledger system that uses an open, distributed record to keep track of transactions, such as cryptocurrencies. These transactions get packaged into blocks, which users in the system then verify via the completion of a math problem. Once confirmed, a block is added to a chain of other verified blocks and cannot be altered — thus, the blockchain.
How Does Blockchain Work?
Blockchains can be set up in several different ways, all of which utilize a distributed database. Every user within the blockchain has complete access to the database, including past transactions. That allows them to complete transactions with transparency and verify other users directly, without the need for a third party, such as a bank.
When someone wants to make a transaction, therefore adding a new block to the blockchain, they must first solve a math problem. Computers use this extra computing power to mine for the answer, which gets vetted by the network of users.
Although the blockchain retains transparency, each user associated with it can remain anonymous. Users’ identities are replaced by a unique 30-character passkey, which can be shared with other users to collect or receive payments.
Blockchain technology goes beyond cryptocurrency. Because blockchain uses a digital ledger, the entire transactional process can be automated using algorithms. Some users have utilized this technology to create what are called smart contracts, which include built-in rules. Once fulfilled, the blockchain automatically completes the transaction.
Benefits of Blockchain
While blockchain initially became famous because of its anonymity, there are plenty of other benefits to using the technology.
One of the most significant benefits of blockchain technology is the secure network. Because transmission data within the blockchain is encrypted, it’s more secure than the standard username and password setup.
Manual data is entry can be tedious and prone to error. With blockchain, all transactional components are automated, meaning transactions can happen securely and almost instantaneously.
While it’s easy for users to remain anonymous, all transaction data gets permanently recorded in the blockchain. This enhanced traceability makes it easy for users to prevent fraud and verify the authenticity of assets.
Businesses and individuals alike pay fees (e.g., credit card, banking) to ensure their transactions are secure. With blockchain, no third parties are needed to complete a guaranteed and verifiable transaction, meaning you can save money with each deal.
Applications of Blockchain
Besides the occasional Bitcoin spending, is anyone using blockchain technology? The answer is an outstanding yes. Many applications of the technology occur beyond cryptocurrency.
Right now, payments and cryptocurrencies are the most popular form of blockchain utilization. Many have found the concept of secure and error-free transactions, without the need for third parties, incredibly enticing.
Elections and Voting
Some governments are already testing the effectiveness of blockchain technology in elections. The prediction is that the likelihood of electoral fraud will become significantly diminished.
The Stock Market
Due to the extreme reliability of the technology, Australia has already announced a plan to switch their stock exchange to a blockchain-powered system for their operations.
Smart contracts are digital agreements that can be automatically validated, signed and enforced through blockchain technology. That eliminates the need for third parties, such as banks or mediators, saving both parties money.
Accounting and Record Keeping
Recording transactions through blockchain virtually eliminates the possibility of human error, thereby preventing any data tampering. In addition to high-accuracy, blockchain leaves behind a highly-traceable audit trail.
While Bitcoin and other cryptocurrencies offer an exciting application of blockchain, the technology provides almost endless possibilities for future advancement. The more businesses begin to invest in and use blockchain, the more the public will learn about its potential.