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Basics of Blockchain and cryptocurrency

The world is experiencing the wave of digital disruption which is reforming the tech world with the impacts of new technologies and Blockchain is being one of them. It is being adopted by many esteemed Custom blockchain software development companies for their future growth. Let us understand blockchain, bitcoin, cryptocurrency in detail.

Bitcoin and cryptocurrency

A cryptocurrency is a medium of exchange, which is digital and uses encryption techniques to control the creation of monetary units and to verify the transfer of funds. Bitcoin is a decentralized, purely digital and a highly recognized cryptocurrency. Two parties can exchange these virtual coins directly without having the need of any middle-man. Unlike modern fiat money, Bitcoin is not controlled or backed by any bank or central government authority.

Of late the buzzword ‘Blockchain’has been making rounds. The Blockchain is an undoubtedly ingenious invention of a person named Satoshi Nakamoto whose identity is still a mystery [1].

Blockchain is a Decentralized Technologywhich is used to process the Digital Transactions based on distributed ledger technology. More importantly, it is a Database or Public Ledger to record all Cryptocurrency Transactions. Distributed Consensus and anonymity are the two most important characteristics of Blockchain. There is no third party involved to mediate the transaction. Blockchain has a Potential to revolutionize the digital payment system.

Working of Blockchain

Now, coming to the working of a Blockchain, User initiates the Transaction using Digital signature. Each Transaction is Represented as a block. Transaction is broadcast to every node on the network and these nodes approve the Validity of the transaction. Once the transaction is validated, Blocks are connected to the chain, and Entry is made in the ledger. Finally, Transaction is received by Receiver. When the transaction is Broadcast on the Nodes, two main verification activities are done. Firstly, the owner of the cryptocurrency that is the digital signature of the transaction is verified. Secondly, it is checked if it spender has enough money in his account to make the payment.

Security in a Blockchain

The records on a Blockchain are secured through cryptography. Participants have their own private keys which are used to initiate the transaction. The Transaction is signed using the Digital Signature of the sender. Receiver verifies the digital signature. i.e. ownership of private key is verified by using the public key of the sender. The signature will become invalid and the network will know right away that something is suspicious if the record is altered during a transaction.

Owing to the decentralized and distributed nature of Blockchain, there is no single point of failure and transactions cannot be changed from a single computer. It would require enormous computing power to access every instance of a certain Blockchain and alter them all simultaneously.

Applications of Blockchain in financial and non-financial sector

The application of Blockchain is not only limited to the Financial sector. Rather they have varied applications in Non-financial domains developed by Blockchain development company as well. In case of banking, Blockchain enables highly secure payment processing with lower cost eliminating the need for intermediaries. Money transfers, Record-keeping, and other back-end functions become easy, digital, decentralized.

Potential applications of Blockchain in non-financial institutions include Governance, Healthcare, Iot, Data management, etc. Distributed database technology could bring full transparency to elections or any other kind of poll taking by making the results fully transparent and publicly accessible. In case of healthcare patient’s encrypted health information could be shared with multiple providers without any risk of a privacy breach. In case of IoT, Smart contracts make the automation of remote systems management possible. Sensors can exchange data through Blockchain wherein lot of overhead costs can be reduced since there is no involvement of any intermediary.

Public and Private Blockchain

There are two main variants of Blockchain Public and Private. These two types are distinguished based upon the criteria of participation in the network. Public Blockchain is open and public to all and no one is in charge here. Public blockchain donot have any access or rights management, therefore, anyone can be the part of the consensus (agreement). The best example for Public Blockchain is a Bitcoin. Private Blockchain, on the other hand, allows known organizations to join. The public Blockchain is designed on the principle of anonymity however in private Blockchain, one can know exactly with whom they are dealing with in a network.

For a transaction to be added to a Blockchain, network participants must agree that it is the one and only version of the truth. That is done through consensus, which means  agreement. Bitcoin is the most renowned example of a public Blockchain in which the agreement is achieved through “mining.” In Bitcoin mining complex cryptographic problem is solved to create a proof of work. [5] Alternatively, a private Blockchain consists of a permissioned network in which consensus can be achieved through a process called “selective endorsement,” where known users verify the transactions.

 Type   Public  Private
 Access  No permission required  Qualified user via online approvals
 Typical Implementation  As a public Blockchain application  Via a private Blockchain implementation
 Innovation Target  New business models  Processes within existing relationships
 Blockchain Governance  Public consensus  Controlled by a single owner
 Number of Users  Millions  Hundreds of thousands

Pros and cons

Bitcoins are decentralized and are purely digital. Couple of parties can exchange virtual coins directly without having the necessity of any middle person. Unlike modern fiat money, Bitcoin is neither controlled nor backed by any bank or central government authority. Therefore, Blockchain has the potency to reduce transaction fees significantly. Alterations to the Blockchain are publicly viewable by all the parties creating transparency and all the transactions are immutable, meaning they cannot be altered or deleted. Being said that it has a decentralized nature, there would not be any central point of failure.

However, there are shortcomings in Blockchain. Like to process the transaction, enormous computation power is required. The generation and verification of digital signatures in the decentralized system is computationally complex and constitutes the primary bottleneck. There is a substantial amount of power consumption required for mining of bitcoins. Transition from traditional banking to Blockchain would require huge efforts and a large amount of Capital Investment.

 Pros  Cons
 Chances of security breach is very low  Huge Computing power is required to process the transaction
 There is no third party involved to mediate the transaction  Technology of Blockchain is widely accepted across the globe
 Any change in the Blockchain is viewable.  Transition from traditional Banking to Blockchain might involve lot of challenges
 Lot of overhead cost is reduced.  Transaction Processing is very slow.