Blockchain, in simple terms, is a database that stores transaction data in a decentralized fashion. In typical computer architecture, data is stored in a centralized server,i.e., in a single location (even if that single location is in the cloud). Blockchain, on the other hand, stores information in groups known as blocks. These blocks have a specific storage capacity. When it exceeds, the block is appended to the previous blocks, forming a chain of blocks. These blocks connect through peer-to-peer (P2P) nodes. Blockchain is known as Distributed Ledger Technology (DLT) because it is a technology that stores transaction data in multiple locations.
The block of information must be validated before getting appended to the blockchain. Each blockchain has its mechanism to carry out this validation, called a consensus mechanism. This validation of blocks enhances the authenticity of the network. The copy of data is available in every node of the blockchain, making it practically impossible to modify. This framework makes blockchain suitable for high-security applications. Several computers share the data, and it is visible to everyone but still cannot be corrupted.
Blockchain makes use of hash encryption to secure the data. The details of the transaction (sender address, receiver address, and other private keys) are hashed through the SHA-256 algorithm to keep them confidential. Once hashed, it is highly improbable that the data will be decrypted. It is then added to the blockchain.
So, if a person A sends payments to B, the blockchain shows the public address of A and B, but no further details, enhancing the users’ anonymity. The computers that perform the hashing are typically rewarded with cryptocurrency, such as coins or tokens (which we will go over in a separate article). This process of hashing transactions for cryptocurrency is known as mining.
Applications of Blockchain
Cryptocurrency is the most well-known use of blockchain technology so far. Blockchain gives unbanked (someone who doesn’t have access to a bank account) or underdeveloped countries access to various financial services, including microloans and digital wallets. DeFi (Decentralized Finance) is the hottest topic in the blockchain space and it eliminates the restrictions imposed on by centralized financial bodies like banks or governments to access funds. People can enjoy complete control over their assets. Blockchain also plays a significant role in digital identity management and travel industries, with its ability to make user authentication relentless. Smart contracts (a self-executing contract with the terms of the agreement between buyer and seller written into lines of code) are another rapidly growing application.
With the increase in the number of tech-savvy users, the demand for future technologies like IoT (Internet of Things) is also increasing. The advent of machine learning and IoT creates a need for machines that communicate data without human intervention. Blockchain can bring this automation into the legal space through smart contracts deployed on top of them.
It is likely that by 2025 blockchain technology could have a significant impact in underdeveloped nations with unstable banks and governments. We expect a blockchain revolution in Africa, just as Africa powered Mobile Money.