A blockchain is a decentralized data network, and the users have equal access to the ownership and management of the network through computer system nodes. Blockchain has a database that stores information in a digital format. Blockchain technology works as the name suggests, it stores information in blocks and then links them to form a chain. Each block has its unique capacity; when it is filled, it is linked with the previous block. After the last block is completed, any newly added information will need its block. Blockchain is infamous for its role in developing breakthrough cryptocurrency systems like Bitcoin. A decentralized version of crypto transactions is maintained. That is why blockchain is known for its cause in promoting data security.
Since the introduction of blockchain technology, the payment and finance industry has witnessed a revolution. Other industries are following the trend, and you must be wondering whether it is something that can benefit your company. Well, you should know how it operates, its benefits and drawbacks.
How does blockchain technology work?
Most blockchain applications work the following way:
- Transaction– Two parties decide to exchange a unit of value (digital currency or a digital form of any other asset). This way, the transaction is initiated.
- Block– The following transaction is packaged along with other pending transactions, which creates a block. The block is then digitally transported to the blockchain network of participating computer systems.
- Verification– The participating computers, also called miners, evaluate the transaction to ensure that they are valid and following the rules of blockchain technology. When consensus is achieved, the transaction is verified by the system. Consensus is generally achieved when more than 51% of the participating computers have approved the transaction.
- Hash– The verified block of a transaction is time-stamped with a cryptographic hash. Each block contains a reference to the previous block’s hash. This creates a chain of records that cannot be falsified. If these records were to be falsified, the participating computers had to be convinced too. However, such a feat is considered impossible to achieve. That is why blockchain applications are hailed for their data security. If you are interested in blockchain applications, security is their unique selling proposition.
- Execution– The valuable unit is digitally moved from one party’s account to another. At this stage, blockchain technology has completed its function.
Benefits of using blockchain technology in blockchain applications
- Highly Secure– Blockchain technologies are designed in a way that any block which is added to the transaction cannot be tampered with in any way, this makes the technology highly secure.
- No censorship– Blockchain is free from censorship as it does not control any element. Rather the process of validation is left to be checked by independent systems.
- Distributed– Blockchain data is distributed among thousands of nodes or computer systems. That is why it is highly difficult to attack the technology. Each network node can copy and store the data, so there is no space for failure in the entire blockchain system.
- Traceability– The format of blockchain technology is that records are available to be audited. Any addition to the chain can be traced and audited before the process is finished.
- Immutability– No one can tamper with the data in blockchain systems because of its decentralization scheme. Any change made will be reflected in all the computer nodes. That is why fraud cannot be committed, and all transactions are secure.
- Open– One of the best things about blockchain applications is that anyone can participate. You can join the system, and you do not need permission from anyone to do so.
- Stability– Once data has been registered into the blockchain system, it is extremely difficult to remove or change. This makes blockchain one of the best technologies for storing financial records. Every change is tracked and permanently recorded on a distributed public ledger.
- Security– Each member is provided with a unique identity, which is linked to their account. When you use one of the blockchain applications, your personal information will be secure. The end-to-end encryption in the chain makes it next to impossible for anyone to trample with the information.
- Rapid processing – Before blockchain companies were in the market, banking organizations used to take a lot of time to process any financial transaction. Now, after blockchain technology has disrupted the market, processing transactions have become extremely fast. Before this, banking companies used to take up to three days to finish a transaction. Now, a transaction can be completed within seconds to minutes. This is one of the biggest leverage blockchain technology has provided the financial market.
- No interference from third parties – No government or financial institution controls the multiple cryptocurrencies operating on blockchain technology. This usually means that political power cannot change the currency’s value.
- Secure transactions– The blockchain responsible for keeping records of each transaction cannot be manipulated. So, anytime anyone makes a transaction, that record is safe and secure. This also means that blockchain transactions are secure and will soon become the norm. More and more financial applications will use blockchain technology in time. If you are in the fintech sector, you should consider investing in an application that uses the blockchain concept.
- Instant transactions- All transactions done within the blockchain technology system are completed within a few minutes. Moving money around is an important aspect of any business. Blockchain technology has helped businesses do transactions that would have taken the bank days. With blockchain apps, always fewer problems are involved.
Disadvantages of using blockchain technology
- Requires a lot of electricity– The blockchain system depends on mining activities, which means you need a lot of electricity to support the technology. Keeping a ledger in real-time is also one of the reasons that power consumption is so high with this technology. Every time you create a new node, the interaction between all the other nodes occurs simultaneously.
- Cost– Enabling blockchain technology is costly because you need storage and the ability to pay the power bills. You cannot create a blockchain application if you do not have that much investment. Additionally, businesses need proper planning beforehand to successfully execute blockchain operations. Otherwise, implementing blockchain technology can put a deep cut in your revenue.
- Public opinion– Blockchain is a fairly new technology, so people do not have a lot of confidence in it. Public opinion on blockchain keeps varying, and it has become a debate among thinkers. With time, blockchain needs to win the confidence of the majority to be accepted as an ideal solution. However, right now, that is not the scenario.
- Performance– Blockchain is slower than a traditional database because it carries out a lot of operations to ensure verification. It also relies on consensus mechanisms to validate transactions. This means that the systems in the chain need to form a consensus on whether the transaction is valid or not. Some consensus mechanisms, such as proof of work, have a low transaction throughput. Since each transaction is verified and stored by each node, there is also a problem like redundancy with blockchain.
- Data modification– What is groundbreaking about the technology also causes problems. What can be seen as an advantage in some situations can be seen as a roadblock. Once data is recorded, its modification is not easy. A rewriting operation must be performed in all nodes for a change, which is extremely time-consuming and expensive. So one small mistake can cost you a lot of money and time. Both are important resources for businesses. Even if you have not made any mistakes but wish to make an adjustment. You still have to follow the same process. This is one of the main reasons some businesses do not choose blockchain. One solution can never be fit for all businesses. That is why in every field, there are companies that provide different solutions.
There is a lot of buzz around Web 3 and blockchain, and many organizations are looking to move from Web 2 to Web 3. However, this is a sort of lift-and-shift solution. Organizations should first deeply analyze their business and then decide on their needs. They can only know their proper IT needs and which technology suits their long-term plan. If your company does seem to benefit from moving to Web3, you can make a move.
- Time-consuming– To add the next block in the chain, miners need to compute values many times, which can be time-consuming. If you need a quick industrial process, you may be disappointed with blockchain here.
- Legal Formality– Money has always been created and controlled by the government in each part of the world. You can take the example of the Reserve Bank of India, which controls the Indian currency. In such an atmosphere, it becomes difficult for digital currencies like Bitcoin to be accepted. They have become popular, but it is a risky bet to rely too much on them.
- 51% Attacks– The proof of work consensus, which has been proven efficient for cryptocurrencies like Bitcoin, have some problems too. Some attacks can be performed on the blockchain, and 51% of attacks are one of them. Such an attack happens if one entity controls the rest of the 50% of the network hashing power. This could disrupt the network internationally and modify the order of transactions. In recent years, such attacks have become common. The blockchain structure is such that it is susceptible to these types of attacks. Sadly, digital attackers know the system’s weakness in advance and can make it a target.
- Elimination of Errors– The application needs to be worked on each node of the peer-peer network. This means that if you have to make any updates, each node has to accept it, and only then can it be made. This makes it a tough technology to handle for your staff. If there were some errors made from your end, and you wish to change them, you also need to work on each node of the blockchain system.
- Lacks Business Sense– Most applications out in the Information Technology landscape have a business sense behind them. They are designed in a way so that businesses can find a purpose for them in their organization. The purpose of such an application is to enhance the operations of a typical type of business. However, businesses also change; generally, it can change the application according to your business. But when it comes to blockchain, its strict logic does not allow redesign without losing any benefits. That’s why, when many businesses remodel their plan, they have to say goodbye to the blockchain instead of spending resources to redesign the blockchain application.
- Difficult to develop– Blockchain is full of complicated concepts and protocols. You must apply these protocols to achieve a consensus while also considering the time factor. To develop a blockchain application, you must have the entire plan ready beforehand. You cannot develop a blockchain application like a website. Where you start and then make changes along the way. You cannot add features to the application without redeploying the network. That is why many experts consider blockchain difficult to adapt to in their organization.
- Inefficient– Blockchains that use the whole proof of work concept are highly inefficient. Mining is highly competitive, so there is one new winner every ten minutes. This means that the work of every other miner is wasted.
- Storage– With time, your blockchain ledgers are bound to grow. The Bitcoin blockchain currently requires around 200 GB of computing space. The growth in blockchain size seems to move faster than in computer hard drives. If it goes at this pace, people or businesses will soon have a storage problem.
- Scalability– Each block has a fixed size for storing information. That is why it is said that blockchain cannot be scaled according to your demands. The size of one block is 1 MB, and it can hold only a couple of transactions. This is one of the biggest drawbacks of this technology and the main reason it is not considered business-friendly.
Blockchain technology has gained a lot of popularity over the years. With the help of this article, you can understand how it functions and then perform a SWOT analysis for this technology. Whether it is the right move for your business to adopt it or not.