What is Blockchain?
The current investment market has gone beyond traditional asset classes that are tightly regulated by various regulatory bodies such as SEBI and RBI. Now, the additional asset class is known to everyone as cryptocurrencies.
In India, it all started with Bitcoin, when its price skyrocketed from thousands to lakhs, making numerous investors millionaires. Initially, people were hesitant to invest in cryptocurrencies as there was no consensus on what it is and how it works. With time and based on the globally increasing demand, cryptocurrencies in India started to see immense interest from investors who wanted to make quick returns. However, raising concerns over its use and legality, cryptocurrency was banned in India in 2018. Notably, the ban has been overturned, resulting in India becoming the highest cryptocurrency holder in the world.
Despite cryptocurrencies attracting millions of investors in India, very few of them know the concept and the technology that creates and manages their operation. If you are looking to invest in cryptocurrencies, this blog will help you understand what blockchain is and how it is a vital part of the whole cryptocurrency concept.
What is Cryptocurrency?
Cryptocurrencies are defined as the digital version of money that is created and held as virtual coins or tokens. Similar to digital payments using the Indian rupee, you can use cryptocurrencies to buy and sell items. However, the person or the business must be willing to accept the cryptocurrency you are offering against their products or services. Although cryptocurrencies sound similar to digital payments, they differ because of their technology and the asset they rely on. Furthermore, unlike the Indian rupee, where you can physically take cash, cryptocurrencies have no physical presence.
What is Blockchain?
Cryptocurrencies are traded in high volume, and millions of transactions are executed in a matter of seconds. But, where are they stored? How are they managed? It happens through blockchain.
One of the contemporary inventions that partnered with cryptocurrencies is blockchain or distributed ledger technology (DLT). The Blockchain is like a digital ledger. Every transaction is authorized and authenticated by the owner. The digital ledger works similar to that of an excel sheet or a Google spreadsheet, where transactional records are stored after each purchase. However, blockchain is highly secured, and every transaction is matched with the buyer and the seller before the payment is debited or credited.
Every time a new transaction is executed by a buyer or a seller for a specific cryptocurrency, it is added to the blockchain. This process continues till the block is full. The completed block then gets added to the longest chain and distributed to all the ledger holders. This ledger is publicly available to anyone who wants to use it, making it immensely transparent as it is virtually impossible to manipulate. If someone decides to manipulate any transaction on the blockchain, it will certainly be identified by others who hold and cross-check the ledger after every transaction.
How does Blockchain work?
The main goal of blockchain is to list and manage transactional records of cryptocurrencies digitally. Furthermore, it ensures that digital information is secured and not edited or manipulated by anyone. Because of its feature of allowing the distribution of these records, blockchain is also called distributed ledger technology (DLT).
There is a common misconception that blockchain technology was introduced after cryptocurrencies. However, the concept of blockchain predated the introduction of cryptocurrencies and was first floated in 1991. The blockchain concept remained in development till 2008, before it was used to create and manage Bitcoin for the first time. Currently, blockchain is not limited to cryptocurrencies but is used in various other assets such as decentralized finance (Defi), smart contracts, and the widely famous non-fungible tokens (NFTs).
To understand the blockchain process, consider the following statement below:
Cryptocurrencies are digital assets which makes them vulnerable to the ‘double-spending problem’. The ‘double-spending’ problem is the one in which a buyer can’t tell if the seller of the coin or token has sold the same coin or token to someone else. If the coin or the token is sold multiple times, the ownership will become illegal. Blockchain is used to tackle the problem of ‘double-spending’,.
Blockchain is a digital accounting book that keeps track of every single bitcoin transaction. It works in the same way as banks. To ensure that the bank sends no amount of extra money to someone, banks match their money (both physical and digital) at the end of the day. Similarly, the ledger made through blockchain is publicly available, and anyone can access it. To make sure there is no double-spending problem, the ledger must be in sync with everyone else. With so many eyes watching and constantly maintaining it, there are negligible chances of your coin or token getting used by someone else.
Examples of Blockchain
Examples of blockchain are better described by types. Which are:
Public Blockchain: It is open and permissionless. This means that they are entirely decentralized, allowing anyone who wants to join without any hassle. In technical terms, a public blockchain ensures that all nodes or the blockchain can equally access the blockchain, record transactions, create new blocks and validate the information. A public blockchain is widely used to mine cryptocurrencies in the present scenario and allows anyone to join and manage the transactions.
Private Blockchain: Also called managed blockchain, a private blockchain is permissioned and is controlled by a specific organization. In this type of blockchain, a central authority determines who can be a node and can have rights to access the blockchain, record transactions, create new blocks and validate the information. Some examples of private blockchain are Hyperledger and Ripple.
Hybrid Blockchain: Similar to a private blockchain, a Hybrid blockchain is also controlled by a single organization. However, the blockchain is looked after with a level of oversight using the public blockchain. Only after the public blockchain approves, the transactions can be validated.
Consortium Blockchain: This type of blockchain is governed by a group of organizations rather than a single entity. When compared to a private blockchain, a consortium blockchain is more decentralized, resulting in higher security levels. However, consortium blockchain is rare as it is a time-consuming process requiring cooperation between various organizations.
Can blockchain technology be used in other financial assets?
Based on its operations and process, blockchain can be used in numerous other ways. One such use can be towards the stock market. As each stock is an asset that is recorded and stored digitally, blockchain can be used to track every stock’s transaction with a trusted and distributed ledger. The process can be more effective, smooth, and transparent.
There is no doubt that blockchain technology is revolutionary. Owing to its highly secure yet simple approach, it can be leveraged in numerous ways to cut costs and increase efficiency. The Indian government has started using blockchain technology to certify startups digitally and allow them to receive incentives. These incentives range from tax exemptions to financing assistance. Similar to how the government has used blockchain for startups, it can be used in various other ways to promote security and transparency.
Frequently Asked Questions Expand All
A blockchain is a database or a digital ledger that stores transaction information in a digital format. Miners or network participants solve complex algorithms, cross-checks the solution with the transaction, and add it to the block. They are used to manage the entire transaction process.
Blockchain is used for storing and managing information of any kind in a digital format. Blockchain can store any type of information as long as it is digital.
Participates or nodes in blockchain solve a complex mathematical problem to create Bitcoins. They just try to come up with the closest 64-digit hexadecimal number (called a hash) to the target hash. The process, called ‘Proof of Work’, creates a new ‘block’ that the miners add to the already existing blocks to keep the system going.