The recent price gain of Bitcoin, Ethereum, and other cryptocurrencies are bringing a lot of attention back to blockchain technology. A Blockchain is decentralized, so there is no single authority that can approve the transactions or set specific rules for the transactions to be valid. This implies that there is a huge amount of trust involved since all the participants in the network have to reach on a consensus to accept transactions.
Most importantly, it’s secure. The database or shared transaction ledger can only be extended and the earlier records cannot be changed.
When someone wants to add a transaction to the chain, all the participants in the network will validate it. They do this by applying an algorithm to the transaction to verify its validity. What constitutes a valid transaction is defined by the Blockchain system and can differ between systems. Only a majority consensus will term the transaction as valid.
A set of approved transactions is then pushed in a block, which gets distributed to all the nodes in the network. They, in turn, validate the new block. Each successive block is identified by a hash, which is a unique fingerprint, of the previous block.
Blockchain ensures that data has not been tampered with, offering a layer of timestamping that removes multiple levels of human checking and makes transactions immutable.
Blockchain technology certainly has many positive aspects, but there are also many misunderstanding and confusion regarding its nature.
# Blockchain records are protected from hackers and can’t be altered
Blockchain’s brand market positioning is around its intrinsic permanent and transparent quality. This creates an illusion that blockchains are invulnerable to outside attacks. No system or database will ever be completely immune, but the larger and more distributed the network, the more secure it is believed to be. What blockchains can provide to applications that are developed on top of them is a way of catching unauthorized changes to records.
# Blockchain are free
Blockchain technology is costly and needs high maintenance. It involves multiple computers solving mathematical algorithms to agree on a final immutable result, which becomes the so called single version of truth (SVT). Each ‘block’ in the Blockchain typically uses a large amount of computing power to solve. And someone needs to pay for all this computer power that supports the Blockchain service.
# Bitcoin transactions are untraceable, anonymous, and absolute
It is not completely anonymous. It’s still possible to identify someone’s real identity by tracking bitcoin transactions. All Bitcoin transactions are recorded publicly on the blockchain and it is possible that authorities could uncover the person’s identity through a subpoena. Hence, it is easy to say that Bitcoin transactions are pseudonymous.
In theory an attacker can create data fork (an alternate chain) that would allow double spending. This will not succeed unless the attacker has vast hashing power at their disposal. So, transactions are probabilistic and not absolute.
# The blockchain is effective and scalable. Conventional money will soon disappear
If every network node in the blockchain processes at the same bandwidth, then the bandwidth of the entire network would be that of a single node. The Bitcoin network can process a maximum of seven transactions per second, for the millions of users worldwide. Plus, each bitcoin transaction is recorded once every 10 minutes. Now, imagine the amount of time required considering the number of transactions worldwide.
The fact that bitcoin usage is less and the increased transaction-processing speed is disproving the scalability factor. If conventional money disappears, it won’t be because of bitcoin.
# The blockchain can be used for anything and everything
Bitcoin and blockchain developers are highly skilled professionals. Though the code is powerful, it’s limited to the number of cryptocurrency transactions in the chain itself, and cryptocurrency is still far from being accepted worldwide. For many, the blockchain is an authority tied to mathematics, and not the government or lawyers. This limits its application for every day transactions. In the mind of some developers the blockchain and smart contracts will one day replace money, lawyers, and other arbitration bodies, but that is still a long way in the future.
# The blockchain is deciding factor for a global economy
The basic premise of blockchain is its transparency and complete lack of ownership by any single nation, entity or corporate. This enables the growth and support for emerging, trusted and encrypted cryptocurrencies. But the reality is that the economy is still not ready for a cryptocurrencies market. If cryptocurrency takes off, and records are generated larger, then this may change in the future.
# The blockchain is decentralized
Mining the blockchain require huge computational resources. The chain itself lock the nodes—sectors of activity—at 1 MB, and nodes are generated approximately every 10 minutes. This implies that while more transactions help the chain become more diverse, and as the blockchain grows it needs more computing power to aggregate data from nodes. The greater the need for resources, fewer are the participants.
# The blockchain and Bitcoin are distinct and separate
Due to Bitcoin’s association with the Dark Web and other unscrupulous actors, the currency’s brand image lost some of its credibility. As a result, innovative startups like Ethereum and Early Temple moved away from Bitcoin and moved on to blockchain technology. While private blockchains do exist, the value of the blockchain comes from records generated by Bitcoin transactions. This means that the two technologies, even though distinct, are linked.
# The blockchain ledger is locked and irrevocable
Analogous large-scale transaction databases like bank records are by their nature, private and tied to specific financial institutions. The power of blockchain is that the code is public, transactions are verifiable, and the network is cryptographically secure. Fraudulent transactions or double spends are rejected by the network, preventing fraud.
Blockchain mining provides financial incentive in the form of Bitcoin, which can be exchanged for real money. This incentive usually deters the participants from rewriting historic transactions. However, as computational resources improve with time, so too does the potential for deception. The impact of future processing power on the integrity of the contemporary blockchain remains ambiguous.