Bitcoin has been in news a lot. It is the most talked about cryptocurrency and chances are that it will be talk of town owing to its popularity and profitability. With the arrival of Bitcoin, terms like cryptocurrency and blockchain have also permeated in the finance ecosystem. Though these terms may seem intimidating at first, the underlying concept is quite simple.
The technology behind bitcoin and other cryptocurrencies is blockchain. The credit for conceptualising and implementing blockchain goes to a person named Satoshi Nakamato. Till date ambiguity remains if Satoshi Nakamato is an individual or is it a pseudo name for the group of developers behind the concept. Nevertheless the technology has been instrumental in development of cryptocurrencies. It is finding new uses in sectors like healthcare, intellectual property rights, real estate, trading and many more.
How does Blockchain work? Blockchain is regarded as a secure distributed database. To put it simply, it acts as an open ledger. As the name suggests, blockchain comprises of a chain of blocks. The chain starts from a genesis block and continuous to the current block.
Every block holds information about transactions that are validated. This information is hashed and encrypted to make it secure. Hashing converts arbitrary data in a specific fixed length hash which secures it. Hash acts a digital fingerprint which cannot be modified. Encryption modifies original data into an encrypted form which can be accessed with the help of a primary key. Each block refers to the earlier block for authentication. The successive block contains a digital fingerprint or hash of the previous block. These linked blocks form a continuous immutable chain. The sequence cannot be modified as it is time stamped. New blocks are added by miners after confirming the sequence and authenticity of the blockchain.
For a transaction to proceed, all involved parties must agree and verify their identities. The time of transaction must be agreed as well. The transactions are then securely recorded by consensus in a decentralized manner hence blockchain is also known as distributed ledger. This technology is safe, tamper proof and auditable. It tracks all events and serves as an important immutable auditing instrument.
There are two kinds of blockchains :
Permissioned or private blockchain : An access control layer governs the network access and is restricted to certain nodes only which are identified and verified. In other words, it is useful for organization specific uses. A company may decide to use private blockchain to validate identity of its employees and modifications in the blockchain can only be made by certain users and the information is also restricted.
Permissionless or public blockchain : They are also known as open or public blockchain. Such blockchain is completely open and users can join and participate in the network. To encourage participation usually an incentivizing mechanism is used. A public blockchain uses more computational power than a private blockchain because the ledger is distributed on a much more larger scale.
Both public and private blockchains are being used to eliminate the need of a central trusted authority for authorizing transactions. They act as a notarised ledger and reduce the risk of fraud considerably. The have revolutionized the way business is done and made existing processes more streamlined and secure.
Blockchain is finding new applications and sectors like insurance, banking, retail and healthcare have already participated in the revolution. Many other industries are exploring how permissioned and permissionless blockchain can be used to for secure authorization and authentication of business information.