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Blockchain (Distributed Ledger)

Reviewed by Kuntal ChakrabortyCheckmark | Last updated: September 15, 2021

What Does Blockchain (Distributed Ledger) Mean?

A blockchain is a tamper-resistant distributed ledger that's used to validate and store digital transactional records. No single authority is responsible for maintaining a Blockchain. Instead, computers in a peer-to-peer (P2P) network each store a copy of the ledger and transactions are verified through a decentralized consensus mechanism.

Transactions are stored in permanent, time-stamped units called blocks and each block is connected (chained) to the previous block with a cryptographic hash that is created by using the previous block's contents. The hash links make it impossible to alter data in one block without making changes to each subsequent block in the chain at the exact same time. Essentially, this means that any attempt to alter or delete information will break the cryptographic chain and immediately alert all nodes in the network that there is a problem.

Blockchains can be public or private. In a public blockchain, anyone can view the ledger and participate in the consensus mechanism. In a private Blockchain, the consensus mechanism is restricted to certain nodes on the network and views of the private ledger may also be restricted.

Originally created for digital currency, Blockchain is now being used by many types of businesses as a decentralized database technology to support smart contracts as well as records management for health care and identity and access management (IAM).

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Techopedia Explains Blockchain (Distributed Ledger)

Blockchain can be thought of as a distributed database technology that's maintained by multiple computers in a network. The security of this system is based on the idea that the financial cost of conducting a fraudulent transaction will be much higher than any potential reward.

How Blockchain Works

Each block in a chain includes the location of the next record. To add a new block to the chain, computers on the P2P network compete to verify and share (broadcast) the new block.

Each computer is given a Proof-of-work (PoW) mathematical problem that requires a lot of processing power to solve, but can be easily verified through consensus algorithms. The first computer to solve the problem "wins" the broadcast and is issued a small reward.

Once a block has been added to the chain, the information it contains becomes permanent and the block cannot be deleted.

Computers on a Blockchain P2P network sync periodically to ensure that all copies of the shared database contain the exact same information, but it is the linkage between blocks that keeps Blockchain ledgers secure.

Types of Blockchains

There are four kinds of blockchain:

  • Public: anyone with internet access can weigh in on the consensus.
  • Private: a single, central authority holds the deciding factors.
  • Consortium (or Federated): multiple organizations have authority status.
  • Hybrid: elements are public access, but privately held authority.

Advantages of Blockchain

Digital ledgers using Blockchain can significantly shorten the time it takes to transact business by eliminating the need for transactions to be approved and verified by a centralized authority. This not only speeds up the time it takes to execute a transaction, it lowers transaction costs while still providing high levels of security and trust.

Disadvantages of Blockchain

One of the criticisms of blockchain transactions is that it requires a lot of computing power, which can be expensive.

The investment required to maintain the security of a public blockchain has incenticized some companies to use private blockchains. When the blockchain network is private, PoW consensus mechanisms are not necessary.

Some critics maintain that because private networks are centralized and include levels of trust, it negates the benefits of using Blockchain. It has been argued that private Blockchains are essentially just convoluted databases.

Another potential disadvantage of private Blockchains is that they could lead to the development of closed technology platforms that do not support common standards for security, privacy and data exchange.

History of Blockchain

The theory of Blockchain has been around for quite some time. David Lee Chaum is credited for proposing the idea in 1982.

Although he presented the theory in his doctoral dissertation Computer Systems Established, Maintained, and Trusted by Mutually Suspicious Groups, it wouldn’t be until 2008 that Blockchain technology was introduced to the world along with the digital currency Bitcoin.

Blockchain and Bitcoin

The white paper Bitcoin: A Peer-to-Peer Electronic Cash System outlined the implementation of Bitcoin’s blockchain technology. The paper was published by "Satoshi Nakamoto", who created Bitcoin, but that name is widely accepted to be a pseudonym.

Nakamoto claims that the problem with current financial institutions is that they rely on trust. Payees have to trust a bank and the bank needs to vouch for payments. Blockchains, on the other hand, provide a non-alterable record of all transactions and are available to all parties. This system gives users proof of transactions and removes the necessity for centralized management and trust in a mediator.

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CybersecurityStorageData ManagementBlockchainCryptocurrency

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