Most blockchains are designed as a decentralized database that functions as a distributed digital ledger. These blockchain ledgers record and store data in blocks, which are organized in a chronological sequence and are linked through cryptographic proofs. The creation of blockchain technology brought up many advantages in a variety of industries, providing increased security in trustless environments.
However, its decentralized nature also brings some disadvantages. For instance, when compared to traditional centralized databases, blockchains present limited efficiency and require increased storage capacity. In this piece, we’ll study the uses of blockchain technology along with the notable advantages and disadvantages of blockchain.
What Is Blockchain Technology?
Blockchain technology can be defined as a system of decentralized digital public ledgers that store transactions. This transactional information is stored in chains of blocks – hence the name “blockchain.” These computers on the network share this information through cryptography.
Blockchain technology is used for a variety of functions. In addition to its widespread use of cryptocurrency, it’s also used for things such as healthcare, smart contracts, supply chains, and electronics. Let’s take a look at how blockchain works.
How is Blockchain Used?
We all know cryptocurrencies use blockchain, but what else in the world benefits from the wonders of blockchain technology?
Cryptocurrencies
As we’ve already seen, blockchain forms the fundamental underpinning of what defines a cryptocurrency: a decentralized asset, free from the shackles of a central entity such as a bank or governmental institution.
Bitcoin may be the most popular cryptocurrency, but really it’s just the tip of the iceberg. A multitude of coins – from altcoins to stablecoins to DeFi tokens – are in existence today, thanks to the technology invented by Satoshi Nakamoto.
Healthcare
Sensitive medical data from patients’ electronic health records (EHRs) has been the target of hacking, used to steal or impersonate identities, or sold to third parties. Through advanced cryptography, blockchain can put an end to this.
Records can be added to a trusted and secure blockchain, becoming longer over time. When new records are added, a consensus is needed – thus making the chain very difficult to hack into or break.
Smart Contracts
A smart contract works the same way any contact would, but through a blockchain, which takes away the need for any third-party intermediaries. Only when preset conditions (which have been set in the computer code of the blockchain) are met does a transaction within the contract take place. Smart contracts were first established on the ETHereum blockchain in 2015. Today, they have many uses, some of them listed below.
Insurance
Smart contracts can make insurance claims a quicker and cheaper process by helping to clearly define when objective criteria have been met. This may not be the case when these decisions are left up to lawyers as this may make the process more subjective, and in turn, lead to a longer and more expensive claim process.
Supply Chains
Supply chains can become easier to manage through the use of smart contracts. As with insurance claims, smart contracts can take away any subjectivity, making it easy to verify if set targets are being met within the blockchain.
Within healthcare, smart contracts have the potential to revolutionize the complicated prescription drug supply market in the U.S. by cutting out middlemen, thus considerably cutting costs for consumers.
Real Estate
Smart contracts can make buying and selling a house a lot less stressful. By cutting out the need for a middleman, such as a housing agent, buyers can handle transactions with a potential seller by themselves. Once the conditions of selling a house are met, the purchasing of a property can be completed solely through the use of a smart contract.
Video Games
Believe it or not, the wonders of blockchain technology have even infiltrated the video game industry. In 2017, a game was released called CryptoKitties. The premise of the game is that you breed, buy and sell virtual cats. It may not be everyone’s cup of tea, but what made this game so eye-opening was that it operated on the ETHereum blockchain.
Since then, blockchain technology has been increasingly adopted in the video game industry, albeit this is still in its infancy. Collectible card games have led the way in adopting the technology. One such example is God’s Unchained, in which gamers can trade collectible cards online by using an ETHereum wallet such as MetaMask.
Advantages and Disadvantages of Blockchain
Advantages
Distributed
Since blockchain data is often stored in thousands of devices on a distributed network of nodes, the system and the data are highly resistant to technical failures and malicious attacks. Each network node is able to replicate and store a copy of the database and, because of this, there is no single point of failure: a single node going offline does not affect the availability or security of the network.
In contrast, many conventional databases rely on a single or a few servers and are more vulnerable to technical failures and cyber-attacks.
Stability
Confirmed blocks are very unlikely to be reversed, meaning that once data has been registered into the blockchain, it is extremely difficult to remove or change it. This makes blockchain a great technology for storing financial records or any other data where an audit trail is required because every change is tracked and permanently recorded on a distributed and public ledger.
For example, a business could use blockchain technology to prevent fraudulent behavior from its employees. In this scenario, the blockchain could provide a secure and stable record of all financial transactions that take place within the company. This would make it much harder for an employee to hide suspicious transactions.
Trustless System
In most traditional payment systems, transactions are not only dependent on the two parties involved, but also on an intermediary - such as a bank, credit card company, or payment provider. When using blockchain technology, this is no longer necessary because the distributed network of nodes verify the transactions through a process known as mining. For this reason, Blockchain is often referred to as a 'trustless' system.
Therefore, a blockchain system negates the risk of trusting a single organization and also reduces the overall costs and transaction fees by cutting out intermediaries and third parties.
Disadvantages
51% Attacks
The Proof of Work consensus algorithm that protects the Bitcoin blockchain has proven to be very efficient over the years. However, there are a few potential attacks that can be performed against blockchain networks and 51% attacks are among the most discussed. Such an attack may happen if one entity manages to control more than 50% of the network hashing power, which would eventually allow them to disrupt the network by intentionally excluding or modifying the ordering of transactions.
Despite being theoretically possible, there was never a successful 51% attack on the Bitcoin blockchain. As the network grows larger the security increases and it is quite unlikely that miners will invest large amounts of money and resources to attack Bitcoin as they are better rewarded for acting honestly.
Other than that, a successful 51% attack would only be able to modify the most recent transactions for a short period of time because blocks are linked through cryptographic proofs (changing older blocks would require intangible levels of computing power). Also, the Bitcoin blockchain is very resilient and would quickly adapt as a response to an attack.
Data Modification
Another downside of blockchain systems is that once data has been added to the blockchain it is very difficult to modify it. While stability is one of blockchain’s advantages, it is not always good. Changing blockchain data or code is usually very demanding and often requires a hard fork, where one chain is abandoned, and a new one is taken up.
Private Keys
Blockchain uses public-key (or asymmetric) cryptography to give users ownership over their cryptocurrency units (or any other blockchain data). Each blockchain address has a corresponding private key. While the address can be shared, the private key should be kept secret. Users need their private key to access their funds, meaning that they act as their own bank. If a user loses their private key, the money is effectively lost, and there is nothing they can do about it.
Inefficient
Blockchains, especially those using Proof of Work, are highly inefficient. Since mining is highly competitive and there is just one winner every ten minutes, the work of every other miner is wasted. As miners are continually trying to increase their computational power, so they have a greater chance of finding a valid block hash, the resources used by the Bitcoin network has increased significantly in the last few years, and it currently consumes more energy than many countries, such as Denmark, Ireland, and Nigeria.
Storage
Blockchain ledgers can grow very large over time. The Bitcoin blockchain currently requires around 200 GB of storage. The current growth in blockchain size appears to be outstripping the growth in hard drives and the network risks losing nodes if the ledger becomes too large for individuals to download and store.
Closing Thoughts
Despite the downsides, blockchain technology presents some unique advantages, and it is definitely here to stay. We still have a long road to mainstream adoption, but many industries are getting to grips with the advantages and disadvantages of blockchain systems. The next few years will likely see businesses and governments experimenting with new applications to find out where blockchain technology adds the most value.
