Blockchain Technology refers to the use of decentralized, transparent ledgers to permanently store records. They offer decentralized control, low transaction costs, and high user anonymity.
In simple words, blockchain technology is the application of cryptography to create a decentralized record of transactions.
Table of Contents
What is a Blockchain?
A blockchain is a digital ledger that records transactions transparently, so that every network participant (whether user or verifier) can see all records. The ledger is distributed to all network participants, so everyone sees its changes in real time.
The purpose of creating such a network is that it needs no central authority. All its decisions are made in a democratic manner according to the established rules of that network. The data required to run the network comes from individual computers, which contribute computing power to run a virtual machine on which the network’s core software operates.
The benefit of creating such a network is that it is highly efficient, secure, and more responsive than a traditional banking system. This happens because information is verified on the network.
How does a Blockchain Work?
A blockchain basically needs 4 components to run
- A blockchain software to automate the entire process.
- A set of computers (nodes) to verify transactions (information).
- Users who make transactions on it
- A blockchain virtual machine (for example, Ethereum Virtual Machine) to run the blockchain software
The entire process from start to end is explained below
- A user generates a transaction.
- The transaction is deposited into a memory pool.
- A validator is randomly assigned to that transaction.
- Calculations are run by the validator to verify transaction details.
- Once verified, the transaction is then distributed to multiple validators, who run the same calculations to recheck its validity.
- Once the transaction is found genuine, it is added to the blockchain.
- The end user receives the crypto sent in step 1.
What are the Applications of Blockchain Technology?
Blockchain Technology is used for several purposes, such as:
- Peer-to-Peer transactions
- Cross-Border Settlements
- Intra and Inter-Bank Transfers
- Tokenization of Physical Assets for easy and efficient Trading
- Creating Digital Fiat Currencies such as CBDCs and Stablecoins
- Secure messaging
- Transfer of funds without the involvement of any bank
- Decentralize Finance
- Non-Fungible Tokens
- Gaming: Blockchain games have a transparent rewards system
- Banking
- Creating Digital Asset Treasuries
Frequently Asked Questions
What are the 4 types of blockchains?
Four common types of blockchains based on centralization are: Private, Public, Hybrid, and Consortium.
Can I withdraw money from a blockchain to my bank account?
No, not directly. However, you can sell the funds at an exchange using your blockchain address, then transfer the funds directly from the exchange account to your bank account.
Is UPI a blockchain?
No, neither UPI is a blockchain, nor is it based on any blockchain, nor does it need blockchain technology. However, eRupee, a CBDC, runs on a Private Blockchain.
