Opinion

Understanding Blockchain in simple terms

Dr. Gaurav Nagpal | October 23, 2020 01:37 PM

NEW DELHI: Blockchain, as its name suggests, is a chain of blocks (lists of records) linked through cryptography. Each block of the blockchain contains timestamp, data, and information of the previous block. Blockchains are much more secure than other record-keeping systems. The information is encrypted and is linked to the previous transaction, thus forming a chain; and is stored in a network of servers instead of a single server making it difficult for hackers to get the information. Changing the information of the one block would affect all the blocks due to the link and is not an independent process. Blockchain is employed in industries where protecting crucial data is of strategic importance, as in the case of the Military and competitive businesses. It is also used by the policymakers, the regulators, and the Government.

 

Blockchains can also help in achieving transparency. Since they are a form of the distributed ledger, all the participants in the network share the same information as opposed to individual copies of information. Therefore, a shared version can only be updated through the agreement of all the participants involved, thereby providing transparency in data. Blockchains are lesser prone to error and have reduced operating costs as well. This is because of their distributed ledger form, which enables them to be shared with all the participants thus reducing the work of making multiple ledgers, making it efficient, and reducing the cost of third parties to provide guarantees since the data can be added/modified with the consent of all the parties.

 

Notwithstanding the benefits that blockchains offer, they have some cons as well. First, these ledgers can grow massive over a while. For example, the size of the bitcoin ledger is more than 100 GB and can be too large to be downloaded by the individual participants, implying the risks of losing the node from the network. Second, even though blockchain can help users save money on transaction fees but the technology involved is quite expensive. For example, the "Proof of work" system used by Bitcoin requires a huge amount of computational power, thus requiring sophisticated technology and a huge amount of power costs associated with it.

 

The third de-merit is the slow speed of the blockchain transactions. Adding a new block in the blockchain is time-consuming, and Transaction per Second (TPS) is comparatively lower than in the case of conventional recordkeeping processes. For instance, the “proof of work “of Bitcoin takes around 10 minutes to add a new block and can provide around just 7 TPS. Quite a lot of times, the companies also have to pay the users to mine cryptocurrency as it requires a vast amount of power. Fourth, while the confidentiality provided by blockchain preserves the privacy of the data, and protects the users from hacks; there is a flip side to it as well. The dark side is that it can be used for illegal activities on the dark web.

Thus, like any other technology, blockchains have advantages as well as disadvantages. It is up to us how we want to use the technology judiciously and conscientiously.

 

Dr. Gaurav Nagpal
The writer Dr. Gaurav Nagpal is an Assistant Professor of Management at BITS Pilani. He is an alumnus of IIFT Delhi and IIM Calcutta and carries 12 years of experience in the industry. His last industry assignment was as Associate Director at Grofers. He loves writing articles on the industry and business perspectives, as well as on broader socio-economic issues,

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