Overview
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Blockchain
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How Does It Work
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Importance for Cryptocurrency
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Smart Contracts
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Other Applications of Blockchain
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Disadvantages of Technology
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Conclusion
Blockchain: A secure, distributed database of transaction
Definition: Distributed digital ledger of cryptographically signed transactions that are grouped into blocks. Each block is cryptographically linked to the previous one after validation and undergoing a consensus decision. New blocks are replicated across all copies of the ledger within the network.
How Does It Work:
The key value proposition of blockchain is centered around the ledger’s immutability (UNCHANGEABLE) which in consequence means that it can replace the need for trusted central counterparties. Fundamentally, this is the reason why a bitcoin cannot be double-spent and why buyers of bitcoin trust that the seller can deliver: the immutable, blockchain-based transaction records terminal ownership at any point in time.
Where does immutability come from?
If we look at this process, there are two reasons why the track record of transactions in a blockchain is almost immutable:
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One, they are distributed, once approved, a new block gets added to numerous copies of the same blockchain. Hence, the transaction history is stored all around the world on countless computers – no single central party has control over the ledger.
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Secondly, and more importantly, mining is competitive. Manipulating a transaction in an already recorded block would have far-reaching implications: a manipulator would need to recalculate the Merkle Root of the respective block; then, to satisfy the header hash conditions, re-calculate the respective Nonce, which eventually yields a valid, but different header hash.
Why is this important for cryptocurrencies?
Blockchain offers transparency and traceability – every participant can tell whether a counterparty possesses the virtual currencies that it wants to transfer, so there is no possibility of double-spending. This provides trust in a decentralized system. On top of that, history is secure, so it is very hard to imagine how someone could take the bitcoin of a single participant away.
What are smart contracts?
Smart contract is an executable code deployed to a blockchain such that future transactions can send data to it, and the contract will execute automatically to perform a service.
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Completely digital and recorded in computer language
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No intermediary –the smart contract acts as trusted party
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Accuracy
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Fast and cheap execution as a consequence of automation
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Immutable
Are there other use cases for blockchain?
If we think about blockchain as a way to store information safely, we could potentially apply the concept to many more use cases:
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a land register could track real estate ownership on blockchain (which virtually cannot be destroyed or faked),
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blockchain-based voting systems would be safe from manipulation, and personal digital identities could be stored securely.
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In an extension of the concept, business contracts could be put on blockchain and executed independently once payments for services arrive (Smart Contracts). While conceptual use cases are widely discussed, they are being implemented in the real world only now.
What are the key disadvantages of this technology?
The key disadvantages of blockchain pose hindrances to its adoption, in our view.
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The most important limitations center around transaction speed and throughput, design inefficiency associated with the mining process and, most importantly, legal questions and governance issues.
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In addition, the legal status of the cryptocurrency (booking center, tax implication etc.) is equally unclear with regard to how this system will be developed and governed.
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Also, there are no clear ways to correct misdirected transactions or ways to recover lost access keys to a Bitcoin account (which means that the associated bitcoins are lost forever).
Conclusion
Blockchain offers a decentralized system that stores transactions
in an immutable way. As a consequence, they eliminate
the need for a trusted central counterparty that maintains a single
ledger of transactions and offer transparency and security
to participants in a decentralized network.
