In this increasingly developing era, digital currency or cryptocurrency is starting to be noticed and sought after by many people. The reason is that this cryptocurrency is believed to be able to replace the type of physical currency that is used daily by the community.
The application of cryptocurrency as a substitute for cash in Indonesia is believed to be able to make people have the freedom to make transactions without being faced with the constraints of different payment systems. Several forms of digital currency that are quite popular and known to the public such as Bitcoin (BTC), Ethereum (ETH), Ripple (XRP), Stellar (XLM), etc.
This digital currency certainly does not have a physical form and is located on the internet, just like if we have cash and then we save it in a bank, while this digital money or cryptocurrency is stored on the internet in a blockchain network. However, some people do not know in detail what blockchain is, which is the technology that builds digital currency or cryptocurrency.
What is Blockchain?
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| What is Blockchain? |
Blockchain is a technology system behind cryptocurrency that functions to regulate and manage digital currency or cryptocurrency transaction data such as Bitcoin. Just like when we want to transact using cash, of course there is a role for third parties such as banks as institutions that regulate and manage the transactions we make.
However, what distinguishes banks from blockchain technology is that every transaction made is managed by the blockchain users themselves so that the nature of the transaction is open and free. A transaction system like this by blockchain technology is called "from user to user".
As the name implies, blockchain consists of a chain of blocks that are sequential and distributed to its users, where each block is distributed in a ledger and must have three elements in it, namely data, hash, and hash from the previous block.
Why is blockchain important?
Traditional database technology presents several challenges in recording financial transactions. An example is the case of a property sale. Once the money is paid, ownership of the property is transferred to the buyer. Individually, both the buyer and seller can record the monetary transaction, but there is no reliable source. The seller can easily claim that they have not received the money even though they have, and the buyer can equally argue that they have paid the money even though they have not.
To avoid potential legal issues, a trusted third party must monitor and validate the transactions. The presence of this central authority not only complicates the transaction but also creates a single point of weakness. If the central database is compromised, both parties will be at a loss.
Blockchain mitigates this problem by creating a decentralized and tamper-proof system for recording transactions. In the case of a property transaction, the blockchain creates a ledger, one for each buyer and seller. All transactions must be approved by both parties and are automatically updated in both ledgers in real time. Any change in historical transactions will corrupt the entire ledger. This property of blockchain has been used in a variety of sectors, including the creation of cryptocurrencies such as Bitcoin.
What are the components of the blockchain?
Blockchain architecture has the following main components:
1. Distributed ledger
A distributed ledger is a shared database on a blockchain network that stores transactions, like a shared file that can be edited by everyone on a team. In most shared text editors, any party with editing rights can delete the entire file. However, distributed ledger technology has strict rules about who can edit and how. You cannot delete an entry once it has been recorded.
2. Smart contracts
Companies use smart contracts to manage their own business contracts without the need for third-party assistance. Smart contracts are programs stored on the blockchain system that run automatically when predetermined conditions are met. Smart contracts perform “if-then” checks so that transactions can be completed with confidence. For example, a logistics company can have a smart contract that automatically makes payments after goods arrive at a port.
3. Public key cryptography
Public key cryptography is a security feature that uniquely identifies participants in a blockchain network. This mechanism generates two sets of keys for members of the network. One key is a public key that is common to everyone on the network. The other key is a private key that is unique to each member. Private and public keys work together to unlock data in the ledger.
For example, John and Jill are two members of the network. John records transactions encrypted with his private key. Jill can decrypt them with her public key. In this way, Jill is confident that John has made the transaction. Jill's public key will not work if John's private key has been compromised.
How Does Blockchain Work?
Everyone who wants to use digital currency needs to have a wallet or commonly called a data folder, every time we create a wallet or data folder we will get a public key and a secret key. The public key here can be likened to an account number, while the secret key can be likened to a pin from the account we have.
In this folder, data about transactions made between blockchain users will be contained. When there is a transaction that wants to be done, each user in the chain will record and save it as a new record, and so on if there is another transaction, a new data record will be added to each user's folder on their respective devices, and it should be remembered that the record is done without any third party intermediaries such as Banks.
The Blockchain system can be started when one of the blocks gets a new data folder, where the block already contains data, a series of cryptographic hashes and hashes from the previous block, these three elements are what can later form a network. To avoid changes to new data made by unwanted parties, the cryptographic hash will take the new data and change it into a compact string or commonly known as a series of unique codes.
Then, after the transaction is considered valid, the data that has been changed is then added to a new block consisting of a new hash and a hash from the previous block. So, users will easily find the location of the block in the chain.
By using blockchain technology, all activities related to digital currency and its assets such as trading, investment, and mining crypto assets will be organized easily and of course will be guaranteed with a good level of security.
While the underlying blockchain mechanism is complex, we provide a brief overview in the following steps. Blockchain software can automate most of these steps:
Step 1 – Record the transaction
A blockchain transaction represents the movement of a physical or digital asset from one party to another in the blockchain network. The transaction is recorded as a block of data and can include the following details:
- Who was involved in the transaction?
- What happened during the transaction?
- When did the transaction occur?
- Where did the transaction occur?
- Why did the transaction occur?
- How many assets were exchanged?
- How many prerequisites were met during the transaction?
Step 2 – Get consensus
A majority of participants in a distributed blockchain network must agree that the recorded transaction is valid. Depending on the type of network, the rules for agreement can vary but are usually set at the beginning of the network.
Step 3 – Link the blocks
Once participants reach consensus, the transactions on the blockchain are written into blocks that are equivalent to pages of the ledger. Along with the transaction, a cryptographic hash is also added to the new block. The hash acts as a chain that links the blocks together. If the contents of a block are changed intentionally or unintentionally, the hash value changes, providing a way to detect data tampering.
Thus, the blocks and the chain are securely connected, and you cannot edit them. Each additional block strengthens the verification of the previous block and eventually, strengthens the entire blockchain. This process is like stacking wooden blocks to build a tower. You can only stack blocks on top, and if you remove a block from the center of the tower, the entire tower will collapse.
Step 4 – Distribute the ledger
The system distributes the latest copy of the central ledger to all participants.
How are different industries using blockchain?
Blockchain is an emerging technology that is being innovatively adopted by various industries. We describe some use cases in different industries in the following subsections:
1. Energy
Energy companies are using blockchain technology to create peer-to-peer energy trading platforms and simplify access to renewable energy. A blockchain-based energy company has created a trading platform for selling electricity between individuals. Homeowners who own solar panels use the platform to sell their excess solar energy to their neighbors. Most of the process is automated: smart meters make transactions and the blockchain records them.
With blockchain-based crowdfunding initiatives, users can sponsor and own solar panels in communities with low energy access. Sponsors can also rent out solar panels to these communities once they are built.
2. Finance
Traditional financial systems, such as banks and stock exchanges, are using blockchain services to manage payments, accounts, and online market trading. For example, Singapore Exchange Limited, an investment holding company that provides financial trading services across Asia, is using blockchain technology to build more efficient interbank payment accounts.
By adopting blockchain, Singapore Exchange Limited has solved several difficulties, including batch processing and manual reconciliation of several thousand financial transactions.
3. Media and entertainment
Companies in media and entertainment are using blockchain systems to manage copyright data. Copyright verification is essential for fair compensation for artists. It takes several transactions to record the sale or transfer of copyrighted content. Sony Music Entertainment Japan is using blockchain services to make digital rights management more efficient. Sony Music Entertainment Japan has successfully used blockchain strategies to increase productivity and reduce costs in copyright processing.
4. Retail
Retail companies are using blockchain to track the movement of goods between suppliers and buyers. For example, retailer Amazon has filed a patent for a distributed ledger technology system that will use blockchain technology to verify that all goods sold on the platform are authentic.
Sellers on Amazon can map their global supply chain by allowing participants such as manufacturers, couriers, distributors, end users, and secondary users to add events to the ledger after registering with a certificate authority.
Conclusion
Blockchain is a technology that has changed the way we view security, transparency, and trust in the digital world. From its beginnings as the foundation of cryptocurrency, blockchain has now expanded its use across industries, bringing more secure, efficient, and transparent solutions.
In the coming years, we will likely see blockchain as an increasingly important technology in many aspects of life, from finance to healthcare to government. For many, blockchain is not just the future of technology, but also the future of how we interact and transact digitally.