What Is Blockchain Technology & How Does It Work

What is Blockchain Technology?

Blockchain is a method of recording information that makes it impossible or difficult for the system to be changed, hacked, or manipulated. It is a distributed ledger that duplicates and distributes transactions across the network of computers participating in it.

Blockchain technology is a structure that stores transactional records, also known as the block, of the public in several databases, known as the “chain,” in a network connected through peer-to-peer nodes. Typically, this storage is referred to as a ‘digital ledger.’

Every transaction in this ledger is authorized by the owner's digital signature, which authenticates the transaction and safeguards it from tampering. Hence, the information the digital ledger contains is highly secure.

In simpler words, the digital ledger is like a Google spreadsheet shared among numerous computers in a network, in which the transactional records are stored based on actual purchases. The fascinating angle is that anybody can see the data, but they can’t corrupt it.

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Why is Blockchain Popular?

Suppose you want to transfer money to your family or friends from your bank account. You would log in to online banking and transfer the amount to the other person using their account number. When the transaction is done, your bank updates the transaction records. It seems simple enough, right? However, there is a potential issue that most of us neglect.

These types of transactions can be tampered with very quickly. People who are familiar with this truth are often wary of using them, hence the evolution of third-party payment applications in recent years. However, this vulnerability is essentially why blockchain technology was created.

Technologically, Blockchain is a digital ledger that has been gaining a lot of attention and traction recently. But why has it become so popular? Well, let’s dig into it to fathom the whole concept.

Record keeping of data and transactions is a crucial part of the business. Often, this information is handled in-house or passed through a third party like brokers, bankers, or lawyers, increasing time, cost, or both on the business. Fortunately, Blockchain avoids this long process and facilitates the faster movement of the transaction, thereby saving both time and money.

Most people assume Blockchain and Bitcoin can be used interchangeably, but that’s not the case. Blockchain is a technology capable of supporting various applications related to multiple industries, such as finance, supply chain, manufacturing, etc., but Bitcoin is a currency that relies on Blockchain technology to be secure.

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Blockchain is an emerging technology with many advantages in an increasingly digital world:

• Highly Secure

  It uses a digital signature feature to conduct fraud-free transactions, making it impossible for other users to corrupt or change an individual's data without a specific digital signature.

• Decentralized System

  Conventionally, transactions require the approval of regulatory authorities like a government or bank; however, with Blockchain, transactions are done with the mutual consensus of users, resulting in smoother, safer, and faster transactions.

• Automation Capability

  It is programmable and can generate systematic actions, events, and payments automatically when the trigger criteria are met.

Structure and Design of Blockchain

A blockchain is a distributed, immutable, and decentralized ledger that, at its core, consists of a block of blocks containing a set of data. Cryptography techniques link the blocks together and form a chronological information chain. The structure of a blockchain is designed to ensure the security of data through its consensus mechanism, which has a network of nodes that agree on the validity of transactions before adding them to the blockchain.

1. Blocks

A block in a blockchain is a combination of three main components: 

1. The header contains metadata such as a timestamp with a random number used in the mining process and the previous block's hash. 

2. The data section contains the main and actual information, such as transactions and smart contracts, stored in the block. 

3. Lastly, the hash is a unique cryptographic value that represents the entire block and is used for verification purposes.

2. Block Time

Block time is the time to generate a new block in a blockchain. Different blockchains have different block times, which can vary from a few seconds to minutes or may be in hours, too. Shorter block times can give faster transaction confirmations, but the result has a higher chance of conflicts. Longer block times may increase the timing for transaction confirmations but reduce the chances of conflicts.

3. Hard Forks

A hard fork in a blockchain refers to a permanent divergence in the blockchain's history that results in two separate chains. It can happen due to a fundamental change in the protocol of a blockchain, and all nodes do not agree on the update. Hard forks can create new cryptocurrencies or split existing ones, and they require consensus among the network participants to resolve.

4. Decentralization

Decentralization is the key feature of blockchain technology. In a decentralized blockchain, no single central authority can control the network. In decentralization, the decision-making power is distributed among a network of nodes that collectively validate and agree on the transactions to be added to the blockchain. Blockchain technology's decentralized nature helps promote transparency, trust, and security. It also reduces the risk of relying on a single point of failure and minimizes the risks of data manipulation.

5. Finality

Finality refers to the irreversible confirmation of transactions in a blockchain. If and when a transaction is added to a block, and the network confirms the block, it becomes immutable and cannot be reversed. This feature ensures the integrity of the data and prevents double spending, providing a high level of security and trust in Blockchain types & sustainability.

6. Openness

Openness in blockchain technology makes the blockchain accessible to anyone who intends to participate in the network. This implies that it is open for all, and anyone can join the network, validate transactions, and add new blocks to the blockchain, so long as they know the consensus rules. Openness promotes inclusivity, transparency, and innovation, allowing participation from various stakeholders.

7. Public Blockchain

It is a kind of blockchain that is open to the public and allows everyone to join the network to perform transactions and participate in the consensus process. Public blockchains are transparent because all transactions are publicly recorded.

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How Does Blockchain Work?

You may have noticed many businesses worldwide integrating Blockchain technology in recent years. But how exactly does Blockchain technology work? Is this a significant change or a simple addition? Blockchain's advancements are still young and have the potential to be revolutionary in the future, so let’s begin demystifying this technology.

Blockchain is a combination of three leading technologies:

1. Cryptographic keys
2. A peer-to-peer network containing a shared ledger
3. A means of computing to store the transactions and records of the network

Cryptography keys consist of two keys – Private key and Public key. These keys help in performing successful transactions between two parties. Each individual has these two keys, which they use to produce a secure digital identity reference. This secured identity is the most important aspect of Blockchain technology. In the cryptocurrency world, this identity is called ‘digital signature’ and is used for authorizing and controlling transactions.

The digital signature is merged with the peer-to-peer network; many individuals who act as authorities use the digital signature to reach a consensus on transactions, among other issues. When they authorize a deal, it is certified by a mathematical verification, which results in a successful secured transaction between the two network-connected parties. To sum it up, Blockchain users employ cryptography keys to perform different digital interactions over the peer-to-peer network.

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Types of Blockchain

There are different types of blockchains. They are as follows:

1. Private Blockchain Networks

Private blockchains operate on closed networks and tend to work well for private businesses and organizations. Companies can use private blockchains to customize their accessibility and authorization preferences, network parameters, and other important security options. Only one authority manages a private blockchain network.

2. Public Blockchain Networks

Bitcoin and other cryptocurrencies originated from public blockchains, which also played a role in popularizing distributed ledger technology (DLT). Public blockchains also help to eliminate certain challenges and issues, such as security flaws and centralization.

DLT distributes data across a peer-to-peer network rather than stored in a single location. A consensus algorithm verifies information authenticity; proof of stake (PoS) and proof of work (PoW) are two frequently used consensus methods. 

3. Permissioned Blockchain Networks

Also sometimes known as hybrid blockchains, permissioned blockchain networks are private blockchains that allow special access for authorized individuals. Organizations typically set up these blockchains to get the best of both worlds, enabling better structure when assigning who can participate in the network and in what transactions.

4. Consortium Blockchains

Like permissioned blockchains, consortium blockchains have public and private components, except multiple organizations will manage a single consortium blockchain network. Although these blockchains can initially be more complex to set up, once they are running, they can offer better security. Additionally, consortium blockchains are optimal for collaboration with multiple organizations.

5. Hybrid Blockchains

Hybrid blockchains combine public and private blockchains. Some parts are public and transparent, while others are private and accessible only to authorized and specific participants. This makes hybrid blockchains ideal for use in cases where a balance between transparency and privacy is required. For example, in supply chain management, multiple parties can access certain information, but sensitive data can be kept private.

6. Sidechains

Sidechains are different blockchains that run parallel to the main blockchain, allowing for additional functionality and scalability. They enable developers to experiment with new features and applications without affecting the main blockchain's integrity. For example, sidechains can be used to create decentralized applications and implement specific consensus mechanisms. They can also be used to handle transactions on the main blockchain to reduce congestion and increase scalability.

7. Blockchain Layers

Blockchain layers refer to the concept of building multiple layers of blockchains on top of each other. Each layer can have its own consensus mechanism, rules, and functionality which  can interact with other layers. This ensures greater scalability, as transactions can be processed in parallel across different layers. For example, the Lightning Network, built on top of the Bitcoin blockchain, is a second layer solution that enables faster and cheaper transactions by creating payment channels between users.

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The Process of Transaction

One of Blockchain technology’s cardinal features is how it confirms and authorizes transactions. For example, if two individuals wish to perform a transaction with a private and public key, respectively, the first person party would attach the transaction information to the public key of the second party. This total information is gathered together into a block.

The block contains a digital signature, timestamp, and other relevant information. It should be noted that the block doesn’t include the identities of the individuals involved in the transaction. This block is then transmitted across all of the network's nodes, and when the right individual uses his private key and matches it with the block, the transaction gets completed successfully.

In addition to conducting financial transactions, the Blockchain can hold transactional details of properties, vehicles, etc.

Here’s a use case that illustrates how Blockchain works:

• Hash Encryptions

  Blockchain technology uses hashing and encryption to secure data, relying mainly on the SHA256 algorithm. The address of the sender (public key), the receiver’s address, the transaction, and his/her private key details are transmitted via the SHA256 algorithm. The encrypted information, hash encryption, is transmitted worldwide and added to the blockchain after verification. The SHA256 algorithm makes it almost impossible to hack the hash encryption, simplifying the sender and receiver’s authentication.

• Proof of Work

  In a Blockchain, each block consists of 4 main headers.
  • Previous Hash: This hash address locates the previous block.
  • Transaction Details: Details of all the transactions that need to occur.
  • Nonce: An arbitrary number given in cryptography to differentiate the block’s hash address.
  • Hash Address of the Block: All above (i.e., preceding hash, transaction details, and nonce) are transmitted through a hashing algorithm. This gives an output containing a 256-bit, 64-character length value called the unique ‘hash address.’ Consequently, it is referred to as the hash of the block.
  • Numerous people around the world use computational algorithms to figure out the right hash value to meet a pre-determined condition. The transaction completes when the predetermined condition is met. To put it more plainly, Blockchain miners attempt to solve a mathematical puzzle, which is referred to as a proof-of-work problem. Whoever solves it first gets a reward.

• Mining

  In Blockchain technology, the process of adding transactional details to the present digital/public ledger is called ‘mining.’ Though the term is associated with Bitcoin, it is also used to refer to other Blockchain technologies. Mining involves generating the hash of a block transaction, which is tough to forge, thereby ensuring the safety of the entire Blockchain without needing a central system.

Advantages and Disadvantages of Blockchain

Like all forms of technology, blockchain has several advantages and disadvantages.

Advantages

One major advantage of blockchains is the level of security they can provide. This also means that blockchains can protect and secure sensitive data from online transactions. For anyone looking for speedy and convenient transactions, blockchain technology offers this. It only takes a few minutes, whereas other transaction methods can take several days to complete. There is also no third-party interference from financial institutions or government organizations, which many users consider an advantage. 

Disadvantages

Blockchain and cryptography involve the use of public and private keys, and reportedly, there have been problems with private keys. If users lose their private key, they face numerous challenges, one disadvantage of blockchains. Another disadvantage is the scalability restrictions, as the number of transactions per node is limited. Because of this, it can take several hours to finish multiple transactions and other tasks. Changing or adding information after it is recorded can also be difficult, which is another significant disadvantage of blockchain.

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How is Blockchain Used?

Blockchains store information on monetary transactions using cryptocurrencies, but they also store other types of information, such as product tracking and other data. For example, food products can be tracked from when they are shipped out, throughout their journey, and until final delivery. This information can be helpful because the outbreak's source can be easily traced if there is a contamination outbreak. This is one of the many ways blockchains can store important data for organizations.

Hyperledger, Hosted by the Linux Foundation

Hyperledger is a global collaboration hosted by The Linux Foundation, which includes finance, banking, IoT, supply chain, manufacturing, and technology leaders. By creating a cross-industry open standard for distributed ledgers, Hyperledger Fabric allows developers to develop blockchain applications to meet specific needs.

Ten Steps to Your First Blockchain Application

1. Understand what Blockchain is and its key components.
2. Understand the purpose of your application.
3. Create a use case for your application.
4. Find out if there's already an existing blockchain for your purpose.
5. Explore the different types of Blockchain platforms available for your application. There are many types of Blockchain, each with its strengths and weaknesses. 
6. Choose the right platform for developing your app.
7. Select the consensus algorithm you will use.
8. Learn Solidity - Ethereum's programming language for smart contracts and DApps (decentralized applications).
9. Learn to use Truffle or Remix - development tools for Ethereum DApps and smart contracts.
10. Get an Ethereum account or wallet and buy some Ether (ETH), the currency of the Ethereum network.

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Decentralization

Decentralization is difficult to Understand, but it is vital today; decentralization is distributing or dispersing functions, powers, people, or things away from a central location or authority. Within the business world, decentralization typically refers to delegating authority from senior executives to middle managers and other employees further down the organizational hierarchy. The benefits of devolution are many and varied, but the most commonly cited advantages include improved communication, greater employee empowerment, and increased flexibility and responsiveness.

Transparency 

One of the most critical aspects of decentralization is transparency. In a decentralized organization, all employees have access to information and decision-making processes. This transparency fosters a greater sense of trust and cooperation among employees. Furthermore, it allows employees to hold managers accountable for their decisions.

Bitcoin vs. Blockchain 

Bitcoin, a digital currency introduced in 2009, has been the most popular and successful cryptocurrency. Bitcoin's popularity is attributed to its decentralized nature, which means it doesn't have a central authority or bank controlling its supply. This also means that transactions are anonymous, and no transaction fees are involved when using Bitcoin.

Blockchain is a database of transactions between two parties. Blocks of data containing information about each transaction are added in chronological order to the chain as they occur. The Blockchain is constantly growing as new blocks are added to it, and records become more difficult to change over time due to the number of blocks created after them.

Blockchain vs. Banks 

Blockchain has the potential to revolutionize the banking industry. Banks need to adapt faster to the changing needs of the digital age, and Blockchain provides a way for them to catch up. Using blockchain, banks can offer their customers a more secure and efficient way to conduct transactions. In addition, Blockchain can help banks streamline their operations and reduce costs.

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Why is Blockchain Important?

Blockchain is important because it has the potential to revolutionize the banking industry. Banks need to adapt faster to the changing needs of the digital age, and Blockchain provides a way for them to catch up. Using blockchain, banks can offer their customers a more secure and efficient way to conduct transactions. In addition, Blockchain can help banks streamline their operations and reduce costs.

What is a Blockchain Platform?

A blockchain platform is a shared digital ledger that allows users to record transactions and share information securely and tamper-resistantly. A distributed network of computers maintains the register, and each transaction is verified by consensus among the network participants. 

Proof of Work (PoW) vs. Proof of Stake (PoS)

Proof of work (PoW) is an algorithm for creating blocks and securing the Blockchain. Miners must solve a puzzle to create a block and receive the block reward in return.

Proof of stake (PoS) is an alternative algorithm for securing the Blockchain, which does not require mining. Instead, users must lock up some of their coins for a certain time to be eligible for rewards.

Energy Consumption Concerns of Blockchain

The main concern with blockchain technology is its energy consumption. Traditional blockchains like Bitcoin and Ethereum use a consensus mechanism called PoW( Proof of Work), which requires computational power and electricity to solve complex mathematical puzzles. This energy-intensive process has raised concerns about blockchain technology's environmental impact because it produces carbon emissions and consumes a huge amount of electricity.

Blockchain or Scalability Trilemma: Decentralization, Security, and Scalability

Blockchain is a distributed database that maintains a continuously growing list of records called blocks. Blockchain is often said to have the potential to disrupt many industries, including banking, law, and healthcare.

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What are the Benefits of Blockchains Over Traditional Finance?

Blockchain offers several potential advantages over traditional finance. One of the most touted advantages is that Blockchain is decentralized, while traditional finance is centralized. This means there is no single point of failure in a blockchain system. Another advantage of Blockchain is that it is more transparent than traditional finance.

Promising Blockchain Use Cases and Killer Applications

Promising Blockchain Use Cases and Killer Applications: Although there are many potential applications for blockchain technology, a few stand out as having the potential to be truly game-changing. These are often referred to as killer applications. Some of blockchain technology's most promising killer applications include supply chain management, identity management, and data management.

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How to Invest in Blockchain Technology

Blockchain technology and stocks can be a lucrative investment, and there are several ways to take the next step toward making your first blockchain investment purchase. Bitcoin is typically the first thing that comes to mind when investing in blockchain technology, and it shouldn’t be overlooked. Aside from Bitcoin, investing in cryptocurrency penny stocks is also available. Some apps and services are in the pre-development phase and use blockchain technology to raise funding. As an investor, you can buy coins, expecting prices to go up if the service or app becomes popular. Another way to invest in blockchain technology is to invest in startups built on blockchain technology. Finally, there is always the option to invest in pure blockchain technology.

Traditional Finance and Blockchain Investment Strategies

In traditional finance, two main investment strategies are active and passive. Active investing involves picking stocks or other assets and holding them for a long period of time. Passive investing, on the other hand, involves investing in a basket of assets and holding them for a long period of time. Both of these strategies have pros and cons, but there is one major difference between them: active investing is much more risky than passive investing.

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How Do Different Industries Use Blockchain?

Blockchain has the potential to streamline processes across many different industries. 

• In the supply chain industry, for example, Blockchain can track the movement of goods and materials as they change hands. This would allow for greater transparency and accountability and reduce the risk of fraud. 
• In the healthcare industry, Blockchain can be used to secure patient data and streamline billing and claims processes.

What are the Features of Blockchain Technology?

• Blockchain technology is a distributed ledger that is secure, transparent, and immutable. 
• Blockchain technology can be used to create a tamper-proof decentralized database that has the potential to revolutionize the way we interact with the digital world.
• Blockchain technology is secure, transparent, and tamper-proof.

What are the Key Components of Blockchain Technology?

There are three key components to blockchain technology:

• The distributed ledger, the consensus mechanism, and the smart contracts. 
• The distributed ledger is a database spread across a network of computers. The consensus mechanism allows the computers to agree on the ledger's state. 
• The smart contracts allow the blockchain to be used for more than just a database.

What are Blockchain Protocols?

The two most common protocols Bitcoin was the first blockchain protocol and is still the most widely used:

• Bitcoin-  Bitcoin is a decentralized digital currency, often referred to as a cryptocurrency. It exists on a decentralized network of computers, often called a blockchain, that keeps track of all transactions made using the currency. Bitcoin uses a proof-of-work algorithm to validate transactions and add them to the blockchain. Bitcoin was the first cryptocurrency to be created and is the most well-known.
• Ethereum- The Ethereum blockchain was initially described in a white paper by Vitalik Buterin in 2013. Buterin, a programmer who was born in Russia and raised in Canada, had been involved with bitcoin from its early days. He was excited by the technology, but he thought that bitcoin needed a scripting language for application development. He decided to create a new platform that would be more general than bitcoin.

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What is the Difference Between a Database and a Blockchain?

So, what is the difference between a database and a blockchain? A database is centralized, meaning that a single entity controls it. This entity can be a company, government, or individual. On the other hand, a blockchain is decentralized, meaning that any entity does not control it.

How is Blockchain Different From the Cloud?

Blockchain is a new technology that is different from the cloud in several ways: 

• Blockchain is decentralized, while the cloud is centralized. This means that Blockchain is distributed across a network of computers, while the cloud is stored on a central server.
• Blockchain is immutable, meaning that it cannot be changed once data is written to the Blockchain.

What are the Implications of Blockchain Technology?

Blockchain technology has made a great impact on society, including:

• Bitcoin, Blockchain’s prime application and the whole reason the technology was developed in the first place, has helped many people through financial services such as digital wallets. It has provided microloans and allowed micropayments to people in less-than-ideal economic circumstances, thereby introducing new life into the world economy.
• The next major impact is in the concept of trust, especially within the sphere of international transactions. Previously, lawyers were hired to bridge the trust gap between two different parties, but this consumed extra time and money. However, the introduction of Cryptocurrency has radically changed the trust equation. Many organizations are located in areas where resources are scarce, and corruption is widespread. In such cases, Blockchain significantly benefits these affected people and organizations, allowing them to escape the tricks of unreliable third-party intermediaries.
• The new reality of the Internet of Things (IoT) is already teeming with smart devices that — turn on your washing machines, drive your cars, navigate your ships, organize trash pick-up, manage traffic safety in your community  — you name it! This is where blockchain comes in. In all of these cases (and more), leveraging blockchain technology by creating Smart Contracts will enable any organization to ‒ both — improve operations and keep more accurate records.
• Blockchain technology enables a decentralized peer-to-peer network for organizations or apps like Airbnb and Uber. It allows people to pay toll fees, parking, etc.
• Blockchain technology can be used as a secure platform for the healthcare industry to store sensitive patient data. Health-related organizations can create a centralized database with the technology and share the information with only appropriately authorized people.
• In the private consumer world, blockchain technology can be employed by two parties who wish to conduct a private transaction. However, these kinds of transactions have details that need to be hammered out before both parties can proceed:

1. What are the terms and conditions (T&C) of the exchange?
2. Are all the terms clear?
3. When does the exchange start?
4. When will it finish?
5. When is it unfair to halt the exchange?

Since blockchain technology employs a shared, distributed ledger on a decentralized network, all parties involved can quickly find answers to these questions by researching “blocks” in the “chain.” Transactions on a blockchain platform can be tracked from departure to destination by all of the transactions on the chain.

How Can Features of Blockchain Support Sustainability Efforts

Despite huge energy consumption blockchain technology has features that can support sustainability efforts. For example:

Blockchain can give transparency and traceability in supply chains, allowing consumers to verify the origins and sustainability of products. This can encourage sustainable practices and discourage unethical practices such as deforestation, illegal fishing, or labor exploitation.

Decentralization: Blockchain's decentralized nature helps eliminate the need for intermediaries, reduce costs, and increase efficiency. This can enable more direct and transparent transactions, reducing the environmental impact associated with traditional intermediaries.

Smart Contracts: These are self-executing contracts that run on blockchain which eliminates the requirements for intermediaries and automating processes. This can reduce paperwork to minimize disputes and streamline operations. It can help to lead to greater sustainability by reducing paper waste and increasing resource utilization.

Tokenization: Blockchain enables tokenization where assets can be represented as digital tokens. This can enable fractional ownership and make the process easier for people who intend to invest in sustainable assets such as renewable energy projects or carbon credits, promoting green investments and supporting sustainability initiatives.

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Conclusion

Blockchain technology is a ground-breaking system that guarantees safe, open, and unchangeable transactions in various sectors. It utilizes cryptographic methods, decentralizes data storage, and produces immutable ledgers. This technology has several uses, including supply chain management and cryptocurrency. Comprehensive training is available for people who want to use blockchain in their jobs through the Professional Certificate Program in Blockchain. This curriculum gives you the fundamental knowledge of blockchain principles and architecture to create creative solutions in the rapidly changing IT industry.

In this blockchain program, you will learn to master blockchain concepts, techniques, and tools, such as Truffle, Hyperledger, and Ethereum, to build blockchain applications and networks.

FAQs

1. What is Blockchain in Simple Terms?

Blockchain is a shareable ledger that records transactions and is difficult to modify or change. It also tracks tangible and intangible assets such as cash or a house.

2. How Many Blockchains Are There?

There are 4 types of blockchain networks currently - public blockchains, private blockchains, consortium blockchains, and hybrid blockchains.

3. What’s the Difference Between a Private Blockchain and a Public Blockchain?

Private blockchains are only open to selected people, while public blockchain is open to the general masses. Private blockchains are more secure compared to public ones.

4. What is a Blockchain Platform?

A Blockchain Platform is any platform that exists to support or facilitate Blockchains. There are many types of blockchain platforms for different needs, such as Ethereum, Hyperledger, etc.

5. Who Invented Blockchain?

Blockchain was created by unknown persons under the pseudonym Satoshi Nakamoto when they designed the online currency, Bitcoin.

6. What is Blockchain used for?

While most popularly used for digital currency such as Bitcoin, Blockchain is also now used in different sectors to safeguard records.

7. What are the 3 Pillars of Blockchain Technology?

Decentralization, Transparency, and Immutability are the 3 main pillars of blockchain technology.

8. Who Controls the Blockchain?

In blockchain, the power is divided between all of the users operating on the network. No single user has any control.

9. Why is Blockchain Important?

Blockchain offers security, transparency, and trust between the entire network of users. It also offers cost saving and efficient methods for data recording and sharing.