Ongoing digitalization is giving rise to lots of new technologies that have the potential to drastically transform the world. Blockchain is one of those technologies. Its invention has made it possible to anonymously send other users money onli...
Ongoing digitalization is giving rise to lots of new technologies that have the potential to drastically transform the world. Blockchain is one of those technologies. Its invention has made it possible to anonymously send other users money online in the form of a cryptocurrency (e.g. Bitcoin) without having to rely on a central server as an intermediary. At the same time, the complex application is proving to be versatile in other areas as well.
What is a blockchain?
Simply put, a blockchain is a decentralized database that chains data together in encrypted blocks. The data transactions are recorded chronologically without a central entity and are traceable as well as unalterable thanks to the tamper-proof data structure. As a result, blockchain technology means that datasets can be secured and regulated more directly and efficiently because there are no gaps in the data. The blockchain database is also referred to as a ledger or, more specifically, a distributed ledger.
If, for example, you want to make an online payment, you’re normally reliant on a trusted third party, such as a bank, which processes your transfer as a central entity and ensures that the transferred amount reaches the intended recipient and leaves the outgoing account. During the transaction, money is neither generated nor lost.
It is not so easy to make a direct payment online from the sender to the recipient (peer to peer) without a third party. Since an electronic transfer does not produce any physical evidence in the form of banknotes or the like, it is difficult to prove that the money has actually reached the recipient. Blockchain technology solves this problem and enables secure peer-to-peer transactions via the cryptocurrency of Bitcoin.
Bitcoins as a digital currency
Bitcoin, a payment method that was launched in 2009, is used as a transaction currency between the sender and the recipient on the basis of blockchain technology. Bitcoins are stored in a personal online wallet and their possession is legitimized by cryptographic keys.
Thus, the main difference compared to conventional banking systems is that the money is not managed by the bank, but rather lies on the blockchain as bitcoins. All transactions are also recorded in a ledger, consisting of the transferred amount and wallet number of both the sender and recipient. This makes the transactions traceable, but does not allow the actual people behind them to be identified because only their wallet number is stored, thereby protecting their privacy to the greatest possible degree.
The pros and cons of blockchain
Although blockchain technology offers many advantages, it does come with some potential negatives.
Advantages of blockchain
Accurate, transparent, and consistent – the data stored in the blockchain can be viewed by everyone with access rights. In addition, any updates require the consent of all participants.
Blockchain stands for security. Transactions must be approved by all participants before they are encrypted and linked to the previous transaction. This makes the transaction chain completely transparent.
What’s more, there is barely any chance for hackers: because the data information is stored across a network of computers and not on a central server, it is practically impossible to illegally access it.
Traceability and authentication: since datasets are linked together by the blockchain, it is easy for companies to verify the authenticity of assets or even products. Consequently, if companies want to trace supply chains, blockchain makes it possible – from the source to the producer.
Eliminating third parties as intermediaries also saves administrative costs or other fees that would otherwise be charged for every transfer.
Disadvantages of blockchain
Due to its complexity, blockchain technology cannot be easily integrated into existing IT landscapes. New servers, programs, and development environments are just some of the prerequisites if a company wants to implement it.
A lot of companies are still reluctant to explore blockchain as an option because there is a lack of real-life use cases. Many still do not understand how it can be implemented in practice and what productive opportunities it can offer.
Implementing blockchain technology creates a large volume of data. Not only can the increased data traffic put a strain on Internet connections, but the rising demand for servers, data centers, and storage capacities also leads to more emissions and a greater environmental impact.
Compared to a central database, transactions within a blockchain take longer because they have to be verified and synchronized first.
Data centers are the world’s fastest-growing energy consumers. Are the digital economy and climate goals compatible? Stefan Mink from IONOS should know. We ask him: How much progress have we made in developing green data centers?
Michael Chrisment is the CEO of the Swiss startup farmer connect®. Using IBM’s blockchain technology, the agritech company ensures greater sustainability and transparency in the food industry’s production and supply chains.