There is a lot of talk about Blockchain especially since cryptocurrencies are no longer a topic understood by a select few but are generating some hype even among laymen. In fact, now that we’re talking about the metaverse and transactions in virtual worlds, even non-financial companies are trying to figure out how you can leverage these technologies. In this article, we will highlight the main features of Blockchain and why its transactions, despite disintermediation, are secure.
Disintermediation: absence of a central authority
Let’s start right from the concept of disintermediation that is the possibility to validate a transaction without necessarily relying on a central authority. If you want to learn more about the logic of Blockchain operation, I recommend you read our report on the state of Distributed Ledger Technologies (DLT). In short, the Blockchain is the technology that allows us to obtain a digital and distributed ledger for the management of peer-to-peer transactions. The data present forms blocks concatenated together in chronological order. The information is protected by cryptography that uniquely and securely identifies each block.
When we rely on an intermediary, we must necessarily incur additional costs. But sometimes you can’t do without them because you lack the expertise or because you need guarantees from a central authority such as banks, for example. When financial transactions are involved, the matter becomes even more delicate.
What aspects of Blockchain allow us to bypass central authorities without increasing the risk of being scammed? The answer includes all the features that I will explain as I go along but for now, what is of interest about disintermediation, is that the agreement of a transaction on Blockchain works through consensus. The validation of a chain occurs when half plus one of the operational nodes approves the sequence of blocks after a technical verification. Once this transaction is verified, it cannot be changed, and this is an important guarantee for those who decide to rely on this technology. Finally, being a decentralized ledger operating in a transparent environment, the Blockchain is inherently secure.
The advantages of disintermediation include cost reduction, new business models, and speed of transactions.
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Decentralization: decentralized and distributed registries
The Blockchain ledger is decentralized. What is meant by this? In computer language, data decentralization implies the absence of a single server where all information is stored. The data is distributed across multiple servers or nodes. If we add that all machines, or rather every node in the chain, contain the same information, we will define the word distributed. In summary, the data and information of transactions on the Blockchain platform are distributed on nodes scattered across the network. Each node contains an identical copy of the original chain.
In fact, this feature places Blockchain as a real alternative to centralized financial intermediaries such as banks, insurance companies, and some public institutions.
Making a transaction on Blockchain means leveraging the features of this technology to eliminate middlemen. Click To Tweet
Immutability of the distributed log: data is not modifiable
What has been said so far brings us to the immutability of the distributed ledger. The Blockchain, once created through the consent of the nodes involved, can no longer be modified. If someone tries to modify a point of the chain, it will invalidate all the blocks of the next one. When they realize the error, the miners who control the chain will restore the original version of the chain, making it conform to all other copies present on the nodes.
What happens then if I realize that I have made a mistake in a transaction? I will create another one, as it happens with the bank transfer. In this way, both will appear in history.
Transaction tracking and the benefits of smart contracts
Data immutability and transparency make Blockchain suitable for payments but also for supply chain control. Whenever trust goes through traceability, Blockchain proves to be a suitable mode for that type of transaction.
When you need to ensure traceability of a product in the supply chain, creating an inviolable blockchain is crucial. This will make all product steps along the distribution chain evident, which will prevent unwanted intrusions. In addition, making real-time data capture possible allows for transparency and visibility throughout the supply chain.
How do you enter into a contract using Blockchain as a guarantor? it’s time to talk about smart contracts, which are computer protocols that manage transactions in a pre-programmed and automated way. Like traditional contracts, smart contracts contain contract terms and, when certain conditions occur between the parties, they are executed without waiting for the action of an intermediary.
An example? The contract between a company and a supplier. If you choose smart contracts, once both parties involved have fulfilled the obligations specified in the clauses, transactions will start automatically based on the schedule you set.
Consent to validate transactions
The consensus mechanism is a fundamental part of the Blockchain as it justifies the absence of intermediaries. As previously mentioned, for a transaction to gain consensus, it will have to be the majority (50% + 1) of the network members to validate it. This is how transactions, values, or the ledger are validated. Therefore, they will carry out a task analogous to that carried out by the guarantor in traditional transactions. Once consent is obtained, the Blockchain will become a permanent record and therefore immutable.
The validation will be distributed throughout the network in the case of permissionless or public Blockchain or on the nodes authorized to participate in the process in the case of permissioned or consortium Blockchain.
Moreover, it is good to remember that the members in charge of validating the chain cannot read the message contained in the blocks that will be visible only to the transaction recipient.
Currencies are not replicable
Currency duplication is a type of scam that was born almost at the same time as the birth of currencies. Today, attempts are being made to transform it from analog to digital. If documents, software, and all digital data are replicable, why can’t currencies be replicated as well? Like in gaming, it would be great to be able to use a code that multiplies the digital money you have at your disposal.
The ability to duplicate a digital currency or pay for two transactions with the same currency is a scam known as Double Spending. In traditional transactions, this risk is averted by the centralized financial authority. With digital currencies, and in a Blockchain context, such fraud is inhibited by the shared and replicated nature of the Blockchain and cryptographic techniques. The Blockchain’s digital signatures and public ledgers prevent the single point of failure and duplication of the transaction. In fact, even cryptocurrencies on DLT platforms are unique digital assets. It is therefore not possible to replicate them.
This overview among the features of the Blockchain shows how the technologies involved allow security in transactions unprecedented. For now, we just have to stay and see what will be its role in the metaverse and how it will gain ground compared to the forms of payment on the market today.