With the emergence of Bitcoin and Altcoins into the mainstream during the last bull market, the concept of blockchain has often been confused with cryptocurrencies. While blockchain is the technological layer upon which cryptocurrencies are built, it is worth explaining overall how it lays the foundations to secure financial transactions and create trust between parties. This introductory paper briefly explains what blockchain is in general and what benefits they provide to users.
What’s a Blockchain?
A blockchain is a digital and decentralized ledger that contains data that is stored as a list of records, called blocks. These blocks link to one another in a chain through the use of cryptographic algorithms. From a simpler viewpoint, the blockchain can be seen as a layer of the internet that allows for secure records to be kept and trusted transactions to occur.
The blockchain maintains an up-to-date and official copy of the ledger across a peer-to-peer network of distributed computers, which is agreed on by a collective governance protocol that specifies the rules of inter-node communication and block validation. For this reason, the blockchain fully eliminates the need for a centralized institution to act as an intermediary, and instead uses cryptography and collaboration through consensus to create trust.
How Decentralization Amplifies Security
By design, the blockchain provides several advanced layers of security that strongly outperform more traditional cybersecurity systems. The use of cryptographic algorithms converts any input fed to the blockchain into a unique encrypted output of a fixed length that cannot be reverted to its original state. This public key cryptography method allows for the management of users' identities, while still preserving their anonymity. Put differently, the technology enables people to prove who they are without the need for public disclosure.
Since each block contains a cryptographic footprint or hash of the previous block, any changes made to the original input will then produce a dissimilar output, recognizably breaking its link to the subsequent blocks. Because of this, any attempts of fraud are instantly made visible. To further ensure its sophisticated security measures, the blockchain is a data structure where information can only be supplemented— it cannot be changed, tampered with, or deleted in any way.
Because the current state of the ledger is determined through a consensus protocol (e.g., derived from the version held by a majority of computers), the distribution of information across nodes prevents security breaches from single computer hacks. While security in traditional environments is primarily boundary-focused, the blockchain protects its data by copying it to as many locations as possible, rendering modifications to all copies reasonably infeasible.
To go even deeper, the generation of new blocks involves the selection of a creator among a pool of candidates through a consensus protocol, making it almost impossible for an attacker to become a legitimate nominee. Additionally, each block structure is defined in advance so that attackers cannot modify it to suit their purposes. The combination of its decentralized ecosystem combined with data encryption makes the blockchain highly hack-resistant, guarantees data integrity and the immutability of the ledger.
Transparency Through Disintermediation
In the blockchain, every user owns their data. This is novel in comparison to traditional third-party transactions, where all transactional operations require a level of trust regarding the institutions’ ability to ensure their security and validity. The intermediary structure also entails that the middlemen possess all corresponding data, at least temporarily, which strengthens their position although they are rarely the most significant actors in the value chain.
By contrast, the blockchain transfers trust from organizations to a technology layer, which enables people to perform peer-to-peer transactions without going through third parties at all. In this sense, the blockchain functions in a completely transparent manner because the history of the ledger remains immutable and its data integrity is always visible and verifiable by anyone at any time.
Therefore, every participant on the blockchain is notified when a transaction occurs. They all own an identical copy of the transaction record shared throughout the network. As a result, every piece of information on the blockchain can be traced back to the exact moment it was created. This system greatly facilitates the conduct of audit processes, since all information is not only available to all users but deemed reliable.
Streamlining with Smart Contract Automatization
When parties sign contracts, they need to be able to specify conditions. The use of smart contracts makes it so that users can flexibly interact with the blockchain. Smart contracts are self-executed codes that offer the ability to define the procedure or the steps and the outcome of a process when some particular events or conditions occur.
For instance, a smart contract can make it so that the seller has the tokens and that the buyer has the money to acquire them before the transactions happen. As such, they provide a stable framework to execute automated processes, without the need or intervention of middlemen such as lawyers, brokers, or auditors.
Removing intermediates greatly improves process efficiency and cuts costs. Shifting from third parties and implementing automation also enhances accuracy by eliminating human mistakes and inconsistencies. Finally, utilizing the blockchain and smart contracts provides a backup solution that ensures the permanent record and traceability of transactions as well as consistency in the services provided, even when their creator is no longer in the business.
To conclude, the blockchain is a tool that helps shape the future of finance by allowing for greater transparency, safety, efficiency, and the lowering of associated costs of carrying out exchanges— all in all creating more value for the user. For Liti Capital, the blockchain is a means to provide exposure to high-return and bear market-friendly litigation assets to everyone. For more information, click here.
