Blockchain Technology: Advantages and Disadvantages

This page outlines the advantages and disadvantages of Blockchain technology. It defines the technology and explains how it works.

What is Blockchain Technology?

Introduction:

• A blockchain is a peer-to-peer distributed ledger that is cryptographically secure, append-only, immutable, and updated only via consensus or agreement among peers.

• Blockchain is a digital decentralized ledger which keeps record of all transactions that have taken place across a peer-to-peer network. Its records are stored securely across a number of interconnected systems. As there is no single point of vulnerability, blockchain technology is resilient.

• Each block is uniquely connected to its previous blocks via a digital signature which makes it impossible to change any record without affecting the previous records. This renders the information tamper-proof.

• Blockchain technology allows its participants to transfer assets across the internet without the need for a centralized third party.

• Example:

  

Types of Blockchain

Blockchain networks can be divided into public and private networks based on who is authorized to participate.

• Public: There are no restrictions on the number of people joining the network, and it operates in a decentralized, open environment. It is similar to the internet.
• Private: It operates within the confinement defined by a controlling entity. It is similar to an intranet.

How Blockchain Works

The figure below depicts the working of blockchain technology, and the subsequent figure depicts the money transfer process through a blockchain network.

As shown, Blockchain works by validating transactions through a distributed network in order to create a permanent, verified, and unalterable ledger of information.

Benefits or Advantages of Blockchain Technology

Following are the benefits or advantages of Blockchain technology:

• Shared Ledger: It is an append-only distributed system shared across the business network. Hence it is resilient as there is no single point of failure.
• Consensus: A transaction is only committed when all parties agree to a network-verified transaction.
• Provenance: The entire history of an asset is available over a blockchain. This decreases the chance of fraud.
• Immutability: Records are indelible and cannot be tampered with once committed to the shared ledger. Hence this makes all the information trustworthy.
• Finality: Once a transaction is completed over a blockchain, it can never be reverted back.
• Smart contracts: Code is built within a blockchain which computers/nodes execute based on a triggering event.
• Security: Information is secured using cryptography.

Drawbacks or Disadvantages of Blockchain Technology

Following are the drawbacks or disadvantages of Blockchain technology:

• A transaction is dependent on multiple intermediaries and their presence. This increases the cost and complexity of the transaction.
• Regulation is the biggest challenge for non-fiat currency as the rate of technical innovation is faster than regulations.
• Scalability is another limitation due to the size of the public blockchain.
• Capacity is another concern as in order to have a dense network, a big number of tracks are needed. The problem here is that each of these tracks must be rooted in the blockchain.