Blockchain Technology – In today’s rapidly advancing era, digital currency, or cryptocurrency, has started to attract considerable attention and interest from many individuals. This growing fascination stems from the belief that cryptocurrency can eventually replace the physical currencies used in daily transactions.
According to Mulyanto (2015), the implementation of cryptocurrency as a substitute for cash in Indonesia is believed to offer citizens the freedom to conduct transactions without the obstacles posed by differing payment systems. Some popular and well-known forms of digital currency include Bitcoin (BTC), Ethereum (ETH), Ripple (XRP), and Stellar (XLM).
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Unlike physical money, these digital currencies exist on the internet, akin to storing cash in a bank. However, digital currencies are stored within the internet through blockchain networks. Despite this growing interest, many people are still unaware of what blockchain technology is—the backbone of digital currencies or cryptocurrencies.
What is Blockchain?
Blockchain is a technological system behind cryptocurrencies, designed to manage and regulate digital currency transactions such as Bitcoin. Similar to how banks act as intermediaries to manage and regulate our cash transactions, blockchain serves a similar purpose for digital currencies.
The fundamental difference is that blockchain transactions are managed by the users themselves, making the transactions open and free from third-party control. This system is often referred to by blockchain technology as “peer-to-peer” transactions. True to its name, a blockchain consists of a sequence of blocks distributed among its users. Each block, distributed in a ledger format, must contain three elements: data, hash, and the hash of the previous block (Noorsanti et al., 2018).
How Does Blockchain Work?
Anyone wishing to use digital currency must possess a wallet, commonly referred to as a data folder. When creating a wallet or data folder, users receive a public key and a secret key. The public key functions similarly to a bank account number, while the secret key is comparable to a PIN.
This folder will contain transaction data between blockchain users. As explained by Bagus and Bhiantara (2018), when a transaction is initiated, each user in the chain records and stores it as a new record. Subsequent transactions add new data records to each user’s folder on their respective devices, all without the intervention of a third party like a bank.
The blockchain system begins when a new data folder is added to one of the blocks, containing data, a cryptographic hash, and the hash of the previous block. These three elements form a network. To prevent unauthorized data alterations, the cryptographic hash converts new data into a compact string, or a unique code sequence. Once a transaction is deemed valid, the altered data is added to a new block comprising the new hash and the hash from the previous block. Consequently, users can easily locate this block within the chain.
The Benefits of Blockchain Technology
Blockchain technology ensures that all activities related to digital currency and its assets, such as trading, investing, and crypto asset mining, are organized with ease and guaranteed high security. Here are some notable benefits:
- Decentralization: Unlike traditional banking systems that rely on a central authority, blockchain operates on a decentralized network of computers, enhancing transparency and reducing the risk of centralized control or manipulation.
- Security: Each transaction in the blockchain is encrypted and linked to the previous transaction, forming an immutable chain. This makes it extremely difficult for unauthorized parties to alter or tamper with the data.
- Transparency: All transactions are recorded on a public ledger that anyone can view, promoting transparency and accountability.
- Efficiency: Blockchain transactions are typically faster and more efficient than traditional banking processes, as they eliminate the need for intermediaries.
- Cost-effective: By removing intermediaries, blockchain reduces transaction costs, making it a cost-effective solution for financial transactions.
In conclusion, as digital currency continues to gain traction, understanding the underlying technology—blockchain—is crucial. Blockchain not only supports the functioning of cryptocurrencies but also offers numerous benefits, including enhanced security, transparency, and efficiency. As more people become aware of these advantages, the adoption of cryptocurrency and blockchain technology is likely to increase, potentially transforming the future of financial transactions.