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:

    How BlockChain Works

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.

working of blockchain money transfer process

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.