Blockchain in Trading |Transparency and Security

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Blockchain in trading is undoubtedly one of the greatest innovations of the 21st century. With blockchain’s ripple effect on various sectors and industries, from finance to supply chains and even education, it’s important to understand the technology and how to use it effectively. The real-world applications of blockchain technology are so numerous and fascinating that they can’t be ignored.

In this blog post on MonoVM, we’ll take a comprehensive look at blockchain technology, its applications, advantages, and disadvantages. We’ll learn about the types of blockchains and the important concepts associated with them, and we’ll explain how they have evolved. So, if you’re curious about how blockchain works and are looking for a comprehensive article that explains its complexities in simple terms, this blog post is for you.

What is Blockchain Technology?

Blockchain is made up of two words: Block and Chain. When we talk about chains and blocks in blockchain, we are talking about a chain of digital information, and each block stores this information. Blockchain can be considered a chain of data or financial transactions stored on a network, and its information is provided to users in a completely secure and encrypted form.

In a general definition, we can say that blockchain is a distributed, decentralized, and shared ledger that is built as a chain of records called blocks. Each block in this chain is responsible for storing a type of information (such as transaction records). Each block stores information related to transactions, such as the date, time, and amount of your purchase from the site, and information about sellers and buyers in transactions. Instead of using your real name in transactions, your purchase is made without any identifying information by using a unique digital signature.

How Blockchain Works

As you now know, a blockchain consists of several blocks that are connected. For a block to be added to the blockchain, there are 4 steps:

1- Initiate a Transaction

Any transaction that occurs on the network results in the addition of a new block to the blockchain. For example, if you want to deposit some Ethereum to your friend’s wallet, this transaction is processed by creating a new block in the Ethereum ecosystem.

2- Confirm the Transaction

After registering your transfer request, the network miners will be responsible for confirming your transaction. First, the new information needs to be entered into the system. This is done by computers. The network is often made up of thousands of computers spread around the world.

3- Save the Transaction

Your transaction needs to be saved in a block. Once the transaction is confirmed, the amount you requested to deposit and your digital signature are stored in a block.

4- Add a Block to the Blockchain Using a Hash

After all transactions in a block have been verified, a unique identifier called a hash must be assigned to the block. Once hashed, the block can be added to the blockchain.

After a new block is created on the network, this block will be available to everyone. For example, if you take a look at the Bitcoin blockchain, you will see that you have access to transaction data and can see the following information:

• Block height, which is calculated based on the total number of blocks and indicates how many blocks there are on the blockchain.
• Block hash, which is a 64-digit string consisting of numbers and letters, starting with zero.
• How long it took for the block to be mined?
• Who mined it (miner)?
• The size of the block (size).

Types of Blockchain

Types of Blockchain are generally divided into four categories:

• Public
• Private
• Consortium
• Hybrid

The performance of blockchains varies in factors such as the ability to see transactions, the conditions for a new node to join the network, the implementation model of the consensus algorithm, etc. Here we identify each type of blockchain in more detail:

1- Public Blockchain

In a public blockchain, there are no restrictions on viewing transactions, joining new nodes to the network, and participating in verifying transactions. None of the nodes has more power or authority than the other nodes, and the network is completely decentralized. The public blockchain has the highest degree of transparency and trust and is highly secure; however, the transaction processing speed is slow, and when the network is crowded, it suffers from scalability problems. 

Example:

Networks such as:

• Bitcoin
• Ethereum
• Litecoin 

2- Private Blockchain

As the name suggests, a private blockchain is not accessible to everyone. This blockchain is mostly used by companies and organizations, and only certain nodes are allowed to join the network. The security level, access, and activities of each node are controlled by a department. Therefore, private blockchains are implemented on a smaller scale than public blockchains and are mostly used for systems such as voting, supply chains, digital identity, etc. 

Example:

Private blockchains include:

• Multichain
• Hyperledger projects
• Corda

3- Consortium Blockchain

A consortium blockchain is a semi-centralized network and is generally managed by several different organizations. These types of blockchains are mostly used by banks and government organizations and, unlike private blockchains, manage and exchange information between several different organizations. In this way, organizations will have better control over resource management, and network security will be increased. 

Example:

The Energy Web Foundation and R3 networks are examples of this type of blockchain.

4- Hybrid Blockchain

A hybrid blockchain is a combination of public and private blockchains and has the characteristics of both. Users in such a network can specify access permissions for specific people to access specific information. It can also be specified which part of the blockchain is accessible to everyone and which part remains private. Anyone can join the public part of the network, but to join the private part of the hybrid blockchain, access permission is required.

Example:

For example, Dragonchain is a type of hybrid blockchain.

Benefits of Blockchain in Trading

Below, we will explain the advantages of blockchain in trading in more detail so that you can become more familiar with this technology.

• Accuracy of the Chain: Blockchain network transactions are confirmed by thousands of computers and devices, which ensures the accurate recording of information. 
• Cost Reduction: Blockchain eliminates the need for third-party verification and the costs associated with it. On the other hand, in decentralized networks such as Bitcoin, there is no central authority.
• Decentralization: Blockchain doesn’t store any of its information in a central location. Whenever a new block is added to the blockchain, every computer on the network updates its blockchain data to reflect the change. 
• Efficient Transactions: On some blockchains, transactions can be completed in minutes and are guaranteed to be secure within minutes. Using blockchain technology, you can easily buy and sell different cryptocurrencies. 
• Private Transactions: Although the details of the transactions are visible, the identifying information of the users who made the transactions is not visible, and your transactions are carried out privately.
• Secure Transactions: Transactions on the blockchain network are completely secure because after each transaction is recorded, the authenticity of this transaction must be confirmed by the blockchain network. 
• Transparency: The open-source nature of the blockchain code means that there is no authority to control or edit it, and anyone can suggest changes or upgrades to the system.
• Expanding Access to Financial Services (Banking the Unbanked): Everyone around the world, including those who do not have access to banking services, can use it. This feature reduces the likelihood of their assets being stolen.

Challenges of Implementing Blockchain in Trading 

Blockchain has many uses and benefits for different kinds of trading like Forex trading, but like any other technology, it also faces limitations in some areas. Here are some challenges of blockchain technology:

Technology Costs

Although blockchain can save users money on transaction fees, the technology is not free. For example, the Bitcoin network’s proof-of-work system uses a lot of computing power to validate transactions. In the real world, the total energy consumed by the many devices on the Bitcoin network is more than the annual electricity consumption of countries like Norway.

Speed and Data Inefficiency

Bitcoin is a great case study for potential blockchain inefficiencies. Bitcoin’s PoW system takes about 10 minutes to add a new block to the blockchain. At this rate, it is estimated that the Bitcoin blockchain network can only handle about 7 transactions per second (TPS). Although other networks, such as Ethereum or Solana, perform better than Bitcoin, blockchain technology still limits them. Another issue is that each block can only hold a limited amount of data. The block size issue is one of the most challenging issues for the scalability of blockchains in the future.

Illegal Activity

Confidentiality, as a positive feature of blockchain technology, protects users’ privacy and prevents hacking, but it also allows for illegal trade and activity. People can buy and sell illegal goods on the dark web and transfer their money using digital currencies with the help of blockchain technology.

Regulatory Challenges

The lack of specific rules and regulations regarding blockchain technology and the world of digital currencies is one of the concerns for users. Some governments may declare the ownership and transfer of money in cryptocurrencies illegal, which will cause harm to users. However, with the increasing acceptance of cryptocurrencies in recent years, this concern has decreased, and many platforms have allowed their users to make their payments in cryptocurrencies.

Risk of a 51% Attack

In blockchain networks such as Bitcoin, if a group of nodes or miners manage to control more than 50% of the hash rate or processing power of the network, they will be able to sabotage the network and change some data—for example, preventing the processing of some transactions or reversing a confirmed transaction. Reversing a transaction exposes the network to the risk of double-spending, a situation in which a malicious person can spend a given cryptocurrency more than once. The blockchain’s algorithm is designed to address this problem, and the likelihood of such a disruption occurring in secure, distributed blockchain networks like Bitcoin is very low. However, a 51% attack is one of the risks that blockchain networks face.

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Is Blockchain Secure for Trading?

Blockchain uses several layers of security. Layers such as different algorithms, proof of work, hashes, peer-to-peer systems, etc., ensure the security of the blockchain. Another factor that makes blockchain secure is that new blocks that are created are added to the end of the blockchain, and by doing so, previous blocks cannot be changed. Also, the hash alone can provide the security of an entire chain of blocks. Among other layers of blockchain security, mention can be made of its private and public keys.

What Is an NFT in Blockchain?

NFTs are like an original painting that cannot be copied in any way. These non-fungible tokens are created on blockchains like Ethereum or Solana. An NFT can be anything from a valuable work of art, like a Picasso painting, to a funny picture of a cat. By purchasing each NFT, you become the owner of that digital work, and each time the NFT is sold, you may receive a percentage of the sale price as royalties.

Difference Between Blockchain and Bitcoin

The purpose of blockchain is to provide a platform where digital information can be recorded and distributed, but not edited or tampered with. Note that blockchain is not the same as Bitcoin. Bitcoin is just one of the countless applications built on blockchain. Bitcoin is undoubtedly the most popular blockchain project at the moment, but blockchain technology can go far beyond Bitcoin. In other words, it is to Bitcoin what the internet is to Google. 

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Future of Blockchain in Trading

In Professor Klaus Schwab's book "The Fourth Industrial Revolution," the keyword "blockchain" is mentioned as the technology that will engineer the future of humanity. Every day, new coins and tokens are created in the market that make more accurate and complete use of blockchain. In the future, with the increasing popularity of the metaverse and, of course, NFTs, blockchain technology will undergo more extensive changes, which will be made to improve blockchain. Finally, it must be said that the future of blockchain is clear from the experts' point of view, and many people will benefit from it in various fields. Considering current trends, it is predicted that blockchain will create major changes in many industries in the coming decades. 

Best Blockchain Platforms for Trading

When it comes to the best trading platforms, there are many options in the market. In the following table, you can take a look at a comparison of the best blockchain platforms for trading:

Conclusion

In this blog post, we learned about the concept of blockchain in trading, its components, how it works, its advantages and disadvantages, the types of blockchain technologies, and how it differs from the digital currency Bitcoin. Blockchain is a decentralized network that allows transactions to be carried out securely, and data transparency and user privacy confidentiality help it gain wider acceptance. Although this technology is known for digital currencies, especially Bitcoin, its uses are not limited to the crypto world, and as we enter the third decade of blockchain, its uses are also expanding.