How Does Blockchain Keep Transaction Data Safe?

Data is considered one of the world’s most important assets. Hence, the need to protect it from being hacked or tampered with. Organizations are trying to secure data by implementing various stringent authentication measures and using cryptography key vaulting mechanisms. These measures, however, are not enough to thwart attempts at fraud.

In this scenario, blockchain is emerging as one of the best ways to secure data. As it is a relatively new technology, people are still debating how secure blockchain is.

As per the reports, the global blockchain technology market will likely be worth $20 billion by 2024. Its unique data security measures are capable of thwarting malicious cyber-attacks. However, understanding how blockchain works can be a bit tricky. 

Hence, this article attempts to summarize blockchain data security in simple terms. By the end of this article, you will be able to decide how and why blockchain is secure.

What are the different types of Blockchains?

Each type of blockchain falls under any of the following three categories – 

• permissionless blockchain
• permitted blockchain or
• both(permitted and permissionless)

Permissionless blockchains allow anyone to anonymously or with a pseudonym join a blockchain network (or become a network node). They can participate in both mining and validating blocks of data. 

Permitted blockchains are such and are not accessible to anyone. Access to such blockchains is limited to a certain number of users. In addition, the users can only perform specific actions granted to them by the administrators of the concerned ledger. Unlike permissionless blockchains, the identity of a user is known to the other users of that blockchain. 

Following are the different types of blockchains –

1. Public Blockchains 

These blockchains are permissionless. Anyone can join this blockchain without revealing one’s identity to fellow users. In this type of blockchain, both the decision-making and the controlling powers are not restricted in the hands of a central authority but somewhat decentralized, i.e., exercised by a network of users. 

All public blockchain nodes have equal rights to build new data blocks, access the blockchain, and validate the blocks of data in the blockchain.

To date, public blockchains are mainly used to mine and exchange cryptocurrency. Bitcoin, Litecoin, and Ethereum are some of the popular public blockchains. 

2. Private Blockchains

These blockchains are also known as managed blockchains. The central authority has the power to determine who can be a node in a private blockchain. Unlike public blockchains, each blockchain node does not exercise equal rights to build new blocks of data, access the blockchain, and validate data blocks. 

These are partially decentralized blockchains that are not accessible publicly. The business-to-business (B2B) virtual currency trading networks Ripple and Hyperledger are some of the best examples of private blockchain. 

However, both public and private blockchains have some drawbacks.  Due to a large number of nodes, public blockchains require a longer time to validate new data as compared to private blockchains, which have a limited number of nodes. On the other hand, private blockchains are more prone to fraud and tampering, as a central authority controls them. 

To address these drawbacks, consortium blockchains have been developed. 

3. Consortium Blockchains

These blockchains can be regarded as semi-decentralized networks, which are governed by a cluster of organizations rather than by a single entity, as in the case of private blockchains. It is more secure than public blockchains. It is popularly used by organizations that have common goals.

For the financial services industry, a consortium blockchain has been developed by R3 – An enterprise software firm. The Global Shipping Business Network Consortium, a non-profit blockchain consortium, has been built by CargoSmart. 

How does blockchain provide security for digital credentials?

Now, let’s discuss how privacy and security in blockchain are ensured. 

To understand how blockchain provides security for digital credentials, let’s break the process down into several component parts such as –

• What is a digital credential
• Difference between traditional ledger and blockchain system
• What are nodes?
• How blockchain uses encryption to secure digital credentials?

What is a digital credential?

A digital credential is a digital form of any type of record. It can be a transaction record too. Whenever one performs a transaction, the individual is awarded a digital credential. Like any other transaction, the details of it need to be recorded in a safe place. The transaction details or the digital credential are stored in a blockchain network to safeguard against fraud, theft, or removal and from the risk of unauthorized amendments. 

Difference between traditional ledger and blockchain system

The difference between a traditional ledger and a blockchain system is that, while a traditional ledger is a single record that is maintained physically, the blockchain system can be considered to be a digital ledger. It is a decentralised ledger system which allows the details of an authorized transaction to be recorded to all designated modes of the blockchain network. Thus, a transaction recorded in a blockchain is immensely safe, as multiple records of a single transaction are maintained. On the other hand, transaction details recorded within a traditional ledger can be easily tampered with, as it is mainly recorded once. 

What are nodes?

A node is any device, be it phones, personal computers, servers, or IP webcams, that is linked to the internet. These nodes are interconnected. Each of these notes in a blockchain can be regarded as an independent ledger. Hence If any user tries to tamper or amend a particular record on the blockchain, they must gain access to more than half of the nodes that bear a copy of that blockchain. The greater the number of nodes(digital ledgers), the more difficult it would become to hack each node. 

A common consensus must validate a transaction before they are added to the blockchain. The node owners are lured to validate a transaction by rewarding them in the form of cryptocurrency. This process of earning validation is called “proof of work.” It can be immensely helpful to thwart any attempt at fraudulent records of transactions. 

How blockchain uses encryption to secure digital credentials?

Moreover, in a blockchain, data is stored in an encrypted form using a private and public key or an encryption algorithm and an encryption key. This means that a simple text such as “my name is John” is converted into unreadable code except for those with the right decryption key. However, you need to be clear about one thing, anyone can see the transactions that are recorded on the blockchain. The data contained within these transactions can be seen only by the rightful owner/owners. 

After reading these measures, you are sure to have a satisfactory answer to your query – “is blockchain safe?” This is why blockchain data security is considered powerful enough to safeguard digital credentials against fraud. 

Why should we use blockchain technology for data security?

You might still wonder how secure blockchain is or why it is secure. Below are some reasons which are likely to leave you with no doubt as to why and how blockchain is secure and why it should be used for data security. 

1. Unfeasible to attack

As the name suggests, Blockchain is a chain of digital “blocks.” These blocks contain transaction records. Since these records are not kept in a central location but instead distributed across everyone’s computers, phones, or servers of the blockchain network, the recorded data cannot be changed from a single node. All of these nodes are in sync and are continually updated. Moreover, these blocks are linked to each other with the help of unique identifiers, which are in the form of cryptographic hashes. 

Hackers could quickly attack traditional networks because all the information was stored in a central repository. Information stored in blockchains is unfeasible to attack because the data is decentralized across peer-to-peer networks. If an attempt is made to alter or hack data from one node, others will automatically get to know about such an attempt, and consequently, the attempt can be successfully thwarted.  

2. Offer secure data storage

Each of the blocks contains transaction records. The blocks form a chain, as each is linked to all the blocks before and after. This makes it almost impossible for hackers to tamper with transaction records. This is because if a hacker attempts to change one block, he would have to change the record in all the blocks linked to the targeted block to ensure that no one detects the tampering of records. 

Cryptography is used to secure the records on a Blockchain. Each participant in a blockchain network is assigned a key to their transactions as a personal digital signature. As soon as the record is changed without the consent of the majority of the network, the peer network will get a notification that something has happened. Early notification is immensely helpful in preventing any further damage. You can thus see how the developers have ensured privacy and security in blockchain technology. 

3. Opening new opportunities for the banking sector

The banking sector is slowly but steadily replacing traditional security measures with high-tech ones. Blockchain technology is one such measure. Blockchain technology, if used shrewdly, can revolutionize the way banks function.

Since Blockchain guarantees the security of all transaction records, it can significantly reduce the number of finance-related crimes. Since the transactions between the bank and its customer are immutable, this information can be referred to as and when needed. This will promote transparency in transactions. 

Blockchain speeds up the transaction process by eliminating third parties in the case of transactions between customers. This makes it easily possible to exchange currency at a lower rate than those charged by the banks. 

It can be safely predicted that the use of Blockchain in the banking sector will grow exponentially.  It can be one of the best measures against money laundering and fraud. 

4. Provide encryption & validation

Blockchain ensures that your valuable data is encrypted, which means that your data is converted into a code to prevent unauthorized access. This makes it immensely difficult to modify your data. You can also secure your data by saving a cryptographic signature of your file or document on a blockchain. This way, you do not need to save the entire file/document on the Blockchain. 

Since Blockchain has a decentralized nature, you can easily cross-check the cryptographic file signatures across all the ledgers and nodes on the blockchain network and verify whether they have been changed or not. If someone modifies a record, the signature becomes invalid. Thus you can verify from time to time whether your documents are safe or not.

5. Decentralised method of securing data

Since Blockchain technology has a decentralized nature, it does not depend on one particular control point. Each node on the blockchain has a complete copy of the data. This lack of a central authority makes it even more secure, as data blocks cannot be modified from one computer. Without a central authority, Blockchain depends on consensus protocols across peer-to-peer networks. 

Blockchain security examples

A lot of companies are shifting towards blockchain technology for security purposes.  The financial sector has a 46% market share in the blockchain technology market. A few examples have been listed below to demonstrate how various types of organizations are using blockchain technology to secure data from the risks of tampering – 

1. Mobilecoin

Location: San Francisco, California

Mobilecoin attempts to develop an easy-to-use, secure, and user-friendly cryptocurrency, especially for businesses that do not have enough resources to independently avail of practice-ledger security measures. 

Mobilecoin’s cryptocurrency does away with third-party transaction vendors. Instead, it keeps all the transaction data between two parties encrypted. It is currently working with Facebook Messenger, Signal and WhatsApp. 

2. Coinbase

Location: San Francisco, California

This California-based cryptocurrency company is an exchange that allows the buying and selling of digital currency. You can trade anything from Bitcoin to Ethereum to Litecoin on this company’s encrypted blockchain platform. 

Since it runs entirely on encryption, it is almost impossible to be hacked. Coinbase stores passwords and wallets in a highly secure database. Employees must undergo a strict background check to ensure the safety of their crypto. 

3. J.P Morgan

Location: New York

J.P. Morgan is the biggest and most renowned financial institution in the United States. It has built an enterprise-focused model of Ethereum, which is called Quorum. 

This platform processes private transactions by using blockchain technology. J.P. Morgan uses smart contracts on its Quorum network to create cryptographically assured and transparent transactions. 

Recently, J.P. Morgan issued a $150 million debar to the National Bank of Canada for one year. All aspects of this debt lifecycle, including origination, execution, and settlement of the debt, have been stored in blockchain.

4. Lockheed Martin

Location: Bethesda, Maryland

The U.S.-based Lockheed Martin is the first-of-its-kind defense contractor implementing blockchain security. It has joined hands with the cybersecurity firm Guardtime Federal and has implemented blockchain cybersecurity protocols in various aspects, such as software development, supply chain risk management, and engineering systems. 

Lockheed Martin aims to use blockchain technology to secure every step of its weapon development system and is also striving to ensure that the most vital and dangerous weapons be made incorruptible. 

Let’s wind-up

You had, in all probability, begun with the question – ” Is blockchain safe?” This article was an attempt to answer your query. Blockchain technology is a combo of security and transparency. Since all the blocks in the blockchain are interconnected, and each transaction is recorded in an encrypted form across all the blockchain network nodes, the chances of tampering with data are almost negligible. It is a unique way to manage data and address issues such as data security.

To know more about how blockchain technology can be used to secure data transactions, connect with Parangat Technologies.