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What is Blockchain and What You Need to Know?

What Blockchain is and What You Need to Know

Blockchain has attracted a lot of attention over recent years. Many people need clarity about it though. What is blockchain technology and what does it do? What makes blockchains different from other technologies? Where and why should one use blockchain? What changes among different blockchain technologies? Read on, as we explain these.

What is blockchain technology?

Blockchain is a modern technology that offers a distributed and permanent ledger of transaction records on a decentralized network. It offers a unique combination of decentralization, disintermediation, transparency, security, and efficiency.

An interesting historical footnote: The financial crisis of 2008 caused many people to lose confidence in the traditional banking system. Some of them wanted a system to transfer digital money without the intervention of central banks, banks, and governments. Satoshi Nakamoto, a pseudonymous person or group created Bitcoin as a response to this. A cryptocurrency that emerged in 2009, Bitcoin is the first and best-known application of blockchain technology.

What is blockchain made up of?

Blockchain is made up of the following components:

Decentralized Network: A blockchain has a “peer-to-peer” (P2P) network. Computers on this network are called “nodes”. A public blockchain network like Bitcoin has nodes with equal authority. Anyone can join a public blockchain network. However, a private blockchain network might impose access controls and specific roles for nodes.

The “Protocol Program” of the blockchain network: The “protocol program” of a blockchain network could be a collection of programs that govern how the network functions. It varies from one blockchain network to another. The protocol program governs interactions between nodes, transaction validation, etc.

Distributed Ledger: A blockchain network has a ledger of all transactions. Transactions are grouped in blocks. Blocks are data structures, and each block has a reference to the earlier block. That creates a virtual “chain”, which gives rise to the name “blockchain”. Every full node on the network has this ledger. That makes it a “distributed ledger”, therefore, blockchain is also called the “distributed ledger technology” (DLT).

Other software components: These include data encryption algorithms, cryptographic hash functions, digital signatures, consensus algorithms, etc.

Learning Note 1: You might wonder whether cryptocurrencies are components of a blockchain. The answer is that cryptocurrencies are simple transaction records stored inside blocks on a blockchain. Cryptocurrencies aren’t fiat currencies. They don’t have the backing of any physical asset, government, or central bank.

Learning Note 2: You might wonder whether smart contracts are components of a blockchain. The answer is that a smart contract is stored in a block on a blockchain. However, it executes on the top of a blockchain network. It records the execution results on the same blockchain.

How does blockchain technology work?

Blockchain technology works as follows:

  1. A user requests for a transaction. This could be a transfer of cryptocurrencies in the case of blockchain networks like Bitcoin and Ethereum.
  2. Transaction validators pick up the transaction. They are called “miners” in Bitcoin and Ethereum.
  3. Miners try to create a new block including a group of transactions. It’s a competitive process, and it’s called “mining”.
  4. Miners try to solve a mathematical puzzle to create a block. This puzzle isn’t skill-intensive. It requires multiple efforts at heavy-duty number-crunching. Miners need to invest in computing power, and they run their computers for long periods. They also run up significant energy bills.
  5. Miners that solve the puzzle broadcast the results for other miners to verify. The successful miner creates the new block.

 

Learning Note 3: In the Bitcoin and Ethereum blockchain networks, the mining process uses the “Proof of Work” (PoW) consensus algorithm. Miners must demonstrate that they solved the mathematical puzzle.

Learning Note 4: The block contains the cryptographic hash of the previous block, which forms the virtual chain we referred to. Miners take care to create new blocks on that chain only. They know that only the longest chain is the true chain in a blockchain network.

What advantages do blockchain offer?

Blockchain offers the following advantages:

1. Decentralization

A public blockchain network like Bitcoin or Ethereum has many nodes. Every node has the same authority. Each of them can communicate with the other nodes, and they don’t need intermediaries.

This decentralization allows cryptocurrencies like Bitcoin or Ethereum to operate outside the control of governments and central banks. One node can completely bypass a bank to send digital currencies to another node.

2. Security

Users of blockchain networks use digital signatures to authorize transactions. They only need to secure their private keys to keep hackers at bay. Data encryption algorithms secure data on a blockchain network.

3. The ease of sharing information

The distributed ledger of blockchain makes it easy to share information with all stakeholders. Public blockchains foster transparency with the help of this distributed ledger.

Private blockchain networks impose access control. However, they can still share information easily with the relevant stakeholders.

4. Immutability

Hackers can’t shut a blockchain network down by shutting one node. Other nodes will continue to operate, and they will have all the transaction records. This acts as a disincentive for hackers. It makes blockchain networks permanent.

Cryptographic hash functions and consensus algorithms make modifying or deleting data on blockchain nearly impossible. Hackers can’t manipulate a decentralized network of miners. They need to overpower the combined computing power of all miners. This requires enormous investments in computing power and electricity. That’s a disincentive.

5. Cryptocurrencies

Cryptocurrencies are cryptographic tokens created on blockchain networks. People interested in digital currencies can trade in cryptocurrencies.

6. Enforcements of transparently written contracts

Smart contracts are open-source pieces of code. They contain “If-Then-Else” statements. Smart contracts transfer cryptographic tokens based on predefined conditions. They execute autonomously, and you can’t modify them after deployment. You can’t reverse their execution either. This can help to enforce transparently written contracts.

Learning Note 5: Some public blockchain networks use the “Proof of Stake” (PoS) consensus algorithm instead of POW. Transaction validators need to stake their cryptocurrencies to get the job of transaction validation. They lose their money if they try to manipulate the system. That’s another form of disincentive.

Enterprise blockchains: What they are

In many cases, businesses can’t use a public blockchain network like Bitcoin or Ethereum. The reasons are as follows:

Access: Public blockchains allow anyone to join. Businesses need a way to allow only trusted parties on their blockchain network.

Scalability and performance: Decentralized security on public blockchains requires energy-intensive consensus algorithms like POW. This impacts the scalability and performance of many public blockchain networks. Businesses need highly scalable and performant blockchain networks.

Confidentiality: Public blockchain networks allow anyone to view transaction data. Businesses need to process sensitive information, therefore, confidentiality is important to them.

Several businesses use “enterprise blockchain” networks. These allow access control and data privacy measures. Such blockchain networks use consensus algorithms that offer better performance and scalability. Hyperledger Fabric is an example of an enterprise blockchain framework. It’s a project from the Hyperledger Consortium, an industry association. Corda from R3 is an enterprise blockchain platform. ConsenSys Quorum is an enterprise blockchain framework that builds on the Ethereum blockchain.

What is blockchain used for? A few use cases

Blockchain has many use cases. The following are just a few examples:

Cryptocurrencies: These are digital currencies. People can use them without any intervention from governments, central banks, and banks. Bitcoin, Ethereum, Litecoin, Ripple, and Monero are a few examples.

Supply chain traceability: Supply chain management is complex. Tracking the lifecycle of products can be hard, and it’s harder for agricultural produces like fruits and vegetables. Walmart is using the IBM Food Trust, a blockchain-based platform. The company has improved supply chain traceability.

Combating the scourge of counterfeit medicines: The menace of counterfeit medicines impacts millions of people all over the world. The lack of traceability of medicines and pharmaceutical ingredients makes it hard to combat this problem. Pharma majors have collaborated and built the MediLedger network. It improves traceability in the pharmaceutical supply chain.

Improving cross-border payments: Cross-border payment transactions take time. They follow a complex set of processes, and there are intermediaries. Ripple, a blockchain platform is trying to improve this process. The company is trying to provide reliable and instant cross-border payment solutions.

Conclusion

Blockchain is a modern technology with transformative potential. It offers decentralization, transparency, immutability, security, and efficiency. Blockchain technology has many use cases across industries. Watch this space to know about the developments concerning blockchain.

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