If you have been following banking, investing, or cryptocurrency over the last years, you may have heard the term “blockchain,” the record-keeping technology behind the Bitcoin network. Here we fully explain What Is a Blockchain Technology? and How Does It Work?
Blockchain : A distributed ledger system. A sequence of blocks, or units of digital information, stored consecutively in a public database. The basis for cryptocurrencies.
What Is a Blockchain Technology?
Blockchains are made up of a series of individual blocks. Each block contains information about transactions conducted within a given time period. They also contain a unique identifier to differentiate them from every other block in the chain.
Blocks are created by solving cryptographic problems. The process of solving these problems is known as mining. Mining a block on the blockchain attracts a reward. For example, at the inception of the Bitcoin blockchain, miners solving the cryptographic hashing problem required to add a new block to the blockchain were rewarded with 50 BTC.
Blockchains are decentralized records. Instead of being stored in one central location, the blockchain is stored on the computers of every user of that given blockchain.
Meanwhile, the unique block identifier — known as the hash — is derived from the information contained in every previous block in the blockchain. This means that, in order to falsify any record on the blockchain, a nefarious actor would have to change every block on every instance of the blockchain. As a result, blockchains are considered to be virtually unfalsifiable, and are thought of as immutable records of transactions.
Today, most blockchains are public. This includes prominent cryptocurrencies such as Bitcoin and Ethereum. Anybody can view records of transactions conducted on a given blockchain, using a tool called a block explorer. Theoretically however, blockchains afford a high level of anonymity to users.
While public blockchains are the norm, private versions are also being explored as a solution for many business and governmental use cases.
Types of Blockchain
Currently, there are at least four types of blockchain networks — public blockchains, private blockchains, consortium blockchains and hybrid blockchains. (Source : Wikipedia)
A public blockchain has absolutely no access restrictions. Anyone with an Internet connection can send transactions to it as well as become a validator (i.e., participate in the execution of a consensus protocol). Usually, such networks offer economic incentives for those who secure them and utilize some type of a Proof of Stake or Proof of Work algorithm.
Some of the largest, most known public blockchains are the bitcoin blockchain and the Ethereum blockchain.
A private blockchain is permissioned. One cannot join it unless invited by the network administrators. Participant and validator access is restricted. To distinguish between open blockchains and other peer-to-peer decentralized database applications that are not open ad-hoc compute clusters, the terminology Distributed Ledger (DLT) is normally used for private blockchains.
A hybrid blockchain has a combination of centralized and decentralized features. The exact workings of the chain can vary based on which portions of centralization decentralization are used.
A sidechain is a designation for a blockchain ledger that runs in parallel to a primary blockchain. Entries from the primary blockchain (where said entries typically represent digital assets) can be linked to and from the sidechain; this allows the sidechain to otherwise operate independently of the primary blockchain (e.g., by using an alternate means of record keeping, alternate consensus algorithm, etc.).
Is Blockchain Secure?
Blockchain technology accounts for the issues of security and trust in several ways. First, new blocks are always stored linearly and chronologically. That is, they are always added to the “end” of the blockchain. If you take a look at Bitcoin’s blockchain, you’ll see that each block has a position on the chain, called a “height.” As of November 2020, the block’s height had reached 656,197 blocks so far.
After a block has been added to the end of the blockchain, it is very difficult to go back and alter the contents of the block unless the majority reached a consensus to do so. That’s because each block contains its own hash, along with the hash of the block before it, as well as the previously mentioned time stamp. Hash codes are created by a math function that turns digital information into a string of numbers and letters. If that information is edited in any way, the hash code changes as well.
Here’s why that’s important to security. Let’s say a hacker wants to alter the blockchain and steal Bitcoin from everyone else. If they were to alter their own single copy, it would no longer align with everyone else’s copy. When everyone else cross-references their copies against each other, they would see this one copy stand out and that hacker’s version of the chain would be cast away as illegitimate.
Succeeding with such a hack would require that the hacker simultaneously control and alter 51% of the copies of the blockchain so that their new copy becomes the majority copy and thus, the agreed-upon chain. Such an attack would also require an immense amount of money and resources as they would need to redo all of the blocks because they would now have different timestamps and hash codes.
Due to the size of Bitcoin’s network and how fast it is growing, the cost to pull off such a feat would probably be insurmountable. Not only would this be extremely expensive, but it would also likely be fruitless. Doing such a thing would not go unnoticed, as network members would see such drastic alterations to the blockchain. The network members would then fork off to a new version of the chain that has not been affected.
This would cause the attacked version of Bitcoin to plummet in value, making the attack ultimately pointless as the bad actor has control of a worthless asset. The same would occur if the bad actor were to attack the new fork of Bitcoin. It is built this way so that taking part in the network is far more economically incentivized than attacking it.
How is Blockchain Used? Blockchain Use cases
As we now know, blocks on Bitcoin’s blockchain store data about monetary transactions. But it turns out that blockchain is actually a reliable way of storing data about other types of transactions, as well.
Some companies that have already incorporated blockchain include Walmart, Pfizer, AIG, Siemens, Unilever, and a host of others. For example, IBM has created its Food Trust blockchain1 to trace the journey that food products take to get to its locations.
Why do this? The food industry has seen countless outbreaks of e Coli, salmonella, listeria, as well as hazardous materials being accidentally introduced to foods. In the past, it has taken weeks to find the source of these outbreaks or the cause of sickness from what people are eating.
Using blockchain gives brands the ability to track a food product’s route from its origin, through each stop it makes, and finally its delivery. If a food is found to be contaminated then it can be traced all the way back through each stop to its origin. Not only that, but these companies can also now see everything else it may have come in contact with, allowing the identification of the problem to occur far sooner, potentially saving lives. This is one example of blockchains in practice, but there are many other forms of blockchain implementation.
History of Blockchain
Although blockchain is a new technology, it already boasts a rich and interesting history. The following is a brief timeline of some of the most important and notable events in the development of blockchain.(Source : builtin.com)
Satoshi Nakamoto, a pseudonym for a person or group, publishes “Bitcoin: A Peer to Peer Electronic Cash System.”
The first successful Bitcoin (BTC) transaction occurs between computer scientist Hal Finney and the mysterious Satoshi Nakamoto.
Florida-based programmer Laszlo Hanycez completes the first ever purchase using Bitcoin — two Papa John’s pizzas. Hanycez transferred 10,000 BTC’s, worth about $60 at the time. Today it’s worth $80 million.
The market cap of Bitcoin officially exceeds $1 million.
1 BTC = $1USD, giving the cryptocurrency parity with the US dollar.
Electronic Frontier Foundation, Wikileaks and other organizations start accepting Bitcoin as donations.
Blockchain and cryptocurrency are mentioned in popular television shows like The Good Wife, injecting blockchain into pop culture.
Bitcoin Magazine launched by early Bitcoin developer Vitalik Buterin.
BTC market cap surpassed $1 billion.
Bitcoin reached $100/BTC for first time.
Buterin publishes “Ethereum Project” paper suggesting that blockchain has other possibilities besides Bitcoin (e.g., smart contracts).
Gaming company Zynga, The D Las Vegas Hotel and Overstock.com all start accepting Bitcoin as payment.
Buterin’s Ethereum Project is crowdfunded via an Initial Coin Offering (ICO) raising over $18 million in BTC and opening up new avenues for blockchain.
R3, a group of over 200 blockchain firms, is formed to discover new ways blockchain can be implemented in technology.
PayPal announces Bitcoin integration.
Number of merchants accepting BTC exceeds 100,000.
NASDAQ and San-Francisco blockchain company Chain team up to test the technology for trading shares in private companies.
Tech giant IBM announces a blockchain strategy for cloud-based business solutions.
Government of Japan recognizes the legitimacy of blockchain and cryptocurrencies.
Bitcoin reaches $1,000/BTC for first time.
Cryptocurrency market cap reaches $150 billion.
JP Morgan CEO Jamie Dimon says he believes in blockchain as a future technology, giving the ledger system a vote-of-confidence from Wall Street.
Bitcoin reaches its all-time high at $19,783.21/BTC.
Dubai announces its government will be blockchain-powered by 2020.
Facebook commits to starting a blockchain group and also hints at the possibility of creating its own cryptocurrency.
IBM develops a blockchain-based banking platform with large banks like Citi and Barclays signing on.
China’s President Ji Xinping publicly embraces blockchain as China’s central bank announces it is working on its own cryptocurrency
Twitter & Square CEO Jack Dorsey announces that Square will be hiring blockchain engineers to work on the company’s future crypto plans
The New York Stock Exchange (NYSE) announces the creation of Bakkt – a digital wallet company that includes crypto trading
Bitcoin almost reaches $30,000 by the end of 2020
PayPal announces it will allow users to buy, sell and hold cryptocurrencies
The Bahamas becomes the world’s first country to launch its central bank digital currency, fittingly known as the “Sand Dollar”
Blockchain becomes a key player in the fight against COVID-19, mainly for securely storing medical research data and patient information
Bitcoin vs. Blockchain
The goal of blockchain is to allow digital information to be recorded and distributed, but not edited. Blockchain technology was first outlined in 1991 by Stuart Haber and W. Scott Stornetta, two researchers who wanted to implement a system where document timestamps could not be tampered with. But it wasn’t until almost two decades later, with the launch of Bitcoin in January 2009, that blockchain had its first real-world application.
The Bitcoin protocol is built on a blockchain. In a research paper introducing the digital currency, Bitcoin’s pseudonymous creator, Satoshi Nakamoto, referred to it as “a new electronic cash system that’s fully peer-to-peer, with no trusted third party.”
The key thing to understand here is that Bitcoin merely uses blockchain as a means to transparently record a ledger of payments, but blockchain can, in theory, be used to immutably record any number of data points. As discussed above, this could be in the form of transactions, votes in an election, product inventories, state identifications, deeds to homes, and much more.
Currently, there is a vast variety of blockchain-based projects looking to implement blockchain in ways to help society other than just recording transactions. One good example is that of blockchain being used as a way to vote in democratic elections. The nature of blockchain’s immutability means that fraudulent voting would become far more difficult to occur.
For example, a voting system could work such that each citizen of a country would be issued a single cryptocurrency or token. Each candidate would then be given a specific wallet address, and the voters would send their token or crypto to whichever candidate’s address they wish to vote for. The transparent and traceable nature of blockchain would eliminate the need for human vote counting as well as the ability of bad actors to tamper with physical ballots.
Blockchain vs. Banks
Banks and decentralized blockchains are vastly different. To see how a bank differs from blockchain, let’s compare the banking system to Bitcoin’s implementation of blockchain.
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