GUIDE TO BLOCKCHAIN
What Exactly Is a Blockchain?
A blockchain is a distributed database that is shared across computer network nodes. A blockchain, like a database, stores information electronically in digital format. Blockchains are widely known for their critical role in storing a secure and decentralized record of transactions in cryptocurrency systems such as Bitcoin. The peculiarity of a blockchain is that it ensures the integrity and security of a data record and generates trust without the need for a trusted third party.
Complete guide to Blockchain
The way data is arranged differs significantly between a traditional database and a blockchain. A blockchain organizes information into units known as blocks, which hold sets of data. Blocks have predetermined storage capacities and, when full, are closed and linked to the previously filled block, resulting in the blockchain, a data chain. All extra information that follows that newly added block is concatenated into a newly produced block, which is then added to the chain once it is complete.
A database generally organizes its data into tables, but a blockchain, as the name implies, organizes its data into chunks (blocks) that are linked together. When used decentralizedly, this data format automatically generates an irreversible time line of data. When a block is filled, it is set in stone and forms part of the time line. When a block is added to the chain, it is given a precise time stamp.
Blockchain is a kind of shared database that differs from traditional databases in the way data is saved; blockchains save data in blocks that are then connected together using encryption.
As new data arrives, it is added to a new block. Once the block has been filled with data, it is chained onto the previous block, resulting in the data being linked together in chronological order.
A blockchain may store several types of data, but its most common use has been as a ledger for transactions.
In the case of Bitcoin, blockchain is used in a decentralized manner, such that no one person or organization has control—rather, all users jointly retain control.
Decentralized blockchains are immutable, which means the data entered is irreversible. In the case of Bitcoin, this means that transactions are permanently recorded and viewable to anybody.
How Does a Blockchain Function?
The goal of blockchain is to allow digital information to be stored and shared while remaining unchanged. A blockchain, in this sense, serves as the foundation for immutable ledgers, or records of transactions that cannot be changed, deleted, or destroyed. As a result, blockchains are often referred to as distributed ledger technologies (DLT) (DLT).
The blockchain concept was initially published as a research project in 1991, before its first widespread application in use: Bitcoin, in 2009. With the development of multiple cryptocurrencies, decentralized finance (DeFi) applications, non-fungible tokens (NFTs), and smart contracts in the years thereafter, the use of blockchains has increased.
Decentralization of Blockchain
Assume a company maintains a server farm with 10,000 computers to administer a database containing all of its clients' account information. This firm owns a warehousing facility where all of these computers are stored under one roof and has total control over each of these systems and all of the information contained inside them. However, this creates a single point of failure. What happens if the electricity goes out at that location? What happens if its Internet connection is lost? What if it catches fire and burns to the ground? What if a malicious actor deletes everything with a single keystroke? In any case, the data has been lost or altered.
A blockchain allows the data stored in that database to be dispersed across several network nodes located in various locations. This not only creates redundancy but also protects the integrity of the data stored in the database—if someone tries to alter a record at one instance of the database, the other nodes are unaffected, preventing a bad actor from doing so. If one user tampers with Bitcoin's transaction record, the other nodes will cross-reference each other and quickly discover the node with incorrect information. This method aids in the creation of a precise and observable sequence of events. As a result, no one node in the network may change the information stored inside it.
As a result, information and history (such as bitcoin transactions) are irreversible. Such a record might be a list of transactions (like with cryptocurrencies), but it is also possible for a blockchain to incorporate a variety of other information such as legal contracts, state identifications, or a company's products inventory.
A majority of the decentralized network's computer power would need to agree to validate new entries or records to a block. Blockchains are safeguarded by a consensus technique such as proof of work (PoW) or proof of stake (PoS) to prevent malevolent actors from authorizing fraudulent transactions or duplicate spends (PoS). These processes allow for agreement even when no one node is in command.
Because of Bitcoin's blockchain's decentralized nature, all transactions can be freely monitored by either having a personal node or using blockchain explorers, which allow anybody to see transactions taking place in real time. Each node maintains its own copy of the chain, which is updated when new blocks are confirmed and added. This means that if you wanted to, you could track Bitcoin wherever it went.
Exchanges, for example, have been hacked in the past, resulting in the loss of every Bitcoin kept on the exchange. While the hacker is completely anonymous, the Bitcoins they stole are easily traceable. It would be known if the Bitcoins obtained in any of these crimes were to be moved or spent anywhere.
Of course, records kept on the Bitcoin blockchain (as well as the majority of others) are encrypted. This means that only the record's owner may decode it to reveal their identify (through a public-private key pair) (using a public-private key pair). As a result, blockchain users may remain anonymous while maintaining transparency.
Is Blockchain Trustworthy?
In a variety of ways, blockchain technology provides decentralized security and trust. To begin, new blocks are always kept in a linear and chronological order. That is, they are always appended to the blockchain's "terminus." After a block has been added to the blockchain, it is very difficult to go back and change the contents of the block unless a majority of the network agrees to do so. That's because each block includes its own hash, as well as the hash of the block before it and the previously mentioned time stamp. Hash codes are created using a mathematical technique that converts digital data into a string of numbers and characters. If that information is changed in any way, the hash code will change as well.
Assume a hacker who also owns a node on a blockchain network wants to modify the blockchain and steal bitcoin from everyone else. If they changed their own unique copy, it would no longer match everyone else's copy. When everyone else compares their copies, they will see that this one copy stands out, and the hacker's version of the chain will be marked as fake.
To be successful in such a hack, the hacker must simultaneously acquire and modify 51 percent or more 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 need a significant investment in terms of money and resources, since they would need to rewrite all of the blocks due to the new time stamps and hash codes.
Because of the size of many cryptocurrency networks and how quickly they are growing, the cost of pulling off such a feat would almost certainly be prohibitively expensive. This would be not only expensive, but also likely useless. Such an action would not go unnoticed by network members, who would see such significant changes to the blockchain. Members of the network would then hard fork to a new version of the chain that had not been modified. This would cause the targeted version of the token to lose value, making the attack ultimately ineffective since the bad actor now owns a worthless asset. The same thing would happen if a bad actor sought to attack the new Bitcoin split. It is designed in this manner so that participating in the network is much more economically advantageous than attacking it.
Blockchain vs. Bitcoin
Stuart Haber and W. Scott Stornetta, two researchers who wanted to establish a system where document time stamps couldn't be faked, invented blockchain technology in 1991. But it wasn't until more than two decades later, with the introduction of Bitcoin in January 2009, that blockchain saw its first real-world use. 1
A blockchain is the foundation of the Bitcoin protocol. Bitcoin's pseudonymous creator, Satoshi Nakamoto, described the digital currency in a research paper as "a new electronic cash system that's completely peer-to-peer, with no trusted third party."
The important point to remember here is that although Bitcoin only uses blockchain as a technique to transparently record a payment ledger, blockchain may, in theory, be used to immutably record any number of data bits. As previously said, this might take the shape of transactions, votes in an election, products inventory, state identifications, property titles, and much more.
Tens of thousands of projects are already striving to use blockchains in a variety of ways to benefit society in ways other than just recording transactions—for example, as a tool to vote securely in democratic elections. Because of the immutability of blockchain, fraudulent voting would become substantially more difficult. For example, a voting system may be set up such that each person of a country receives their own currency or token. Each candidate would then be assigned a unique wallet address, and voters would send their token or cryptocurrency to the address of the candidate for whom they want to vote. Because blockchain is transparent and traceable, it eliminates the need for human vote counting as well as the ability of unscrupulous actors to interfere with physical ballots.
Banks vs. Blockchain
Blockchains have been hailed as a disruptive force in the financial sector, particularly in payment and banking operations. However, banks and decentralized blockchains are not the same thing.
Let's compare the banking system to Bitcoin's implementation of blockchain to see how it varies from blockchain.
What Is the Purpose of Blockchains?
Blocks on Bitcoin's blockchain, as we already know, record information about monetary transactions. More than 10,000 new cryptocurrency systems are already running on blockchain. However, it has been discovered that blockchain is a reliable method of maintaining data about other types of transactions as well.
Walmart, Pfizer, AIG, Siemens, Unilever, and a number of other companies have already embraced blockchain. IBM, for example, has created the Food Trust blockchain to track the path that food commodities travel to reach their destinations.
Why are you doing this? Multiple E. coli, salmonella, and listeria outbreaks have occurred in the food industry, as well as harmful substances being accidentally introduced into meals. In the past, it may take weeks to track down the source of these epidemics or the source of sickness caused by what individuals ate. Using blockchain, marketers can track a food product's journey from its origin through each stop along the way, and finally to its delivery. If a meal is found to be poisoned, it may be traced back through each stop to its source. Not only that, but these companies can now see everything else they've been in contact with, allowing the problem to be identified far sooner and maybe saving lives. This is one example of a blockchain application in practice; however, there are many various types of blockchain applications.
Finance and banking
Perhaps no industry will benefit more from implementing blockchain into its business procedures than banking. Financial institutions are only open during business hours, which are usually five days a week. This implies that if you try to deposit a check on Friday at 6 p.m., you will most likely have to wait until Monday morning to see the funds in your account. Even if you make your deposit during business hours, the transaction may take one to three days to verify due to the massive volume of transactions that banks must settle. Blockchain, on the other hand, is awake all the time.
By integrating blockchain into banks, consumers may be able to have their transactions completed in as little as 10 minutes—basically the time it takes to add a block to the blockchain, regardless of holidays or time of day or week. Banks may also use blockchain to move money more quickly and securely among organizations. In the stock trading industry, for example, the settlement and clearing process might take up to three days (or more if dealing internationally), which means that the money and shares are frozen for that period of time.
Given the magnitude of the monies involved, even a few days in transit may incur significant costs and risks for institutions.
Blockchain serves as the basis for cryptocurrencies such as Bitcoin. The Federal Reserve controls the value of the US currency. A user's data and cash are potentially at the mercy of their bank or government under this central authority model. If a user's bank is hacked, important information about the customer is at risk. If the customer's bank fails or he or she lives in a country with an unstable government, the value of their money may be jeopardized. Numerous bankrupt banks were bailed out in 2008, with some of the funds coming from the government. These are the issues that motivated the creation and development of Bitcoin.
Blockchain allows Bitcoin and other cryptocurrencies to run without the need for a central authority by spreading its activities over a network of computers. This not only reduces risk, but also removes numerous administrative and transaction costs. It may also give citizens in countries with weak currencies or financial infrastructures with a more stable currency with more applications and a larger network of people and organizations with whom they may do local and global commerce.
Using bitcoin wallets for savings accounts or as a form of payment is especially important for those who do not have a state identification. Some countries may be war-torn or have governments that lack the necessary infrastructure to provide identities. Citizens in such countries may not have access to savings or brokerage accounts, and hence no way to hold money safely.
Blockchain technology might be used by healthcare professionals to securely store their patients' medical records. When a medical record is created and signed, it may be stored on the blockchain, providing patients with proof and assurance that the record cannot be altered. These sensitive health data might be encoded and maintained on the blockchain using a private key, making them only available to a small group of people and therefore protecting privacy.
If you've ever visited your local Recorder's Office, you'll know that the process of recording property rights is both time-consuming and inefficient. A tangible deed must now be submitted to a government employee at the local recording office, who manually enters it into the county's central database and public index. Property claims must be reconciled with the public index in the case of a property dispute.
This strategy is not only costly and time-consuming; it is also prone to human error, with each inaccuracy making property ownership tracking less efficient. Blockchain has the potential to eliminate the need for scanning documents and tracking down actual files at a local recording office. Property owners may have confidence that their deed is accurate and permanently documented if it is kept and validated on the blockchain.
In war-torn countries or areas with little to no government or financial infrastructure, and certainly no Recorder's Office, establishing title of a property may be almost impossible. If a group of people residing in such a location can utilize blockchain, then transparent and clear time lines of property ownership may be built.
Contracts that are smart
A smart contract is a piece of computer code that may be embedded in the blockchain to help facilitate, verify, or negotiate a contract agreement. Smart contracts are based on a set of conditions that users agree to. When specific conditions are met, the contents of the agreement are instantly implemented.
Assume a potential tenant wishes to lease an apartment via the use of a smart contract. The landlord pledges to supply the tenant with the door code to the unit as soon as the security deposit is paid. Both the tenant and the landlord would send their respective portions of the agreement to the smart contract, which would hold the door code for the security deposit and automatically swap it on the day the lease begins. If the landlord fails to send the door code by the lease expiration date, the smart contract refunds the security deposit. This would eliminate the costs and processes currently involved with hiring a notary, a third-party mediator, or attorneys.
Chains of Supply
Suppliers, like IBM Food Trust, may use blockchain to document the origin of items they have received. This would allow businesses to verify the legality of not just their own products, but also popular labels like "Organic," "Local," and "Fair Trade."
According to Forbes, the food industry is increasingly embracing the use of blockchain to track the path and safety of food from farm to consumer.
As previously said, blockchain might be used to aid a modern voting system. Voting using blockchain has the ability to eliminate election fraud while also increasing voter engagement, as seen during the November 2018 midterm elections in West Virginia. 5 Using blockchain in this way would make it almost impossible to tamper with votes. The blockchain system would also ensure transparency in the electoral process, reducing the number of people needed to run an election and providing authorities with nearly instant results. This would eliminate the need for recounts and any actual risk of election fraud.
Blockchain's Advantages and Disadvantages
Despite its complexity, blockchain's potential as a decentralized method of record keeping is practically limitless. Blockchain technology has a wide range of applications, from improved user privacy and security to lower processing costs and fewer errors. However, there are certain drawbacks.
• Reduced human engagement in verification improves accuracy.
• Cost reductions may be realized by eliminating third-party verification.
• Decentralization makes it more difficult to interfere.
• Transactions are secure, private, and quick.
• Technology that is transparent
• Provides a banking option as well as a way to protect personal information for residents of countries with unstable or underdeveloped governments.
• Mining bitcoin incurs significant technical costs.
• Transactions per second are low.
• Usage in illegal operations, such as on the dark web, in the past
• Regulation differs by jurisdiction and is still uncertain.
• Data storage constraints
The Advantages of Blockchains
The Chain's Accuracy
A network of thousands of computers authorizes transactions on the blockchain network. This almost removes any human involvement in the verification process, resulting in less human error and an accurate record of information. Even if a computer on the network committed a computational error, it would only affect one copy of the blockchain. For that error to spread to the rest of the blockchain, it would have to be produced by at least 51 percent of the network's computers—a near-impossible task for a massive and rapidly developing network like Bitcoin's.
Cuts in Prices
Clients often pay a bank to verify a transaction, a notary to sign a document, or a priest to perform a marriage. Blockchain eliminates the requirement for third-party verification and, with it, the associated costs. For example, when accepting credit card payments, business owners incur a little fee since banks and payment-processing companies must handle the transactions. Bitcoin, on the other hand, lacks a central authority and has low transaction fees.
Blockchain does not store any of its information in a centralized location. Rather, the blockchain is replicated and distributed across a network of computers. Every computer in the network updates its blockchain to reflect the change whenever a new block is uploaded to the blockchain. Blockchain becomes more difficult to manipulate with by disseminating that information over a network rather than storing it in a single central database. If a hacker obtained a copy of the blockchain, only a single copy of the information, rather than the entire network, would be compromised.
Transactions that are Efficient
Transactions performed via a central authority may take several days to settle. If you attempt to deposit a check on a Friday evening, for example, you could not see any money in your account until Monday morning. Whereas financial institutions operate during business hours, which are typically five days per week, blockchain operates 24 hours a day, seven days per week, and 365 days per year. Transactions may be completed in as little as 10 minutes and certified secure in as little as a few hours. This is particularly crucial for cross-border transactions, which often take much longer owing to time zone considerations and the need that all parties accept payment processing.
Transactions Between Individuals
Many blockchain networks operate as public databases, which means that anybody with an Internet connection may see a list of the network's transaction history. Although consumers may see transaction data, they cannot obtain identifying information about the persons who make those transactions. It is a common misconception that blockchain networks like as bitcoin are anonymous, whereas in fact they are just secret.
When a user executes a public transaction, their unique code—referred to previously as a public key—is kept on the blockchain. Their personal information, on the other hand, is not. If a person buys Bitcoin on an exchange that needs identification, their identity is still connected to their blockchain address—but a transaction, even if attached to a person's name, does not divulge any personal information.
Transactions that are secure
Once a transaction is recorded, the blockchain network must authenticate its validity. Thousands of computers on the blockchain rush to confirm that the purchase data are correct. The transaction is added to the blockchain block once it has been confirmed by a computer. Each block on the blockchain contains its own unique hash, as well as the unique hash of the block that came before it. When the information on a block is changed in any way, the hash code for that block changes; nevertheless, the hash code for the block after it does not. Because of this difference, it is very difficult for information on the blockchain to be altered without notice.
The majority of blockchains are completely open-source software. This means that anybody and everyone is free to view its code. This allows auditors to examine the security of cryptocurrencies such as Bitcoin. This also suggests that there is no centralized authority over who controls Bitcoin's code or how it is changed. Because of the system's openness, anybody may suggest changes or additions. Bitcoin may be updated if a majority of network users think that the new version of the code with the upgrade is sound and useful.
Banks for the Unbanked
Perhaps the most important aspect of blockchain and Bitcoin is the ability for everyone, regardless of race, gender, or cultural background, to use it. According to the World Bank, around 1.7 billion people do not have bank accounts or other means of storing their money or wealth. 7 Almost many of these people live in developing countries, where the economy is still in its infancy and is heavily dependent on cash.
These folks often earn a little amount of money that is paid in cash. They must then conceal this real cash in hidden sections of their homes or other places of residence, leaving them vulnerable to robbery or unnecessary violence. Keys to a bitcoin wallet may be kept on a scrap of paper, a cheap mobile phone, or even memorized if necessary. For most people, these options are likely to be more easily disguised than a little sum of money under a mattress.
Blockchains of the future are also looking for methods to store medical information, property rights, and a variety of other legal contracts in addition to serving as a unit of account for wealth storage.
Demerits of Blockchain
The Price of Technology
Although blockchain technology may save clients money on transaction expenses, it is far from free. For example, the PoW method used by the bitcoin network to authenticate transactions necessitates vast amounts of computing power. In the real world, the power generated by the bitcoin network's millions of devices is similar to what Denmark consumes each year.
Despite the expenses of mining bitcoin, consumers continue to push up their power bills in order to confirm blockchain transactions. This is due to the fact that when miners add a block to the bitcoin blockchain, they are compensated with enough bitcoin to make their time and effort worthwhile. Miners will need to be compensated or otherwise encouraged to validate transactions on blockchains that do not employ cryptocurrencies.
Some answers to these problems are beginning to emerge. Bitcoin mining farms, for example, have been set up to use solar energy, excess natural gas from fracking sites, or wind farm power.
Inefficiency in Data and Speed
Bitcoin is an excellent case study for the potential inefficiencies of blockchain. It takes around 10 minutes for Bitcoin's PoW mechanism to add a new block to the network. 9 At this rate, the blockchain network is expected to be able to manage only around seven transactions per second (TPS) (TPS). Although other cryptocurrencies, such as Ethereum, perform better than bitcoin, they are still limited by the blockchain. Visa, for example, has a legacy brand that can manage 24,000 TPS. 10
For years, researchers have been working on solutions to this challenge. There are currently blockchains that claim to be able to process more than 30,000 transactions per second.
The second issue is that each block can only hold so much information. The block size debate has been and continues to be one of the most crucial concerns for blockchain scalability in the future.
While blockchain network secrecy protects users from hackers and ensures privacy, it also enables for illegal transactions and activity on the blockchain network. The Silk Road, an online dark web illicit-drug and money laundering bazaar that operated from February 2011 until October 2013, when it was shut down by the FBI, is likely the most well-known example of blockchain being used for criminal activity. 12
The dark web allows users to purchase and sell illegal items without being tracked by using the Tor Browser and conducting illegal transactions in Bitcoin or other cryptocurrencies. Current US regulations require financial service providers to collect information about their customers when they open an account, to verify each customer's identify, and to confirm that the consumers do not appear on any list of known or suspected terrorist organizations. 13 This strategy has both advantages and disadvantages. It gives everybody access to bank accounts, but it also makes it easier for fraudsters to communicate. Many have asserted that the good applications of cryptocurrency, such as banking for the unbanked, outweigh the negative uses of cryptocurrencies, especially because most illegal activity is still carried out using untraceable cash.
While Bitcoin was first used for such purposes, its transparency and maturity as a financial asset has resulted in criminal activity shifting to other cryptocurrencies such as Monero and Dash.
14 Today, illegal activity represents for a relatively small percentage of all Bitcoin transactions. 15
Many people in the bitcoin sector are concerned about government regulation of cryptocurrencies. While it is becoming more difficult, if not impossible, to terminate something like Bitcoin as its decentralized network spreads, governments may make it unlawful to own cryptocurrencies or engage in their networks.
This anxiety has lessened over time, as large organizations such as PayPal begin to allow the ownership and use of cryptocurrencies on their platform.
What exactly is a Blockchain Platform?
A blockchain platform allows users and developers to create custom apps on top of an existing blockchain infrastructure. Ethereum, for example, has a native cryptocurrency known as ether (ETH) (ETH). 16 However, the Ethereum blockchain also makes it easier to create smart contracts and programmable tokens for use in initial coin offerings (ICOs) and non-fungible tokens (NFTs) (NFTs). All of them are based on the Ethereum architecture and are protected by nodes on the Ethereum network.
How Many Blockchains Exist?
Every day, the number of active blockchains grows at an alarming rate. There are about 10,000 active cryptocurrencies based on blockchain as of 2022, with several hundred more non-cryptocurrency blockchains. 17
What Is the Distinction Between a Private and a Public Blockchain?
A public blockchain, also known as an open or permissionless blockchain, is one in which anybody may freely join the network and create a node. Due to their open nature, these blockchains must be protected using encryption and a consensus process like as proof of work (PoW) (PoW).
In contrast, a private or permissioned blockchain requires each node to be validated before joining. Because nodes are presumed to be trustworthy, security requirements do not need to be as stringent.
Who Created the Blockchain?
Stuart Haber and W. Scott Stornetta, two mathematicians, invented blockchain technology in 1991 with the goal of creating a system in which document time stamps could not be changed.
1 In the late 1990s, cypherpunk Nick Szabo proposed using a blockchain to secure a digital payment system called bit gold (which was never implemented)
What Is the Future of Blockchain?
With various practical applications for the technology now being implemented and investigated, blockchain is finally establishing a name for itself, thanks in no little part to bitcoin and cryptocurrencies. Blockchain, a concept on the lips of every investor in the nation, aspires to make business and government procedures more accurate, efficient, secure, and inexpensive by eliminating intermediaries.
As we reach the third decade of blockchain, the issue is no longer if traditional organizations will adopt the technology—a it's matter of when. Today, we are seeing the growth of NFTs and asset tokenization. The coming decades will be a critical period of growth for blockchain.
What Is the Block Time of a Cryptocurrency?
In the context of cryptocurrencies, block time is the average amount of time it takes to add a new block to a blockchain. More
What Exactly Is Ethereum?
Ethereum is a blockchain-based software platform that includes the ether native token. Ethereum smart contracts allow a variety of distributed applications throughout the cryptocurrency ecosystem. More
What Exactly Is Sharding?
Sharding is a database splitting technique that may help blockchain networks boost scalability, reduce latency, and manage bigger transaction volumes.