What is Blockchain Article
Unless you have been living under a rock or somewhere in the North Pole for the past 11 years, you might have heard the word “Blockchain” being mentioned on one or more occasions. It seems to be the buzzword right after Bitcoin. However, it seems that many people do not quite understand what this relatively new technology is.
In this article, we are going to look at what Blockchain is, its defining principles, and how it impacts different industries.
So what is Blockchain Technology?
Blockchain technology is undeniably an ingenious invention different from what tech guys are familiar with. This technology was launched by an individual or individuals by the pseudonym, Satoshi Nakamoto, to serve as a public transaction ledger for the cryptocurrency Bitcoin. But since then, developers have evolved it into something great that spans beyond cryptocurrencies and the financial sector into almost all other industries.
Blockchain is a decentralized ledger (that is, a computation and information-sharing network) that enables multiple authoritative nodes that do not trust each other to corporate or coordinate in a rational decision-making process.
Blockchain works with blocks and chains; A block is a collection of transactions or data that is appended to the Blockchain in a chronological order to form a chain of blocks linked together by cryptographic principles (that is, the chain).
So what is so special about Blockchain Technology, and why has it been termed on many occasions as an industry-disruptive technology? The Blockchain network has inherent characteristics of being; decentralized, transparent, and an immutable consensus network. These are the three main properties that set it apart from traditional technologies.
Decentralized
Decentralization can be termed as the process of distributing power away from a single entity to all involved parties.
Before the conception of Bitcoin, most of us were used to centralized systems in which we had a single highest authority in an organization, network, or economy. For example, governments, banks, and monopoly organizations operate like central authorities. However, although central authorities take much of the responsibility from parties and individuals, there are crucial vulnerabilities of centralization. In the case where the central authority fails, the organizations are set to follow suit.
Blockchain, on the other hand, was designed to be decentralized. It eliminates any central authority or control and distributes it across the involved nodes (i.e., a peer-to-peer network). The nodes have access to all the information and transactions on the network and store data in each node to ensure consistency, making Blockchain resilient, efficient, and democratic. What’s more, nodes on the Blockchain platform transact and interact directly without the need of any central authority. Don't use plagiarised sources.Get your custom essay just from $11/page
Transparency and Privacy
One of the significant benefits of Blockchain is that it is transparent. However, over the years, there have been several debates as to whether Blockchain provides transparency or privacy. Well, depending on the use case, Blockchain provides both.
In the financial sector (or any public Blockchain in that matter), a person’s identity is usually concealed by a complex cryptographic address that appears like “1MF1bhsFLkBzzz9vpFYEmvwT2TbyCt7NZJ”. So if you are looking at an individual’s transaction history, you will only see his public address and not his names, the real person’s identity remains secure, but his transactions can be traced.
Blockchain has also spanned into other industries where a selected group of nodes interact with each other in what is termed as a Private Blockchain. In this type of Blockchain, the identity of the nodes may be known or concealed. However, information and transactions are stored on the Blockchain, where every node can access it and trace it.
Immutable Consensus Network
In the context of Blockchain, immutability means that data can only be added to the Blockchain ledger with time and in sequential order. What this implies is that once data is appended into the Blockchain, it is almost impossible to alter the data. Blockchain gets this property from cryptographic hash functions. That is, hashing means taking an input string of any length and giving out an output of a fixed length, known as a message digest. It is crucial to note that this transaction is one way and any change on the input independent of how small changes the message digest thoroughly. This property becomes very useful when dealing with large amounts of data. Instead of storing the massive data, the message is just hashed and appended as a single hash value on the Blockchain. In creating a chain of blocks, the hash value of a previous block is also hashed with the current block creating a hash pointer that points/links to the previous block. This ensures the Blockchain in linked and data cannot be altered throughout the chain.
Additionally, for a transaction to be appended on the Blockchain, all involved parties have to go through strict criteria defined by Blockchain protocols to validate the block of transactions. This process is termed as reaching a consensus, and it gives the power of decentralization. It is only after a consensus has been reached that the block is appended to the Blockchain.
How Does Blockchain Work?
As stated earlier, the Blockchain network consists of various nodes interacting and transacting with each other. Each transaction on the Blockchain is initiated by a node by first creating the transaction and digitally it with a private key. Note that transactions could mean various actions on the Blockchain, such as transfer of value, data, or even financial transactions. In any transaction, the data structure consists of the data being transacted, source and destination addresses, private and public keys, and other validation information. Once the transaction has been initiated and signed, it is then propagated into the network where peer nodes validate it based on the present criteria.
In most cases, for the transaction to be considered valid, a more significant section of the network should deem it legal and valid. Once it is validated, the transaction is included in a block. More transactions are added into the Blockchain until it reaches its limit size, which is currently 1MB. It crucial to note that the transactions are also hashed following the Merkle tree structure for easy verification. After all the transactions on a block are hashed, a new hash value is generated. The value is propagated onto the network, and at this point, it is confirmed and validated. The current hash value is hashed with the previous block and cryptographically appended onto the Blockchain, and the transaction is considered final. The link between the two blocks is known as a hash pointer.
The next block is then created by new transactions that follow a similar process and are then appended onto the Blockchain.
The Different Types of Blockchain
There are three primary types of Blockchain;
- Public Blockchain
- Private Blockchain
- Hybrid Blockchain
Public Blockchain
Public Blockchains are open-source platforms with no central authority that allow anyone to participate as users, developers, community members, or miners. All the participating nodes can read, write into, send, and verify transactions on the network. A consensus in the public Blockchain is reached at with the proof of work algorithm, that is, the node with the highest computing power verifies the transaction and is incentivized. All the transactions on this type of Blockchain are fully transparent, and anyone can examine, track, and trace any transaction. Transactions on a public Blockchain are verified by miners, who put in computing power to verify the transaction. The miner with the highest computing power verifies the transaction and is rewarded with a token. In the public Blockchain, the identity of all involved parties is kept private using addresses.
Such an example is the Bitcoin Blockchain.
Private Blockchain
Private Blockchain is a permissioned network that places restrictions on who is allowed to participate in the network and what transactions. On this type of Blockchain, participants require consent to join the network; the transactions are private and are only participants who have been given permission can write into the Blockchain. Additionally, Private Blockchains may not offer tokens as a single entity on the network governs the network.
The Private Blockchain is the most suitable for business and industrial applications as it provides control over transactions in the network and ensures only known and valid parties participate in transactions. Such an example is the Hyperledger Fabric developed by IBM and Linux.
Consortium Blockchain
Consortium Blockchains are considered to be a separate designation from the Private Blockchains. The main distinction is that in Consortium Blockchain, the network is governed by a few selected nodes rather than a single entity. Some of the nodes in the network control the consensus process while other nodes participate in transactions. This type of Blockchain enhances efficiency both on an individual and a collective level. Participants on this Blockchain can include any organization, from governments, banks, companies, individuals to supply chains.
What New Applications Does Blockchain Bring to Us
Blockchain has been termed as the new internet by some as it provides the internet with the ability to create value and authenticity in the digital age. Below are some new business applications that result from Blockchain technology
A Sharing Economy
In today’s economy, many companies are enjoying a shared economy. Companies like Uber can provide people with services around the globe independent of their geographic location. However, such economies have the problem of a central authority.
Blockchain enables a peer-to-peer economy where involved parties interact directly without having to go through a central authority. It offers a truly decentralized sharing economy.
OpenBazaar has taken the initiative and created a peer-to-peer eBay. On this platform, all the principles of Blockchain are utilized to enhance transparency, security, and scalability.
File and Data Storage
Decentralizing the storage of data in a network brings in clear benefits. Currently, the internet allows us to access and store large amounts of data on the cloud. However, this data can be easily hacked or lost. Blockchain files are distributed across the network, eliminating a single point of failure. If your data gets lost or tampered with, other nodes notify you, and you can access the data from other peers on the network.
The InterPlanetary File System (IPFS) provides such a platform. Instead of a centralized client-server, files are stored on participating nodes in the network. This also speeds up the transfer of files as nodes can access the files from the closest node.
Anti-Money Laundering (AML) and Know Your Custome (KYC)
AML and KYC are not only some of the most labor-intensive and crucial, but they are also some of the most expensive processes in today’s financial sector. Blockchain allows for the accumulation of data from multiple authoritative service providers into a single immutable, cryptographically secured, and validated the database. Hence financial institutions can easily access this data.
A startup like Polycoin has taken this initiative and implemented AML/KYC Blockchain solutions. Polycom ensures that all their users’ data is accurate, legal, and up to date and also forwards suspicious transactions to compliance officers.
Blockchain is a revolutionary technology that is set to bring anyone to the highest degree of accountability. No more double-spending, human-induced errors, or exchange was done without the consent of involved parties. Above everything else, Blockchain offers a decentralized platform where all participating parties have a say on every transaction.