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What is a Blockchain?

Oct 9, 2023
20m
Conor Walsh Cristiano Troffei

Blockchain Technology Explained

A blockchain is a shared, unchangeable ledger that’s secured with cryptography. 

Think of blockchain as a database that contains information about transactions and users. While these may be similar to databases used by banks (for example), there are a few key technological features that stand out: 

  • The database isn’t stored on one computer, but across countless computers that form a network.

  • The rules according to which new information is added rely on mathematics. 

  • This database is able to store any kind of digitized data.

  • Blockchains can be used to create digital assets (like cryptocurrencies).

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Read More >>> The difference between centralization and decentralizatio

Main Elements of a Blockchain

The most fundamental elements of the blockchain include: 

Digital Ledger

A digital ledger is an electronic record-keeping system used to securely store and track transactions or data in a structured and organized manner. Digital ledgers can be centralized or decentralized, with blockchain technology representing a prominent example of a decentralized digital ledger.

Blockchain digital ledgers usually consist of three main parts: 

  • Blocks: A collection of verified transactions, timestamps, and cryptographic hashes that are linked together in a chain.

  • Nodes: Computers connected to the blockchain network that maintain a copy of the blockchain and validate transactions. They use complex algorithms to confirm that all transactions are valid and follow the rules of the blockchain.

  • Consensus protocols: Rules and procedures used to validate transactions and securely add them to the blockchain’s ledger. Examples include Proof of Work (PoW) and Proof of Stake (PoS).

Encryption Technology

Encryption is a method of securing digital information by converting it into a coded format, which can only be accessed and deciphered by authorized parties possessing the appropriate decryption keys. This process helps maintain the confidentiality, integrity, and privacy of data during storage and transmission, safeguarding it from unauthorized access or tampering.

Encryption is used in blockchains to create unique digital signatures, generate cryptographic hashes for blocks, and ensure secure communication between nodes. Robust encryption makes it difficult for unauthorized parties to tamper with or access the data stored on the blockchain.

Most encryption technology is made up of: 

  • Cryptography: Mathematical algorithms used to secure and verify transactions, ensuring that they cannot be tampered with or reversed.

  • Cryptographic hash function: A mathematical algorithm that links blocks together by generating an encrypted output and input of data. 

  • Public and Private Keys: A pair of keys used for secure communication and authentication. The public key is used to receive transactions and the private key is used to sign transactions.

Tokens

Tokens represent digital assets or units of value that are issued and managed on a blockchain. Tokens have various functions and purposes: serving as a medium of exchange, a store of value, providing access to certain services or applications within the blockchain, and much more. 

Network Participants 

In a blockchain ecosystem, community members and network participants play crucial roles in maintaining and expanding the network. 

These roles contribute to the overall growth, security, and functionality of the blockchain network. Productive collaboration between different participants is essential for the success, resilience, and growth of the blockchain ecosystem.

Some of the key roles include:

  • Miners/Validators: Responsible for verifying transactions and creating new blocks. They participate in the consensus process by solving complex mathematical problems or staking their cryptocurrency to secure the network. They’re rewarded with new cryptocurrency and transaction fees for their work.

  • Node Operators: Ensure the decentralization, security, and integrity of the network by relaying and validating transactions and blocks.

  • Developers: Contribute to the blockchain's codebase, maintain its underlying software, and work on upgrades, bug fixes, and new features. They play a vital role in the evolution of the blockchain and its applications.

  • Traders and Investors: Buy, sell, and hold various cryptocurrencies, contributing to the liquidity, price discovery, and overall market activity for digital assets associated with the blockchain (i.e., cryptocurrencies, NFTs, etc.)

  • Users: Individuals and organizations that utilize the blockchain for various purposes, such as transactions, using decentralized applications (DApps), or leveraging blockchain-based services. Users help drive adoption and showcase the practical use cases of blockchain technology.

  • Governance Participants: In some blockchain networks, particularly those with decentralized governance models, community members can participate in decision-making processes. They can propose, discuss, and vote on changes or upgrades to the network, shaping its future development.

The Blockchain Process

Every blockchain technology can be broken into five basic steps. 

  1. Transactions: Any action between two parties on the blockchain – for example, sending cryptocurrency from one person to another or recording a digital contract. Each transaction is bundled with others into a "block."

  2. Verification: Before a transaction can be added to the blockchain, the network participants –  using "nodes" – must verify each one using complex algorithms to confirm that the transactions are valid and follow the rules of the blockchain.

  3. Cryptographic hashing: Once the transactions are verified, they are combined into a block. Each block contains a unique "hash" – a string of characters created using a cryptographic algorithm. The hash is based on the transactions in the block and a reference to the hash from a previous block. The references create the "chain" in the blockchain, ensuring that the blocks are in the correct order and can't be tampered with.

  4. Consensus: To add a new block to the blockchain, the nodes must reach consensus on its validity. In some blockchains, this is achieved through a process called "Proof of Work" (e.g., Bitcoin) or "Proof of Stake" (e.g., Ethereum 2.0). These processes require nodes to solve complex mathematical puzzles or hold a certain amount of cryptocurrency as a stake. The first node to successfully complete this process adds the block to the chain and is rewarded with cryptocurrency.

  5. Added to the blockchain: Once consensus is reached, the new block is added to the blockchain, and its transactions become a permanent part of the public record. The updated blockchain is then propagated to all nodes in the network, and the process starts again with new transactions.

How Secure Is Blockchain Technology?

Blockchain technology is considered highly secure due to its decentralized nature, cryptographic techniques, and consensus mechanisms. Decentralization also ensures no single point of failure in a network, as multiple nodes in the network maintain identical copies of the blockchain’s digital ledger. So, if one node fails or is hacked, it can be isolated, and the network will not fail as a result. 

Cryptographic techniques, such as hashing and digital signatures, help protect data integrity and verify authenticity. 

Consensus mechanisms, like Proof of Work or Proof of Stake, add a layer of security by requiring network participants to agree on the validity of new blocks before adding them to the chain. 

However, it is essential to remember that no system is entirely immune to attacks, and blockchain technology is only as secure as its design. Human error is still possible, and the overall security of a blockchain relies heavily on its original design, implementation, network size, and actions of network participants.

How Many Types of Blockchain Networks Are There?

There are mainly four types of blockchain: 

1. Public Blockchains

These blockchains are permissionless and can be accessed by anyone. 

In a permissionless blockchain, anyone can participate in the network without requiring authorization from a central authority. Participants can freely join or leave the network, create transactions, and contribute to the network's security through mining or validation, promoting transparency, censorship resistance, and open access.

Ethereum is a public blockchain that can be used to build decentralized applications (dApps), which can have different use cases. Some examples of dApps and protocols that use Ethereum: 

  • Uniswap - a decentralized crypto exchange 

  • Aave - mainly used as a lending protocol 

  • Gitcoin Grants - a crowdfunding platform 

  • Etherisc - a decentralized insurance platform 

2. Private Blockchains 

In a private blockchain, also known as a permissioned blockchain, participation is restricted to specific, pre-approved entities. Access to the network and the ability to validate transactions,or view the data stored on the blockchain are controlled by a central authority. 

Private blockchains allow for increased privacy, control, and efficiency compared to public blockchains. 

Corda is an example of private blockchain. Its technology was used to create ClaimShare, a permissioned system used to detect insurance fraud. 

3. Hybrid Blockchains

Hybrid blockchains use both permissioned and permissionless elements and can be both decentralized and centralized. For example, they can centralize the process of collecting data, keeping the process private, and then release that data publicly, allowing anyone to view and interact with it. 

Hybrid blockchains include Quorum Consensys, which offers business solutions that can benefit from Ethereum and tailor-made permissioned solutions. 

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4. Consortium Blockchains

A consortium blockchain, sometimes referred to as a federated blockchain, is a permissioned blockchain that combines elements of public and private blockchains. The blockchain is governed by a group of pre-selected organizations that work together to establish consensus, validate transactions, and maintain the blockchain's integrity, allowing for a balance between transparency, trust, and efficiency in the network.

Hyperledger Besu is a protocol that helps organizations create consortium blockchains. Hyperledger Besu was used to create LACChain, a consortium blockchain sponsored by the IDB (Inter-American Development Bank) that supports projects focused on economic inclusion and sustainability in Latin America. 

Advantages of Blockchains

Blockchains and their related technologies have already presented numerous benefits across many industries and use cases. 

1. Increased Security: Blockchain technology is highly secure and almost impossible to breach due to its distributed ledger system (which stores data on multiple computers simultaneously). This data is encrypted and nearly impossible to alter or destroy. 

2. Transparency: All transactions on a blockchain are transparent and viewable to users within the network, allowing for greater trust between participants. 

3. Tamper-proof records: Once data has been added to a blockchain, it can’t be modified or meddled with without altering the entire blockchain and alerting every participant. As such, they’re ideal for important record-keeping.

4. Lower costs: Blockchain transactions are processed and validated without middlemen or third parties, Theoretically, more limited infrastructure should result in lower fees and faster processing times (compared to traditional financial systems). 

5. Faster transactions: Blockchain transactions’ decentralized architecture and automated nature mean financial transactions can also be completed much faster than with traditional financial systems. 

6. Automation: Blockchain technologies like smart contracts allow for certain transactions and agreements to be completed automatically without the need for manual intervention from lawyers, banks, or similar entities.

7. Improved accuracy: Automation of processes and record-keeping (without human input) can provide much greater accuracy and quicker settlement rates in financial transactions when compared to manual processes. 

8. Decentralization: By eliminating the need for a centralized authority such as a bank or government agency, blockchains create more efficient systems that function independently and without any single point of failure or control by a single entity. 

9. Financial inclusion: Blockchains potentially allow people excluded from traditional finance (due to socio-economic or geographic constraints) easier access to financial services, ownership of digital assets, investments, and much more by making financial instruments completely digital. 

10. Improved Traceability & Supply Chain Management: Transactions on a blockchain can be traced back to their source, thereby providing a powerful means of tracking products and assets through their entire life cycle and global supply chain. This could significantly reduce issues like human rights abuses and environmental damage from the products and commodities we use. 

Disadvantages of Blockchains

While blockchains present huge potential,like any early technology, they also have numerous issues that will need to be resolved before true mainstream adoption can be achieved. 

1. Energy consumption: Blockchain technology requires a lot of computing power, potentially leading to high energy consumption.

2. Costly transactions: Blockchains usually charge some kind of fee whenever a transaction takes place, which can become expensive over time due to their high frequency of use. 

3. Limited scalability: Blockchains are subject to limited bandwidth capacity, meaning they cannot handle large volumes of transactions quickly. This can cause delays and backlogs.

4. Susceptible to attack: Because of their distributed nature, blockchains are susceptible to malicious attacks from hackers and scammers

5. Immutability: While it can be a major advantage, immutability also creates certain disadvantages when it comes to flexibility and updating data on the chain. 

6. Lack of regulation: Cryptocurrencies lack uniform regulation across jurisdictions, making it difficult for companies and investors to effectively manage risk in these markets. 

7. Difficulty in changing consensus algorithms: Since consensus algorithms are embedded within the codebase, they are difficult to update or modify (due to the decentralized nature of blockchains). 

8. Lack of standardized infrastructure: There is currently no standardized infrastructure for globally deploying and managing blockchains at scale across different industries or sectors. Businesses looking to utilize this technology for commercial purposes at scale internationally or across industry verticals/markets/territories etc.

Incompatible technologies may halt progress (or at least significantly slow things down).

9. Lack of trust between participants: Due to anonymity, users may not trust each other enough to share important information on a blockchain platform.

10. Difficulty getting started: Many people find it hard to understand how blockchains work. For example, setting up a node is too complicated for most users due to its technical complexity. 

11. Subjectivity and centralization risks: Decentralization means that power lies in the hands of all participants which leads to subjective decisions. Additionally, there is a risk of centralization since some projects tend to be more popular than others leading to concentration of power by those few privileged networks. 

12. Lack of privacy: Blockchain systems offer limited privacy. Since everyone has access to all transactions, this could lead to personal information being exposed. 

13. Fragmented user base: Most blockchains have a fragmented user base scattered across various geographical locations. This means it’s harder for developers and companies trying to develop applications on top these networks

11 Ways People Use Blockchain Technology

Cryptocurrencies are not the only use case of blockchain technology. Especially when it comes to institutions and business owners, a blockchain can also be an efficient tool to manage data, create new tokens and offer financial services. 

1. Supply chains: Blockchain technology can be used to track the origin of goods from suppliers throughout the supply chain, verify product authenticity, monitor quality assurance processes, and securely store supplier information.

2. Real estate: Used for financial transactions like mortgages, and as a method to turn illiquid assets into liquid ones (thanks to tokenization). 

3. Identity verification: IBM uses blockchain for identity verification, providing other institutions with a database where users’ credentials can be checked.

4. Fraud prevention: Blockchain technology can be used to prevent fraud, especially in sectors like telecommunications and insurance. 

5. Healthcare: Securely store patient records and medical data, provide a secure system for sharing information between healthcare providers, and allow patients to control their own health data through smart contracts. (Source

6. Environment: Powerledger, an Australian company, facilitates the tracking and trading of renewable energy using a blockchain. 

*7. NFTs: unique digital assets that can be used to prove ownership and authenticity of digital art, collectibles, virtual real estate, and other digital goods. They also enable creators to earn royalties from secondary sales, fostering a new market for digital assets and creative works.

Read More >>> What is an NFT? 

8. Payment Processing: Blockchain technology is being used to facilitate digital payments and transactions, allowing users to transfer money quickly and securely with minimal fees, especially compared to traditional methods such as credit cards or bank transfers.

9. Financial Services: Blockchain technology can be used in financial services to securely store customer data, reduce the cost of cross-border transactions, and streamline payments.

10. Data Management & Storage: Blockchain technology can be used to securely store and distribute digital data. Enhanced security and privacy features help protect user data from malicious actors or hackers who might seek to access it without permission or authorization. 

11. Voting Systems: Blockchain technology can be used to create secure online voting systems that are both transparent and immutable. Users can exercise their right to vote with confidence that their votes will remain anonymous and uncorrupted by outside interference or the manipulation of the election process.

When Was Blockchain First Used?

Launched in 2009, Bitcoin (BTC USD) was the first project to create an alternative financial system based on blockchain that:

  • Could be used by anyone

  • Had no geographical boundaries

  • Eliminated the need for trust in third parties and institutions 

However, from Bitcoin’s whitepaper, it’s evident that Satoshi Nakamoto (the pseudonym linked to the creator of Bitcoin) was inspired by earlier versions of blockchain technology. 

Early Iterations of Blockchain

1976: Public-Key Cryptography

  • Whitfield Diffie and Martin Hellman introduce public-key cryptography in their paper, "New Directions in Cryptography." This concept becomes crucial for secure communication and transactions in digital systems, including blockchains.

1991: Cryptographic Timestamping

  • Stuart Haber and W. Scott Stornetta develop the idea of cryptographic timestamping, a method to securely timestamp digital documents, making them tamper-proof. This is considered the first step toward the development of blockchain technology. 

1992: Merkle Trees

  • Ralph Merkle invents Merkle Trees, a data structure that allows efficient verification of large data sets, like those found in blockchain systems.

1993: The cypherpunks Manifesto 

  • A group of cryptographers known as Cypherpunks published a manifesto assessing the need for privacy due to digital transactions threatening people’s sensitive data. It seems possible that “Satoshi Nakamoto” was a part of this group – their email list was the first place that Bitcoin's whitepaper was shared.

1997: Hashcash 

  • Adam Back developed Hashcash, an algorithm used to avoid spam emails through proof-of-work. 

1998: B-Money and Bit Gold

  • Wei Dai proposes B-Money, an anonymous, distributed electronic cash system, while Nick Szabo introduces the concept of Bit Gold, a decentralized digital currency. Both ideas contribute significantly to the development of blockchain technology and cryptocurrencies.

2004: Triple-Entry Accounting

  • Ian Grigg introduces the concept of triple-entry accounting, a system that records transactions in a secure, verifiable, and distributed manner, laying the groundwork for blockchain-based systems.

2008: Bitcoin Whitepaper

  • Satoshi Nakamoto, an anonymous individual or group, publishes the Bitcoin whitepaper, titled "Bitcoin: A Peer-to-Peer Electronic Cash System," introducing the first working implementation of a blockchain.

2009: Bitcoin Network Launch

  • Satoshi Nakamoto launches the Bitcoin network, and the first block, known as the "genesis block," is mined. This marks the beginning of the modern blockchain era.

How Many Blockchain Companies Are There?

Between 2018 and 2022 alone, almost 3800 new blockchain companies were founded in the United States alone. This number undoubtedly increases when considering international companies.

Note: When we talk about blockchain companies, we’re referring to crypto exchanges and companies that adopted blockchain technology 

Centralized Exchanges

Centralized exchanges have a central authority that manages the platform. They allow users to create unique wallets and carry out crypto transactions. 

The most popular centralized exchanges are:

Decentralized Exchanges

Decentralized exchanges provide interfaces that can be used to directly communicate with the blockchains they support. 

Currently the most popular decentralized exchanges are: 

  • Uniswap (built on Ethereum)

  • PancakeSwap (built on BNB smart chain)

Companies that Adopted Blockchain

Some of the biggest global companies in the world have experimented with, or fully adopted blockchain into their operations. Notable examples include: 

Accenture has adopted blockchain technology to streamline secure data sharing, improve visibility and transparency in its operations, and offer blockchain-based enterprise solutions to partners.

Amazon offers two blockchain solutions to AWS customers: 

  • Amazon Managed Blockchain, a fully managed service that makes it easier to create and manage blockchain networks

  • Amazon Quantum Ledger Database (QLDB) which provides a transparent, immutable, and cryptographically verifiable transaction log. 

British Airways has invested in blockchain-based facial recognition software for passengers on their flights for faster boarding and airport security.

IBM has adopted blockchain technology through its blockchain platform, the IBM Blockchain Platform, which allows for the deployment of decentralized applications and smart contracts.

J.P Morgan has adopted a permissioned blockchain platform, Quorum, that is designed for enterprise use cases such as payments and trade finance.

Microsoft has adopted blockchain technology through its Azure Blockchain Service which allows users to manage consortium blockchain networks with built-in governance. 

Oracle has adopted blockchain technology to provide consumers with end-to-end security for their transactions and data management. Oracle's blockchain service allows customers to develop their own distributed ledger systems and applications.

Walmart Canada is using blockchain to manage its supply chain, by connecting data from over 70 supply partners, paying invoices, and much more. 



How Does Blockchain Compare to Banking? 

Since blockchain is mainly used for financial transactions, it’s common to compare this relatively new technology and the traditional financial system (mainly controlled by banks). However, there are notable differences: 

  • Blockchains allow for the creation of more secure accounts. Their underlying technology doesn’t need to rely on third parties and has no single point of failure. 

  • Distribution allows blockchains to work 24/7. 

  • People can use pseudonyms to stay anonymous when they make transactions on a blockchain. 

  • Blockchain fees are usually lower. In any case, you’re free to choose the network you find more convenient.

The Future of Blockchain Technology

Despite its many use cases and structural advantages, blockchain technology is still in its infancy – and most use cases may still be untapped. For now, developers and institutions are contributing to new solutions based on this distributed technology. 

Enterprise solutions (Healthcare, Banking, Real estate, Retail, Entertainment)

NFTs

International Commerce and Trade

Payment Processing

Supply chain management

Voting and Governance

Environmental Considerations

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