What is Blockchain?
This is such a complicated technology, why call it “Blockchain? “Blockchain is literally a chain of blocks at its most basic level, but not in the traditional sense of those words. In this sense, when we say “block” and “chain,” we ‘re clearly thinking about digital information (the “block”) that’s stored in a public database (the “chain”).
“Blocks” are composed of digital pieces of information on the Blockchain. They specifically have three components:
- Blocks store data about your most recent Amazon purchase, such as the date, time and dollar amount of transactions. Note that this example from the Amazons is for illustrative online purchases; Amazon’s retail does not function according to the blockchain principle.
- Blocks store the data about who takes part in transactions. A block for your Amazon splurge purchase will have your name registered along with Amazon.com, Inc. (AMZN). Rather than using your actual name, your transaction is documented using a unique “digital signature,” sort of like a username, without any identifying information.
- Blocks store data that differentiate between them and other blocks. Like you and I have names for the purpose of differentiating us from each other, each unit stores a unique code called “hash,” which allows us to discover it apart from any other block. Cryptographic codes generated with special algorithms are hashes. Let’s assume you had your Amazon splurge purchase, but while it’s in transit, you realize that you can’t just refuse and need a second one. While the information on your new transaction will almost be the same as your previous purchase, we can still differentiate the blocks because of their specific codes.
Although the block in the example above is used to store one Amazon purchase, the truth is somewhat different. Currently, up to 1 MB of data can be contained in a single block on the Bitcoin blockchain. This means that a single block can accommodate a few thousand transactions on one roof, depending on how large the transactions are.
What Is the Blockchain?
How Blockchain Works
A block is added to a blockchain when new data is processed. Blockchain is made up of several blocks, as its name suggests. However, four things must happen to add a block to the Blockchain. These are the following:
- There must be a transaction. Let’s proceed with your Amazon impulsive buying as an example. You go against your best judgment and make a purchase after you swiftly click through the multiple checkouts prompt. As we previously discussed, in many situations a block will theoretically bring thousands of transactions together, meaning that your Amazon purchase will also be included in the block along with transaction details from other users.
- We need to verify that transaction. Your transaction has to be verified after you make that purchase. There is a person responsible for screening new information entries with other public records such as Wikipedia, Securities Exchange Commission, or your local library. Yet with Blockchain, the job is entrusted to a network of computers. Once you make your order from Amazon, the network of computers responds to verify if your transaction actually occurred the way you said it did. That is, they confirm the payment information including the date, dollar sum and participants of the transaction. (More in a second on how this happens.)
- You have to store that transaction in a block. After verifying your transaction as valid, it gets the green light. The dollar sum of the purchase, your digital signature and the digital signature of Amazon are all recorded and stored in a block. Hundreds, or thousands, of others like it, would possibly enter the transaction there.
- There must be a hash to that block. Not apart from an angel obtaining his wings, after all the transactions of a block have been checked, a special, identifying code called a hash must be given. The block is also provided the hash applied to the Blockchain by the most recent block. The block can be stored in the Blockchain once hashed.
When the new block is added to the Blockchain, it becomes available to everyone to view, including you. If you look at the Blockchain of Bitcoin, you can see that you have access to transaction data, along with details about when (“Time”), where (“Height”), and who (“Relayed By”) added the block to the Blockchain.
Is Blockchain Private?
Anyone can access the blockchain contents, but users can also choose to link their computers to the blockchain network as nodes. This way, your computer will get a copy of the Blockchain, which will automatically be updated when you add a new block, a kind of Facebook News Feed that will inform live updates or when a new status is published.
Every desktop in the blockchain network has a blockchain copy of its own, meaning there are thousands of copies of the same Blockchain, or in the case of Bitcoin, millions. Even though every copy of the Blockchain is remarkably similar, spreading that data throughout a network of computers makes it harder to manipulate the information. There is no single, definitive record of events that can be manipulated with Blockchain. Rather, any copy of the Blockchain on the network will need to be exploited by a hacker. That is why Blockchain is called a “distributed” ledger.
However, in Bitcoin blockchain environment, you will discover that you don’t have access to identifying details about the transaction users. Although blockchain transactions are not fully anonymous, personal user data is restricted to their digital signature or username.
It poses a crucial question: Why do you trust Blockchain or the network of computers to manage it if you can not know who adds blocks to the Blockchain?
Is Blockchain Secure?
Blockchain technology takes care of security and confidence problems in many respects. Initially, new blocks are always placed chronologically and linearly. This is, they are always added to the Blockchain’s “end.” If you look at the Blockchain of Bitcoin, you’ll see that every block has a position on the chain, called a “height.” As of January 2020, the height of the block had topped 615,400.
After connecting a block to the end of the Blockchain, it is quite hard to go back and change the block’s contents. That’s because every other block has its own hash, together with the hash of the block before it. A math function creates hash codes which transforms digital information into a string of numbers and letters. If the data is changed in some way, then the hash code also changes.
That’s why safety is critical here. Let’s say that a hacker tries to modify your Amazon transaction so that you really have to pay twice for your order. As soon as they edit the transaction’s dollar sum the hash of the block will change. The following block in the chain will still bear the old hash, and that block would need to be updated by the hacker to cover its tracks. Doing so will, therefore, change the hash of that block. And the next one, and so forth.
A hacker then needs to change every single block after the Blockchain, in order to change a single block. It would take a huge and unlikely amount of computing power to recalculate all of those hashes. It means that it’s impossible to edit once a block is added to the Blockchain and can’t be deleted.
Blockchain networks made analysis/tests for computers that would like to join and insert blocks to the chain to address the trust issue. The evaluations, called “consensus models,” allow users to “prove” themselves before participating in a network of blockchains. One of the most common examples that Bitcoin employs is called “proof of work.”
Computers must “prove” in the proof of work system that they have done “work” by solving a complicated problem of computational math. If one of these problems is solved by a computer, they become qualified to add a block to the Blockchain. But trying to add blocks to the Blockchain, what the world of cryptocurrency calls “mining,” is not an easy process. In fact, in January 2020, the odds of solving one of mathematical problems in Bitcoin network were about one in 15.5 trillion. Computers have to run programs that cost them significant amounts of power and energy to solve complex mathematical problems at those odds (read: money).
Proof of work does not really make hackers’ attacks impossible, but it makes them a little ineffective. If a hacker were to organize an assault on the Blockchain, they would need to manipulate more than 50 percent of all the blockchain processing resources in order to be able to overpower the other network participants. Given the Bitcoin blockchain ‘s tremendous size, a so-called 51 percent threat is almost definitely not worth the effort and more than highly improbable. (For more on this, read below)
Blockchain vs. Bitcoin
The purpose of Blockchain is to enable the recording and dissemination of digital information, but not editing. The idea can be hard to wrap our minds around without seeing the technology in practice, so let’s see how the blockchain technology’s earliest application actually operates.
Stuart Haber and W. Scott Stornetta first outlined Blockchain technology in 1991, two researchers who wish to create a system where in document timestamps could not be manipulated. But it wasn’t until nearly two decades later that Blockchain had its first real-world implementation, with Bitcoin launched in January 2009.
The Blockchain builds on the Bitcoin protocol. Satoshi Nakamoto – the Bitcoin’s pseudonymous creator, referred to it in a research paper introducing the digital currency as “a new electronic cash system that is fully peer-to-peer, with no trusted third party.”
Here’s how it functions.
There are potentially several million people worldwide who own at least a portion of a bitcoin. Let’s say one of those millions want their bitcoin spent on food. That is where the Blockchain is coming in.
When it comes to printed money, a central authority, usually a bank or government, regulates and verifies the use of printed currency — but no-one controls Bitcoin. Conversely, a network of computers verifies transactions done in bitcoin. That is what is implied by the ‘decentralized’ Bitcoin network and Blockchain.
When one person uses bitcoin to pay another for products, computers on the Bitcoin network rush to confirm the transaction. To do so, individuals start a system on their machines and attempt to solve a complex mathematical problem, called a “hash.” If a computer solves the problem by “hashing” a block, its algorithmic work would also have checked the transactions of the block. As we have mentioned above, the successful transaction is documented publicly and recorded as a block on the Blockchain at which point it is unchangeable. In Bitcoin ‘s case, like most other blockchains, computers that successfully validate blocks are compensated with cryptocurrency for their work.
While transactions are registered publicly on the Blockchain, user information isn’t really, or at least not in total. Participants must run a program “wallet” to conduct transactions on the Bitcoin network. Each wallet is composed of two separate and special cryptographic keys: a public key and a private key. The public key is the place of depositing and canceling transactions. This is also the key that appears as the digital signature of the user on the blockchain ledger. This is usually called “mining.”
Even if a user receives payment on his public key in bitcoins, they can not withdraw it with his private partner. A public key for a user is a simplified version of its private key generated by a complex mathematical algorithm. However, it is virtually impossible to reverse the cycle and to produce a private key from a public key because of the complexities of this equation. That is why blockchain technology is also classified as private.
Public and Private Key Basics
Here’s the edition of ELI5 or “Explain It Like I am 5.” Basic Example is you think of a public key as a locker for the school, and the private key as a locker code. Teachers, students, and even your crush can put letters and notes in your locker opening. However, the only person capable of retrieving the mailbox contents is the one who has the unique key. However, while the combinations of the school lockers are stored in the main office, there is no central database to monitor the private keys of a blockchain network. When a user misplaces his private key, they lose access to their bitcoin wallet, like this man who, in December 2017, made national headlines.
A Single Public Chain
The Bitcoin network not just shares and maintains the Blockchain through a public network, but also accepts that it is. When users enter the network, they obtain a copy of the Blockchain from their connected computer that is updated when a new block of transactions is added. But what if one user’s copy of the Blockchain manipulated to be different from any other copy of the Blockchain by human error or the efforts of a hacker?
In the existence of several different versions of the Blockchain the consensus protocol takes over the longest available chain. The protocol prohibited numerous blockchains by means of a mechanism called a “consensus.” More users on a blockchain allow for faster adding of blocks at the end of the chain. With this logic, the record blockchain is always the one most users believe in. The consensus protocol is one of the key strengths of blockchain technology but also one of its main drawbacks.
Theoretically, Hacker-Proof
Theoretically, in what is referred to as a 51 percent attack, a hacker could perhaps take advantage of the majority rule. This is how it would occur. Let’s claim the Bitcoin network comprises five million machines, a gross underestimate for sure but a simple enough amount to split. A hacker would have to check at least 2.5 million and one of these computers in order to achieve a majority in the network. This could interfere with the logging of new transactions by an attacker or group of attackers. They could submit a transaction — and then reverse it, making it look like they still have the coin they’ve just spent.
Such an attack is incredibly difficult to implement on a Bitcoin scale blockchain because an attacker would have to take control of millions of computers. When Bitcoin was first developed in 2009 and its users numbered in the dozens, it would have been easier for an intruder to control a majority of the network’s computational power. For fledgling cryptocurrencies, this defining feature of Blockchain has been marked as one weak spot.
User fear of 51 percent attacks will potentially prevent monopolies from forming on the Blockchain. The New York Times’ journalist Nathaniel Popper reports about how a community of users named “Bitfury” brought together tens of thousands of powerful computers in order to take the competitive lead on the Blockchain, in “Digital Gold: Bitcoin and Inside Story of Misfits and Millionaires Trying to Reinvent Money.” Their objective was to collect as many blocks as possible and bitcoin, valued at around $700 each at the time.
Harnessing Bitfury
However, by March 2014, Bitfury was placed to surpass 50 percent of the overall computational power of the blockchain network. Instead of trying to expand its control over the network, the group chose to self-regulate and vowed to never exceed 40 percent. Bitfury realized that if they were to continue to expand their leverage over the network, the value of bitcoin would decline as users sold off their coins in preparation for a 51 percent attack. In other words, if users lose faith in the blockchain network, there is a risk that the information on that network will become totally worthless. Then, blockchain users can only raise their computational power to a point before they start losing money.
Blockchain’s Practical Application
Blocks on the blockchain store money transaction data — we’ve got that out of the way. But Blockchain turns out to be a very secure way to even store data on certain forms of transactions. Blockchain technology can potentially be used to store data about transfers of assets, stops in the production process, and elections for a leader too.
Deloitte’s professional services network recently surveyed 1,000 businesses across seven countries on integrating Blockchain into their operational processes. Their Survey showed that 34 percent of them have already developed a blockchain program, while 41 percent expect a blockchain framework to be implemented in the next 12 months. Moreover, almost 40% of the companies surveyed reported that in the coming year they would invest five million dollars or more in the Blockchain. Here are some of the most common blockchain applications currently under review.
Bank Use
Maybe no industry stands to benefit more than banking from integrating Blockchain into its business operations. Financial institutions only work five days a week during business hours. That means you’ll actually have to wait until Monday morning to see the money enter your account if you try to deposit a check on Friday at 6 p.m. Even if you make your deposit during business hours, because of the sheer volume of transactions banks need to settle, the transaction may still take one to three days to verify. Conversely, Blockchain never sleeps.
Consumers will see their transactions processed in as little as 10 minutes by incorporating Blockchain into banks, essentially the time it takes to add a block to the Blockchain irrespective of the time or day of the week. With Blockchain, banks now have the opportunity to swifter and more securely exchange funds between institutions. For instance, the resolution and clearing process in the stock trading business may last up to three days or longer, if banks are internationally traded, meaning money and shares are frozen for this period.
Even after few days that the money is in transit, considering the size of the sums involved, will bring substantial costs and risks for banks. The European bank Santander put the possible savings at 20 billion dollars annually. Capgemini, a French consulting firm, estimates that every year consumers can save up to $ 16 billion in banking and insurance charges through blockchain apps.
Use in Cryptocurrency
For cryptocurrencies like Bitcoin, Blockchain forms the bedrock. As we discussed earlier, a central authority, usually a bank or government, regulates and verifies currencies such as the US dollar. Data and currency of a consumer under the central authority scheme are legally at the discretion of their bank or administration. If a user’s bank fails, or they live in a state with an oppressive government, the value of their currency can be at risk. These are the issues Bitcoin was born out of.
Blockchain enables Bitcoin and other cryptocurrencies to function without the need for a central authority by spreading their operations over a network of computers. This not only reduces the risks of processing and transaction charges but also eliminates them. It also provides countries with unstable currencies with a more stable currency with more applications and a broader network of individuals and institutions with which they can do business both domestically and worldwide (at least, this is the objective).
Healthcare Uses
Medical practitioners may utilize the Blockchain to safely store medical records of their patients. When creating and signing a medical record, it can be written into the Blockchain, which gives patients the proof and assurance that the record can not be altered. These personal medical records can be protected and stored on the Blockchain with a private key, so that only specific authorised individuals can access them protecting privacy.
Property Records Use
You will know that the registration of ownership rights is both burdensome and inefficient if you have spent time at your local registry office. At the local recording office, where it is entered manually in the central database and public index of the county, a physical deed must be delivered to a government employee today. The claims to the property must be reconciled with the public index in the case of a property dispute.
This method is not only time-consuming and costly, but it is also full of human errors in which each inaccuracy decreases property ownership monitoring performance. Blockchain has the ability to eliminate the need to search for documents and monitor physical files inside a local recording office. If the ownership of the property is registered and checked on the Blockchain, owners can trust the authenticity and permanence of their deed.
Use in Smart Contracts
Smart contract is a computer code which can be incorporated in the Blockchain to facilitate, verify or negotiate a contract. Under the conditions agreed by users, smart contracts operate. The terms of the agreement will be automatically executed when those conditions are met.
Say, I rent my apartment using a smart contract to you, for instance. As soon as you pay for your security deposit, I agree to give you the door code to the apartment. Both of us will send our portion of the deal to the smart contract, which would hold on to and exchange my door code automatically for your security deposit on the rental date. If I do not provide the door code by the rental date, your security deposit will be refunded through the smart contract. That excludes the fees typically associated with the use of a notary or mediator.
Supply Chain Use
Blockchain can be used by manufacturers to record the origin of the products they have purchased. This would enable companies, along with medical and ethics labels such as “organic,” “local,” and “fair trade,” to verify the authenticity of their products.
The food industry is shifting to the Blockchain, according to Forbes, to track food paths and protection progressively during the journey from farm to customer.
Uses in Voting
Voting with Blockchain could reduce electoral fraud and increase voter participation, as was tested in West Virginia during the Nov. 2018 mid-term elections. Every vote is stored on the Blockchain as a block, which makes it almost impossible for anyone to tamper with. The Blockchain Protocol would also keep the electoral process transparent, reduce the number of personnel required to conduct elections and deliver immediate results.
Advantages and Disadvantages of Blockchain
The ability of Blockchain as a decentralized method of record-keeping, with all its difficulty, is almost unlimited. From increased user privacy and increased security to reduced service charges and fewer errors, blockchain technology can see applications beyond the above-mentioned applications.
Pros
- Improved precision by eliminating human involvement in the verification
- Eliminates costs by reducing verification by third parties
- Decentralization makes it more difficult to exploit
- Secure, private and efficient transactions;
- Accessible Technology
Cons
• Important cost of technology associated with bitcoin mining
• Small trading per second
• The history of illicit use
• Is vulnerable to hacking
Here are the blockchain sales points for companies on the market today.
Accuracy of the Chain
The network of thousands or millions of computers approves transactions on the blockchain network. This eliminates nearly all human intervention in the verification process, leading to less human error and a more reliable information record. Even when a network computer would make a computer error, only one copy of the Blockchain would make the error. To make this mistake spread to the rest of the Blockchain, at least 51 percent of the network’s computers would have to be done which is an almost impossible fact.
Cost Reductions
Consumers usually pay a bank to validate a transaction, a notary to sign a document or a marriage minister. Blockchain removes the need for verification by third parties and their related expenses with it. Business owners pay a small fee, for instance, because banks have to complete such transactions if they accept payments using credit cards. On the other hand, Bitcoin has no central authority and practically no transaction fees.
Decentralization
Blockchain has no central place to store all of its data. Instead, the Blockchain is copied and distributed over a network of computers. Each computer in the network updates its Blockchain to reflect the change every time a new block is added to the Blockchain. Blockchain becomes more difficult to tamper with by spreading that information across a network, rather than storing it in one central database. When a copy of the Blockchain falls into a hacker’s possession, then just one copy of the database will be compromised, rather than the entire network.
Efficient Transactions
It takes up to a few days to resolve transactions through a central authority. You may, for example, not see funds on your account until Monday morning when you try to deposit a check on Friday night. With financial institutions running five days a week in working hours, Blockchain operates 24 hours a day, seven days a week. Transactions can be finished within 10 minutes or just a few hours and can be considered safe. This is especially useful for cross-border businesses which normally take a lot longer due to time-zone issues and because all parties must confirm the processing of payments.
Private Transactions
Most blockchain networks act as public repositories, which indicates that anybody who has an internet service can view a list of the history of the network. While users can access transaction details, they can not access the identification of user information who made the transactions. It is a common misunderstanding that blockchain networks such as bitcoin are anonymous when in fact they are confidential only.
That is, when a customer performs public transactions, the Blockchain registers their unique code, called a public key, instead of their personal details. While a person’s identity is still linked to their blockchain address, this prevents hackers from acquiring personal information from a user, as may happen when a bank is hacked.
Secure Transactions
If a transaction is registered, the blockchain network must check its validity. There are thousands or even millions of computers running through the Blockchain to verify that the transaction details are correct. It’s added to the Blockchain in the form of a block after a computer has validated the transaction. Every block on the Blockchain includes its own unique hash, along with the block ‘s unique hash before it. When the information on a block is revised in any way, the hash code of that block changes spite, the hash code on the block after it does not. This disparity makes information about the Blockchain incredibly difficult to alter without prior warning.
Transparency
Although personal information is kept confidential on the Blockchain, the technology itself is almost always open source. That means users on the blockchain network can alter the code as they see fit, as long as the users have a majority of the computational power of the network to back them up. Maintaining data on the open source blockchain also makes it much harder to manipulate data. For example, it is impossible that anyone will make a change without being noticed with millions of computers on the blockchain network.
Disadvantages of Blockchain
While the Blockchain is experiencing major upsides, its adoption still faces significant challenges. For the most part, the real challenges are political and regulatory, not to mention the tens of thousands of hours of customized software development and programming necessary to integrate Blockchain into existing business networks. Here are a few of the challenges that stand in the way of broad blockchain adoption.
Technology Cost
Although Blockchain can save transaction fees for users, the technology is far from being free. For example, the “proof of work” system used by bitcoin to validate transactions consumes vast amounts of computational power. The control of the Bitcoin network’s millions of computers in the real world is close to what Denmark consumes every year. All that energy costs money and according to a recent report by research firm Elite Fixtures, The cost of extracting one single bitcoin varies significantly from just $531 to a whopping $26,170 per venue.
That figure is closer to $4,758, based on average U.S. utility costs. Despite the high costs of bitcoin mining, consumers tend to pump up their energy bills to verify the blockchain transactions. That’s because they are compensated with enough bitcoin when miners add a block to the bitcoin blockchain to make their energy and time valuable. However, when it comes to blockchains not using cryptocurrencies, miners may need to be charged or otherwise allowed to verify the transactions.
Speed Inefficiency
Bitcoin is a perfect case study for potentially blockchain inefficiencies. It takes around ten minutes for the Bitcoin “proof of work” system to add a new block to the Blockchain. At that rate, the blockchain network is estimated to be able to manage only seven transactions per second (TPS). Even though other cryptocurrencies such as Ethereum (20 TPS) and Bitcoin Cash (60 TPS) perform much better than Bitcoin, Blockchain still restricts them. For background, legacy brand Visa can process 24,000 TPS.
Illegal Activity
While blockchain network confidentiality protects users from hacks and safeguards privacy, illegal trading and activity on the blockchain network also are possible. Silk Road, the anonymous dark-web marketplace operating between February 2011 and October 2013, when it was shut down by the FBI, possibly is the most cited example of Blockchain for illegal transactions.
The website has enabled users to search the website without being monitored and make illegal bitcoin transactions. Present laws in the United States hinder the privacy of the users of online platforms, such as blockchain ones. Online transactions in the U.S. have to collect customer details before opening an account, verify customer identification and ensure that customers are not on a list of confirmed and alleged terrorist organizations.
Central Bank Concerns
Several central banks have launched investigations into digital currencies including the Federal Reserve, the Bank of Canada and the Bank of England. “A system would also need further research that could use distributed ledger technology without compromising the ability of a central bank to control its currency and secure the system against systemic attack,” according to a Feb. 2015 Bank of England research report.
Hack Susceptibility
Because of the computational power needed to obtain majority control over a blockchain network, these attacks are incredibly difficult to conduct, but NYU computer science researcher Joseph Bonneau said that could change. Last year, Bonneau published a study predicting that 51% related attacks will increase due to availability of low power computing.
What’s Next for Blockchain?
Blockchain was first suggested as a research project in 1991 and settled comfortably in its late twenties. Like most millennials of its age, over the past two decades, Blockchain has seen its fair share of public scrutiny, with businesses around the world speculating about what the technology is capable of and where it will be headed in the years to come.
With many practical uses for the technology already being applied and discussed, at the age of twenty-seven, Blockchain is already making a name for itself, in no small part due to bitcoin and cryptocurrency. Blockchain stands as a buzzword on the tongue of every investor in the nation to make business and government operations more precise, more effective and more stable.
As we move forward to a new Blockchain’s era, it is no longer a question of “if” legacy firms catch up with technology— it’s about “when.”