What Is Blockchain | History Of Blockchain | How Blockchain Works |
With the evolution of human beings over thousands of years, from the stone age to the digital era that we are in right now, we can most certainly state that we have come a long way.
As Human beings evolve, the technology associated with them also evolves, and so do the financial models over hundreds of years. We are moving from fiat currencies to digital currencies.
The fiat currency used a physical ledger, such as books to keep records of transactions, but these were prone to various errors. Although ledgers are now in the form of servers, they are still centralized and under the authority of banks or institutions.
Hence automated digital ledgers were sought after to address all the issues related to the centralized ledger, this is where blockchain technology kicks in.
This article focuses on the aspects which are essential to know about blockchain, its working, different types of blockchains. What are the best-case scenarios to use Blockchain, why is it being called the future of data centers, and more.
So let’s learn more about this technology…
Table of contents
- What is Blockchain?
- Let’s consider an analogy:
- Types of Blockchain
- Public blockchains
- Private Blockchains
- Hybrid blockchain
- 1. Blocks
- 2. Miners
- 3. Nodes
- 1.0- Bitcoin/Currency
- 2.0-Smart Contracts
- 4.0- Blockchain for Business
- Proof of Work (PoW):
- Proof of Stake (PoS):
- Delegated Proof-of-Stake:
- Benefits Of Blockchain in Cryptocurrency
- Possible use case scenarios of Blockchains in the Future:
- Final Thoughts:
What is Blockchain?
Unless you have been on a long nomadic trip or, have been living under a rock, you would have come across a term called Crypto-currency, the likes of Bitcoin, Ethereum and more. The Transactions of these crypto-currencies are carried out digitally since these are virtual currencies. This is where Blockchain technology comes into play.
Blockchain is a decentralized, distributed ledger technology that records the provenance of digital assets using a peer-to-peer network.
In simple words, a large set of databases which permanently records all of the Digital currency transactions as and when they are carried out on a peer-to-peer basis rather than using a centralized data system.
These data blocks are added only after all the other blocks authenticate the transactions and reach a common consensus.
It is sometimes referred to as Distributed Ledger Technology(DLT), which aids the distribution of digital asset transactions (not copied or transferred). This revolutionary technology is a savior, which the digital assets rely on for transparency in a scalable way, reducing the risk of fraud and verification.
Block consists of data related to digital asset transactions, a unique hash number, and a Unique Blockheader. The succeeding block consists of the hash number previously formed block. These blocks are connected such that it becomes a chain of blocks. Hence named Blockchain.
Let’s consider an analogy:
Blockchains can be considered as a large set of Data storing structures that are identical to excel sheets, but you cannot edit the data once that enters, and any changes to that data should constitute a new block, or append!!
These sets of data are not stored in one single centralized server but on a lot of its user’s devices. Of course, there are more functionalities to the blockchain, but this must give you a very simple idea to define this not so easily definable technology.
Need for the Blockchain Technology
With changing trends in finance, many major financial institutions like banks, and governments have started adopting technology to bring transparency and efficiency to their day-to-day operations. These integrations of the worlds of finance and technology have been coined as FINTECH or Financial Technology.
The latest technological advancements brought in Debit and Credit cards for ease of access to customers and increased customer experience at nominal charges through Gateways.
Yes, customer experience has improved over the last 2 decades with these systems in place, but so has the uncertainties of transaction success, as each of these transactions is administered by companies that are offering card services, financial institutions(Banks), and third-party API for validation.
Now all these parties have to be profitable to sustain their business, hence they charge an “Interchange Fees”, Hence burden on the consumer, more problems to solve!!!!
Oh!! Worry not!! Technology and the people developing these technologies have responded to solve these problems as is the nature of any progressive society. The Card transaction systems, which are almost 2 decades old now are being aggressively challenged with more efficient methods.
Some of these methods are based on eliminating the whole system of trust-based verification systems of banks by introducing peer-to-peer networking to efficiently transfer assets digitally. One of these tried and tested, promising methods is Blockchain Technology.
History of Blockchain
The idea of blockchain protocol was first proposed by Cryptographer David Chaum in his 1982 dissertation “Computer Systems Established, Maintained, and Trusted by Mutually Suspicious Groups.
However, the year 1991 was regarded as important for the blockchain, when computer scientists Stuart Haber and W Scott Stornetta introduced a practical solution for timestamping digital documents so that they could not tamper.
The technology or the system uses the secured chain of Blocks backed by the cryptography method to store the timestamp documents. MERKLE TREE in 1992 came up with the Blockchain’s Design to make it more efficient by allowing several documents to be collected and stored in one block.
But unfortunately, the patent lapsed in the year 2004. After this, Stefan Konst published his theory of cryptographically secured chains, plus ideas for implementation. Computer scientist Nick Szabo works on ‘bit gold’, a decentralized digital currency.
Hal Finney, a computer scientist, and Cryptographic analyst introduced the Reusable proof of work (R PoW). It can be considered as the earliest prototype for Blockchain technology.
However, it took almost three decades to see the first blockchain implementation in the real world by a person (or group of people) known as Satoshi Nakamoto in 2008. Nakamoto significantly improved the design using a Hashcash-like method to timestamp blocks without requiring them to be signed by a trusted party.
Types of Blockchain
There are at least four main types of blockchains that are in use: Public blockchains, Private blockchains, Hybrid blockchain & Sidechain.
As the name suggests, these types of blockchains have no access restrictions. These are usually open-source and are transparent to everybody with Internet access. Anybody can take part in the process of validation to submit the proof of work and maybe incentivized proportionately!!
Another very important feature of a public blockchain is that it is not owned by an organization or an individual, hence completely decentralized.
Ex: Bitcoin blockchain, Ethereum blockchain, etc.
Private blockchains, also called permissioned blockchains, unlike public blockchains, have restrictions on who can access the network. These are administered by an administrator, who approves the access of users in the ecosystem.
Primary users may include individuals or companies who want their transactions or data to be secure and only accessible by the selected few, Hence centralized. The advantage of private blockchain over the public blockchain is that the consensus or verification mechanism takes less time.
The similarities between blockchain are that these perform similar functions,
- Both function as an append-only ledger- where no data can be altered or edited once validated.
- Both blockchains types have a complete set of transaction ledgers on each node, Hence distributed over peer-to-peer.
- Validation is only approved after the majority of the nodes reach a consensus.
Examples: Ripple (XRP) and Hyperledger
Hybrid blockchains are a combination of public and private blockchain systems depending on the needs of the users and the applications. These types are best for companies that are working on some secret projects hosted on a private blockchain, but also have a product that needs to be used by their customers, hence should be a public blockchain.
Sidechains can be classified to be blockchain ledgers that can run in parallel with the primary blockchain. Entries from primary sources can be stored and linked if needed, with a different algorithm. It could be used as a backup blockchain.
How Does Blockchain Work?
Blockchain is a distributed, decentralized public ledger which is a continuously appending list of records that are stored in the form of blocks. These blocks in a blockchain are connected through cryptography, which keeps the confidentiality of the transactions intact.
A blockchain is a time-stamped series of immutable (tamper-proof) records of data that is not managed by a central authority but managed by a cluster of computers.
Blockchains are storing a large set of data which permanently records all of the Digital currency transaction by its users?? Yes, let’s continue from here.
So imagine, John wants to invest in digital assets, so he has to carry out transactions, and he does that on an electronic device! When John does so, he is connecting to a person directly without the interference of any third party like a bank.
This is called a peer-to-peer system. When his device completes the transaction, it becomes a part of this database which stores all the transactions. This database is used additionally to validate other such transactions on a peer-to-peer network, if necessary. So his device is a NODE officially!
Also, the transaction when completed produces data related to transactions and will be stored in blocks, which are chained together with the help of the Hash number of the previous block. About safety, the network as it is decentralized, no single person can alter the asset according to their specific needs but has to be validated by the majority of the nodes.
As long as a single organization or a person owns 51% of the assets over the blockchain network, the assets on the network cannot be modified or altered. Hence it can be assumed to be safe. It also will be protected by the keys of your digital assets!
Blockchain consists of three important concepts on which the system works: Blocks, Nodes, and Miners.
- Block consists of data related to digital assets.
- A 32-bit whole number called a nonce, which is randomly generated when a block Is created, eventually also creates a Hash.
- Hash is a 256-bit number wedded to the nonce, which means that each hash and nonce values are individually signed uniquely.
Once all the above processes are completed, they are permanently stored in a block, which when connected digitally is called Blockchains.
- Miners create new blocks on the chain, through a process called Mining.
- Remember that each block has its unique set of Hash and Nonce, hence it’s not easy to mine a block in the chain especially when on a large scale. The block which is altered must also be accompanied by the re-mining of all the blocks after it.
- This process of mining requires a huge amount of time as the blocks are created, also greater computing power as the complexity of hash(256-bits) and a nonce(32-bits) changes.
- If and when the miner finds the unique nonce, it’s said to be the “Golden Nonce ”, after which the block is added to the chain and the miner may be awarded proportionally.
- While the block is being added to the blockchain, the change is accepted by all the other nodes on the network.
- The most important concept of blockchain technology is that it is a decentralized network. Each such element in the network is called a NODE.
- Node is an electronic device that maintains a copy of the blockchain and hence keeps the network functioning on peer to peer basis.
- Any new block to be mined and included in the blockchain must be verified with all the nodes over the network. This system is done using algorithms designed for the same, because of which it is very unlikely that a digital currency can be owned and manipulated solely.
- These nodes are transparent and hence there is less risk of fraud.
Evolution of the Blockchain Technology
As all the inventions need timely upgrades intending to solve the issues related to the previous version and for better performance, blockchain technology also has been modernized over time and requirements.
Cryptocurrency, mainly Bitcoin, is the first use case of blockchain technology. It allows financial transactions based on DLT.
After the blockchain technology was separated from bitcoin to discover more use cases, Ethereum blockchain came into existence which aimed to execute smart contracts. It intended to reduce the cost of verification, execution, and fraud prevention.
Smart contracts are the predefined computer programs that contain the terms and conditions of the agreements between the two parties. They cannot be altered or changed.
DApps or decentralized applications work similar to other normal applications but the only difference is that Dapps work on peer-to-peer networks such as blockchain.
4.0- Blockchain for Business
Blockchain 4.0 aims at implementing blockchain 3.0in real-life commercial usage. Some of the real-life use cases are supply chain management, financial sectors, and healthcare.
Consensus Protocols Used to Validate Transactions on Blockchain
A consensus algorithm is a procedure through which all the peers of the Blockchain network reach a common agreement about the present state of the distributed ledger.
In this way, consensus algorithms achieve reliability in the Blockchain network and establish trust between unknown peers in a distributed computing environment. New blocks in the blockchains are added only after the transaction details are verified and the consensus is reached.
Here are some of the algorithms designed:
Proof of Work (PoW):
This consensus algorithm is used to select a miner for the next block generation. Bitcoin uses the PoW consensus algorithm. The goal of this algorithm is to solve a complex mathematical puzzle and easily give out a solution. This mathematical puzzle requires a lot of computational power and thus, the node who solves the puzzle as soon as possible gets to mine the next block.
Proof of Stake (PoS):
Proof of stake (PoS) is used by Ethereum to attain a consensus. Unlike PoW, instead of investing in expensive hardware and incur heavy gas fees to solve a complex puzzle, validators stake some of their assets. Validators will validate blocks by placing a bet on it if they discover a block that they think can be added to the chain.
Based on the actual blocks added in the Blockchain, all the validators get a reward proportionate to their bets, and their stake increases accordingly. In the end, a validator is chosen to generate a new block based on their economic stake in the network. Thus, PoS encourages validators through an incentive mechanism to reach an agreement.
Similar to PoS, there is a need for staking. But the people who stake their assets don’t validate the blocks, but they become “delegates”, who have voting rights proportional to the value of their assets. Delegates elect “Witnesses”, who in turn are responsible for validating transactions, maintaining the blockchain network. The incentives are then awarded to witnesses, who share the incentives to their voters proportionally.
Proof of authority is the kind of algorithm that would be used in a permissioned network to become a node. The validators should prove their worth to be chosen and must be trusted by the administrators or users.
PoET is one of the fairest consensus algorithms which chooses the next block using fair means only. It is widely used in permissioned Blockchain networks. Every validator on the network gets to create their block, but the algorithm randomly generates a time period, and the first one to complete the designated waiting time wins the new block.
The created blocks are broadcasted to the network for others’ consideration. The winner is the validator which has the least timer value in the proof part. The block from the winning validator node gets appended to the Blockchain. There are additional checks in the algorithm to stop nodes from always winning the election, stop nodes from generating the lowest timer value.
Benefits Of Blockchain in Cryptocurrency
- The need for a physical or trust-based validation process is eliminated.
- Better transaction speed and connectivity in a peer-to-peer system.
- Transactions may be carried out irrespective of time, location, unlike banking processes.
- Completely accessible from anywhere in the world.
- Lower transaction charges. Lower transaction failure risks.
- No risk of account suspensions, double spendings and to have minimum recurring balance for transactions.
Future of Blockchain
Blockchain has advanced over years and has proved that it’s a trustworthy technology, which is easily scalable as a data structure. This can be used by banking sectors, as Card payment transaction ledgers, in stock markets for keeping a record of stock delivery and verify with ease.
This hence enables us to perform more transactions digitally and reduces the risks involved in the present system which is based on the trustworthiness of the financial institutions or the governments. Also using the Blockchain system reduces the transaction charges significantly as the verification is done by algorithms in a matter of minutes without third parties such as banks and financial institutions.
Possible use case scenarios of Blockchains in the Future:
- Maintaining medical records of the patients in hospitals
- Payments or asset transfers around any parts of the world
- Real-time IoT operating systems
- Personal identity security
- Anti-money laundering tracking system
- Supply chain management and logistics monitoring
- The voting mechanism for democratic countries
- Keeping records of governance or history
- Advertising insights Original content creation
- Cryptocurrency exchange
- The real estate processing platform
Blockchain, since its inception in 2008, has proved its worth over the current systems in place which is less efficient. Understanding the importance of technology, many central banks and governments have shown interest to study and adopt blockchain for good.
Although there are risks involved, it is to be observed how the technology will be implemented by various beneficiary industries!!
The record on a blockchain is theoretically immutable to change. Sensitive or non-public information can be protected through the use of smart contracts, but this has yet to be put into practice outside of financial institutions.
Blockchain governance is determined by those who set up the system. Changes to the governance can take place through voting similar to the resolving algorithms of transaction consensus.
No, It depends solely on the business and kind of data you want to store looking at the economics, importance of the data stored, and viability of the business.
These Blockchains are designed to be administered privately by multiple administrators or organizations, who may be working on the same kind of subjects that may be of mutual interest. These blockchains are not made public unless deemed by the administrators.
Encryption is the process of converting the easily readable and interpretable data into unreadable data for the common user, using targeted encryption algorithms. The people who only have access to the decrypting algorithm can access the data.
Since blockchains can be used to store and keep records of data related to finance, the internal security of organizations, or any other sensitive information, to be kept secure from potential hackers who could misuse the information.
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