What is Blockchain Technology?
The rapid progress of Blockchain technology is showing no signs of slowing down. In the past few decades, many things that seemed impossible have turned out to be false, such as high transaction fees, double spending, net fraud, retrieving lost data, etc. But now all this can be avoided with the help of Blockchain Technology. The core technology that Bitcoins, Defi or the latest trending Non-Fungible Tokens (NFTs) are all underlying on Blockchain Technology.
A blockchain is a time-stamped series of immutable records of data that is managed by a cluster of computers not owned by any single entity. Each of these blocks of data (i.e. block) is secured and bound to each other using cryptographic principles (i.e.chain). The blockchain is a simple yet ingenious way of passing information from A to B in a fully automated and safe manner. One party to a transaction initiates the process by creating a block. This block is verified by thousands, perhaps millions of computers distributed around the net. The verified block is added to a chain, which is stored across the net, creating not just a unique record, but a unique record with a unique history. Falsifying a single record would mean falsifying the entire chain in millions of instances. That is virtually impossible. Bitcoin uses this model for monetary transactions, but it can be deployed in many other ways.
The Three Pillars of Blockchain Technology
The three main properties of Blockchain Technology which have helped it gain widespread acclaim are as follows:
Pillar #1: Decentralization
Before Bitcoin, we were more used to centralized services. We have a centralized entity that stores all the data and you’d have to interact solely with this entity to get whatever information you require. An example of a centralized system is the banks. They store all your money, and the only way that you can pay someone is by going through the bank.
The traditional client-server model is a perfect example of this:
Centralized systems have treated us well for many years, however, they have several vulnerabilities.
- Firstly, because they are centralized, all the data is stored in one spot. This makes them easy target spots for potential hackers.
- If the centralized system were to go through a software upgrade, it would halt the entire system
- What if the centralized entity somehow shuts down for whatever reason? That way nobody will be able to access the information that it possesses
- Worst case scenario, what if this entity gets corrupted and malicious? If that happens then all the data that is inside the blockchain will be compromised.
In a decentralized system, the information is not stored by one single entity. In fact, everyone in the network owns the information. In a decentralized network, if you want to interact with your friend then you can do so directly without going through a third party. That was the main ideology behind Bitcoins. You and only you alone are in charge of your money. You can send your money to anyone you want without having to go through a bank.
Pillar #2: Transparency
One of the most interesting and misunderstood concepts in blockchain is “transparency.” Some people say that blockchain gives you privacy while some say that it is transparent.
A person’s identity is hidden via complex cryptography and represented only by their public address. So, if you were to look up a person’s transaction history, you will not see “Harry sent 1 BTC” instead you will see “1MF1bhsFLkBzzz9vpFYEmvwT2TbyCt7NZJ sent 1 BTC”.
The following snapshot of Ethereum transactions will show you what we mean:
So, while the person’s real identity is secure, you will still see all the transactions that were done by their public address. This level of transparency has never existed before within a financial system.
Pillar #3: Immutability
Immutability, in the context of the blockchain, means that once something has been entered into the blockchain, it cannot be tampered with. Can you imagine how valuable this will be for financial institutes?
The reason why the blockchain gets this property is that of the cryptographic hash function. In simple terms, hashing means taking an input string of any length and giving out an output of a fixed length. In the context of cryptocurrencies like bitcoin, the transactions are taken as input and run through a hashing algorithm (Bitcoin uses SHA-256) which gives an output of a fixed length.
Let’s see how the hashing process works. We are going to put in certain inputs. For this exercise, we are going to use the SHA-256 (Secure Hashing Algorithm 256).
As you can see, in the case of SHA-256, no matter how big or small your input is, the output will always have a fixed 256-bits length. This becomes critical when you are dealing with a huge amount of data and transactions. So basically, instead of remembering the input data which could be huge, you can just remember the hash and keep track.
A cryptographic hash function is a special class of hash functions that has various properties making it ideal for cryptography. There are certain properties that a cryptographic hash function needs to have in order to be considered secure.
Now, we look at the “Avalanche Effect.” It means even if you make a small change in your input, the changes that will be reflected in the hash will be huge. Let’s test it out using SHA-256:
Do you see that? Even though you just changed the case of the first alphabet of the input, look at how much that has affected the output hash.
The blockchain is a linked list that contains data and a hash pointer that points to its previous block, hence creating the chain. What is a hash pointer? A hash pointer is similar to a pointer, but instead of just containing the address of the previous block it also contains the hash of the data inside the previous block. This one small tweak is what makes blockchains so amazingly reliable and innovative.
Imagine this for a second, a hacker attacks block 3 and tries to change the data. Because of the properties of hash functions, a slight change in data will change the hash drastically. This means that any slight changes made in block 3, will change the hash which is stored in block 2, now that in turn will change the data and the hash of block 2 which will result in changes in block 1 and so on and so forth. This will completely change the chain, which is impossible. This is exactly how blockchains attain immutability.
Blockchain and Mainstream Adoption
The impact of blockchain technology is genuinely far-reaching and has far more use-cases than being a facilitator for transactions. Several industries have discovered the benefits of blockchain integration. While Bitcoin and Ethereum are examples of public blockchains, most of these industries require specific functionalities out of their distributed ledger architecture. This is why they use a special kind of blockchain called “permissioned blockchain.”
What is a Permissioned Blockchain?
So, what’s the difference between a public and a permissioned blockchain? Public blockchains are open protocols. Anyone can join the network and participate in the protocol and take care of the overall network consensus. Plus, the data stored in the blockchain is pretty much open for all to see since everything is public.
While transparency is a very desirable trait, the fact remains that enterprises don’t want to use a network wherein any average Joe can peek into their daily dealings and be a party to some confidential information.
As such, enterprises prefer using a unique form of blockchain called “permissioned” chains, limiting the number of nodes entering the network. Permissioned chains can also be differentiated into public permissioned and private permissioned blockchains.
- Public Permissioned Blockchain
In a public permissioned system, anyone can join the network, but just a select few can take care of the consensus and overall networks. Let’s take a real-life example to understand how this system works. Anybody can access a public ATM and use it. You don’t need to have any special privileges to use it (save for an ATM card). But, not everyone can open up the machine and add new functionalities and cash. Only the bank that owns the machine has the right to do so.
Blockchains like stellar, ripple, EOS, sovrin, etc. are examples of public and permissioned blockchains. In EOS, anybody can join the network. However, to take part in the consensus, you will need to be elected as one of the 21 block producers and lock up some stake in the ecosystem.
- Private Permissioned Blockchain
A private permissioned blockchain is one where members need to gain permission to enter the system and only a chosen few nodes are allowed to make administrative decisions. For example, University. Not everyone can enter this university. You need to pass an entrance exam first. Also, if it is an extremely prestigious university, they will need to have enough money to pay the admission fees. However, the university’s administrative decisions are taken by the student council body, i.e., students elected/selected to take care of these roles. Not every student gets to handle the administrative side.
Many companies have created consortiums using protocols like Hyperledger Fabric, which are private permissioned blockchains.
How Will Blockchain Disrupt Industries?
Several industries like Unilever, Walmart, Visa, etc. use blockchain technology and have gained benefits in transparency, security, and traceability. Considering the benefits blockchain offers, it will revolutionize and redefine many sectors.
Here are the top 5 prominent industries that will be disrupted by blockchain technology in the near future:
Banking has transfer fees, which can be both expensive and time-consuming for people. Also, sending money overseas becomes even more difficult due to the exchange rate and other hidden costs.
Blockchain eliminates the need for a middleman. Blockchain is disrupting the banking system by providing a peer-to-peer payment system with the highest security and low fees.
- Blockchain technology provides instant and borderless payments across the globe
- Cryptocurrencies (like Ethereum, bitcoin) remove the requirement for a third party to perform transactions
- Blockchain records all the transactions in a public ledger which is globally accessible by bitcoin users
2. Cyber Security
Earlier, cyberattacks were a significant threat to the public. Several organizations were developing an effective solution to secure the data against unauthorized access and tampering.
- Blockchain quickly identifies malicious attack due to the peer-to-peer connections where data cannot be tampered with
- Every single piece of data stored on the blockchain network is verified and encrypted using a cryptographic algorithm
- By eliminating the centralized system, blockchain provides a transparent and secure way of recording transactions (without disclosing your private information to anyone)
3. Supply Chain Management
Due to the lack of transparency, supply chain management often had its challenges like service redundancy, lack of coordination between various departments, and lack of reliability.
Tracking of a product can be done with blockchain technology, by facilitating traceability across the entire Supply chain.
Blockchain gives the facility to verify and audit transactions by multiple supply chain partners involved in the supply chain management system.
- Blockchain records transaction (history, timestamp, date, etc.) of a product in a decentralized distributed ledger
- Each transaction is recorded into a block
- With blockchain, anyone can verify the authenticity or status of a product being delivered
In the healthcare system, patients can connect to other hospitals and collect their medical data immediately. Apart from the delay, there are high data corruption chances since the information is stored in a physical memory system.
- Blockchain removes a central authority, which results in instant access to data
- Here, each block is linked to another block and distributed across the computer node. This becomes difficult for a hacker to corrupt the data
Rigged votes are an illegal activity that occurs during most traditional voting systems. Also, citizens who want to vote to wait a little longer in a queue and cast their votes to a local authority, which is a very time-consuming process.
- Voters are allowed to vote without the need of disclosing their identity in public
- The votes are counted with high accuracy by the officials knowing that each ID can be attributed to just one vote
- As soon the vote is added to the public ledger, the information can never be erased
Although we are still in the early stages of this promising technology, Blockchain is undoubtedly important to our society. It’s an impact on the current industries. With the growth of Blockchain and other improvements, it is the only time when most of the industry will start adopting blockchain.
In the next articles, we will talk about what is Blockchain good for? The blockchain network gives internet users the ability to create value and authenticates digital information. So, what does business will result from using blockchain technology?