What is Blockchain?

Autor: Vadim Shechkov | Crédito: Getty Images/iStockphoto

In a world that is constantly evolving, the importance of blockchain technology in our lives is increasing. For this reason, and because the rapid progress of Blockchain technology shows no signs of slowing down, we think it is important that everyone (at least) knows what it is, how it works, what its benefits are, and what applications are possible. Blockchain goes beyond cryptocurrencies, is constantly evolving, and is becoming increasingly important in the business world, with a wide range of applications. Over the past few decades, many things that seemed inevitable have turned out to be unnecessary, such as high transaction fees, double spending, network fraud, recovery of lost data, etc. But all these can now be avoided with the help of blockchain technology.

Blockchain is a shared and immutable database that is distributed among the nodes of a computer network. The information is collected in groups (the blocks), which have specific storage capacities. When filled, these blocks close and link themselves to the previous filled block, forming a chain of data (the blockchain). Three key elements are necessary for the existence of a blockchain: the latter must have a distributed ledger technology that must be accessible to all participants of this network; the record of transactions is immutable,i.e., no participant can change or tamper a transaction after it’s been recorded to the shared database (for instance, if a transaction error includes an error, a new transaction must be added to reverse the error and subsequently, both transactions are then visible); lastly, to speed up transactions, a set of self-executing rules and conditions, known as a smart contract, is stored on the blockchain. The two latter key elements are especially relevant, as they imply decentralization and subsequent increase in trust and transparency (as no third party is involved), an increase in speed, efficiency, and accuracy, as bureaucracy is reduced, and greater security (as blockchain transactions are encrypted).

In practical terms, a blockchain works in the following way:

  • as each transaction occurs (which shows a movement of an asset) occurs, it is recorded as a block of data (which has a specific storage capacity);
  • a chain of data is formed with these blocks, as an asset changes ownership or moves from one place to another. These blocks link securely together to prevent any block from being altered or from another block being inserted between two blocks
  • Transactions are blocked together in an irreversible chain, as each additional block strengthens the verification of the previous block and thereby the entire blockchain. This virtually removes any possibility of tampering by a malicious intervener and builds a network of transactions that can be trusted.

Another key concept worth mentioning is mining. i.e., the process of adding transactions to the existing blockchain ledger/database distributed among all participants. This process is more common in the context of bitcoin, with a new “currency” being created every time a computational/mathematical puzzle is solved. Nevertheless, it is becoming increasingly common among other cryptocurrencies. Mining is performed using GPUs (as regular CPUs revealed to be too slow), leading to the creation of mining pools and a shortage of GPUs in the market.

Having defined blockchain and its basis, we shall now establish the bridge between the latter concept and cryptocurrencies. Indeed, the blockchain was first mentioned in the original code for Bitcoin. While nowadays there is a separation between blockchain technology and Bitcoin, the history of these two objects/concepts is intimately related.

Indeed, the theorization of cryptocurrencies dates between the 1980s and 2000s laid the foundations for Bitcoin and Blockchain. In 2008, Satoshi Nakamoto (assumed to be a pseudonym) posted the paper “Bitcoin: A Peer-to-Peer Electronic Cash System”, which describes the creation of Bitcoin and blocks of transactions linked in chains. A year later, Nakamoto created the Bitcoin network along with the first blockchain, which was a crucial feature of Bitcoin, as it prevented double-spending and acted as a distributed ledger for all transactions in this network.

In 2015, the Ethereum Blockchain was launched, allowing smart contracts and decentralized applications to run on a blockchain. It is sometimes informally called Blockchain 2.0, as it includes the two above-mentioned new functionalities.

Transparency: Blockchain-based systems provide more transparency compared to existing records and ledgers. Changes to the ledger are visible to everyone on the network, and once transactions are entered into the blockchain, they cannot be changed or deleted. There are countless examples where massive fraud went undetected because the ledgers were not transparent. This allowed people to change entries or manipulate data without other people knowing about the changes. Blockchain-based technology provides transparency to everyone on the network because transactions are visible to all connected computers. The majority of computers connected to the blockchain must approve transactions or changes to the blockchain to prevent transactions from being hidden or manipulated.

Because the scenario of an individual in a company stealing money by manipulating entries in the ledger is much less likely with a blockchain-based on distributed ledger. Moving to a blockchain across industries provides transparency in a number of areas. When you make a financial transaction, you can track the status of the transfer on the blockchain in real-time, rather than not knowing the status of a transaction until it is complete, as is often the case with today’s systems.

Elimination of intermediaries: Most transactions between people today require intermediaries such as banks to provide trust and security for transactions. One advantage blockchain technology has over existing systems is that it eliminates the need for intermediaries, allowing transactions to take place directly between people without the involvement of a third party. This benefits billions of people around the world who live in countries where they do not trust third-party intermediaries due to corrupt governments, high crime rates, inadequate regulation of businesses, or limited legal ability to enforce claims. Blockchain is particularly useful because it builds trust and transparency while reducing the risks associated with transactions without the need for a third party to act as an intermediary in transactions.

Decentralization: The decentralization of a blockchain database is a key component of how to eliminate intermediaries while increasing transparency and trust. Blockchains are maintained in a single shared ledger rather than multiple ledgers. People and businesses do not have to hand over control to a single institution when using blockchain, making collaboration between parties faster and easier.

The decentralized structure of blockchain is an advantage for companies that are competitors but work together as part of an industry group or consortium. A company might be hesitant to share data or collaborate on a database owned by a competitor. Competitor collaboration, where one party owns all the data, could entail lengthy legal contracts and non-disclosure agreements to protect privacy and access to the data. However, with a blockchain-based system, competitors can collaborate on a shared database that they can all access and have full control over. Unlike centralized databases, which are vulnerable to hacking, data loss, and corruption, there is no centralized database in blockchain systems, eliminating this vulnerability. All computers on the blockchain network have a copy of the blockchain, which reduces the risk of data loss. To manipulate the data on a blockchain, more than 50% of the computers on the network must be “hacked” at the same time, which is almost completely infeasible.

Security: Data entered into a blockchain is immutable, meaning it cannot be changed or exchanged. The immutability of data entered into blocks, which can be traced back to the first block in the blockchain, creates an easily traceable trail for each transaction in the blockchain. We know that there have been countless cases of fraud and manipulation of data throughout history. When fraud is committed, the trail leading to it is often altered, making investigations more difficult and time-consuming. The trail of data may have been altered so much that it is impossible to trace the transactions and fraud. In a blockchain-based system, past transactions cannot be altered, leaving a clear trail of events in the blockchain. Blockchain security is not flawless, but existing systems have proven time and again that they are anything but secure. Blockchain solves many of the security problems of traditional systems. Fraud can never be completely eliminated, but the Blockchain provides a clear trail so that fraud attempts can be easily detected.

Lower costs: Blockchain technology has the potential to significantly reduce costs in many industries by eliminating the intermediaries involved in the capture and transfer of assets. In current systems, when assets are transferred or recorded, there are often multiple general ledgers and databases that each company maintains. Maintaining general ledgers or databases is costly and often requires many individuals to verify the integrity of each general ledger. Blockchain-based distributed ledgers reduce costs by replacing the individual ledgers with a common ledger and providing real-time accounting and verification for each transaction by all parties connected to the network.

Increased transaction speed: Blockchain-based systems, not only reduce the costs associated with transactions but also dramatically increase speed. By eliminating intermediaries and processing transactions in a common distributed ledger, blockchain-based ledgers can process transactions almost instantly. Any type of transaction or value transfer could use blockchain technology to increase the speed of transactions.

Blockchain’s Wide Range of Applications: Almost anything that has value can be recorded on the blockchain. It does not necessarily have to be a financial value, but can also be proof of ownership, a digital identity, a copyright license, digital files, or anything else that can be stored in a database. For example, some organizations and associations control and manage copyright licenses in a centralized database. These licenses are valuable assets that can be stored on the blockchain, making the organizations that control the licenses obsolete. Valuable assets such as cryptocurrencies, licenses, and other digital assets can exist solely on the blockchain as native blockchain assets, making them easier to manage than existing proofs of ownership. Blockchain technology is an easily accessible new technology, especially with recent innovations such as the Ethereum platform and smart contracts. This allows anyone to develop applications that leverage blockchain technology. Blockchain has the potential to change almost every industry in the world. Many companies are already developing their own Blockchain-based systems.

Disadvantages/Dangers of Blockchain technology: Most of the information published about blockchain technology is related to its utility, benefits, and potential applications. Although we have covered many of the benefits of blockchain-based systems in this article, it does not mean that this technology is flawless or the answer to all problems in the industry. We will now discuss some of the disadvantages and dangers of blockchain-based systems.

Security concerns: Blockchain-based assets are like cash: If you lose the money in your wallet or it gets stolen, it’s gone. Many of the security methods in blockchain will make it more difficult to achieve widespread adoption and may be less secure than existing methods because people write down private keys, so they do not forget them.

No centralized control: With a decentralized blockchain network like Bitcoin, changes must be approved by a certain majority of the network, which may be over 50%, but may include 70% to 80% of the network. No single organization has control over the changes or direction of decentralized blockchains, which makes them risky for businesses because they have no control over the changes to the system.

Unproven New Technology: Blockchain technologies are unproven new technologies that are mainly used for cryptocurrencies. There is still little real-world software or companies using blockchain technology to prove it is an advantage over existing systems.

Cost: The power requirements are significant. It is estimated that the Bitcoin network consumes the same amount of electricity every half hour as an average U.S. household consumes in an entire year.

Scalability issues: Blockchain networks have not yet been proven to scale as effectively as existing systems. The Bitcoin network is only capable of processing about 7 transactions per second, while the Visa network is capable of processing over 20,000 transactions per second.

Reputation and Trust: Bitcoin is the most well-known application of the Blockchain, which is strongly associated with terrorism, drug trafficking, and crime. People need to trust the blockchain network they use, especially if it replaces a trusted intermediary. Many people will be hesitant to trust blockchain networks, which are also associated with criminal activity.

Regulation and integration: Blockchain-based systems will face regulatory issues as well as costly and time-consuming integration issues with existing systems. Governments and banks are resistant to change due to the scale and cost of replacing existing systems.

Hype: There is a lot of hype around the capabilities of Blockchain-based systems. Blockchain is just a new type of database; it is not the magical solution it is often touted to be. It is also not yet proven at scale or with many practical applications outside of cryptocurrencies.

We can be sure that blockchains will enter every aspect of our lives in the coming years. Many corporate and government databases that use outdated spreadsheets or manual ledgers will be replaced by Blockchains. Major banks around the world are already developing their own blockchains to handle transactions, ledger entries, currency exchanges, and more. The hype around blockchain-based systems disrupting existing industries and replacing companies may not materialize in the short term, but there is a clear trend that blockchain-based alternatives will coexist with existing options in many industries.

Blockchain technology may not replace existing intermediaries such as banks, companies like Google, or Uber as some people have predicted, especially in the short term. But even if intermediaries are not replaced, we will eventually encounter a Blockchain-based alternative to the current options in many areas of daily life.

This article was written by:

Teresa Thomas

Maria Gorjão-Henriques

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Nova Blockchain Club is a student-led organization from Nova SBE with the mission of building a community interested in learning more about Blockchain

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Novablockchainclub

Novablockchainclub

Nova Blockchain Club is a student-led organization from Nova SBE with the mission of building a community interested in learning more about Blockchain

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