What is Blockchain Technology?
Author: Andrew Ong
Blockchain is an emerging method of recording transactions and managing databases. Blockchain technology, or distributed ledger technology, is a decentralized and open ledger that records transactions. Let’s explore blockchain technology by first presenting existing ways of recording transactions, and how blockchain technology makes them better!
1st Problem: Centralized
Traditionally, a single or central ledger is kept to record all transactions. This is similar to how a google docs works, everyone can see it, but only one person can edit it at a time, and there are varying levels of access. A single or central ledger or database is difficult to manage and coordinate with too many users with varying access, and a central ledger is a single point of failure. If your google docs were hacked, information could be altered or falsified easily.
A decentralized ledger involves all parties or participating nodes in a network having the same access to edit and manage transactions. So now, everyone has the permission to access and edit the google docs at the same time. If this is the case, then how do people agree on which edit or transaction is valid? This is what we will explore later, with the use of a consensus mechanism, or a way that helps people agree on which transaction is valid. A decentralized ledger also removes the possibility of a single point of failure, as a hacker would need to alter data from all ledgers in everyone’s system, at the same time.
2nd Problem: Closed
A ledger or system of records in a company or centralized organization is not open to users, hence we do not know what is going on behind the scenes. A centralized authority that is not transparent with its processes might commit fraud or might mismanage transactions without users knowing. Users might also demand greater transparency such as tracking where their grocery produce came from, or if their luxury handbags are authentic, by accessing an open ledger of transactions.
An open ledger that every participating node can download when they are part of the blockchain enables users to gain transparency into transactions and how they are managed. Transactions on a blockchain can easily be downloadable online, with transactions dating right back to the start of all activities. This open ledger will enable people to gain greater clarity on the management of their data, and gain information on the history of their products.
3rd Problem: Fraud
As alluded to earlier, a malicious or ill-managed organization with a central ledger could edit or manage transactions incorrectly. They could edit or change transaction details 2–3 months before to achieve certain agendas, and being a centralized ledger, it would not have any problem doing so. Hence a centralized database or ledger could be prone to manipulation or ill-intent.
Blockchain technology involves the use of cryptography, or cryptographic hash functions, whereby each new set of transactions is created with an acknowledgment from the previous set of transactions. These sets of transactions form a block, and with each set of transactions linking to one another through cryptography, it forms a blockchain. This makes the distributed ledger immutable and impossible to change, as each set of transactions are cryptographically secure and tied to the previous block. For someone to falsify data or transactions, they would need to decode the block they want to hack, as well as all preceding blocks.
There are 3 underlying technologies that form the blockchain. These technologies ensure that it is possible to create a trustworthy and secure ledger or database that exists between an entire network of strangers.
Cryptographic hash functions
A hash function works like this: you have an input, and it generates a unique output. You will always get the same unique output from the input, but it is difficult to backtrack from an output to an input. This is significant as all blocks or set of transactions include a hash unique to that block (much like a fingerprint of a block), as well as the hash of the previous block. Changing any data or transactions within that block would result in the hash of that block changing. Imagine that if someone changed your DNA, your fingerprint would be different. Cryptographic hash functions link blocks together to form a chain, and these blocks are cryptographically secure due to hash functions. This prevents tampering or fraud in a blockchain.
A blockchain or a distributed ledger needs to be distributed over the internet across all nodes, or participating computing systems. This means that there is no central authority or body that governs all transactions, and that the entire system is run by peer-2-peer networks, where all participating systems have a copy of the entire ledger and history of transactions, and anyone can choose to edit it. Similar to our google docs example, what happens when everyone is trying to change it at the same time — who is right?
Consensus mechanism: A network of users decide which transactions are valid.
This brings us to the final underlying technology, a consensus mechanism that helps sustain a network. A consensus mechanism is a series of rules that govern a network that uses blockchain, by ensuring that if there are conflicting views on how a transaction should be edited or recorded, there will be a way of resolving a conflict. In Bitcoin, their consensus mechanism is called proof-of-work. With everyone claiming that their record is valid, the Bitcoin network will issue a rule: a new block must have 30 ‘0’s in their hash. Miners will then use their computers and their computers’ computational power to compete against one another, to obtain an input that produces the correct output (a hash with 30 ‘0’s). The miner that does this first is incentivized for his efforts, in the form of cryptocurrency.
Hence, in order for a network of strangers to trust one another, a blockchain network removes the trust and replaces it with cryptography and code. This creates a set of rules for people to participate in when they join a network, and rules that help resolve disagreements and conflict in determining who’s record of transactions is valid.
Blockchain technology is valuable because applications or structures built on it will be efficient to manage, secure, and immutable. Let’s explore these 3 benefits as we move from a macro to micro scale.
Efficient to manage
Countries are looking to develop smart economies and systems, where perhaps voting is online and digitized, enabling greater citizen participation and efficient vote tabulation. By building these systems on the blockchain, countries could efficiently manage votes or data on the blockchain, ensuring transparency and efficient management with every participating node editing and contributing to the database simultaneously.
With the onslaught of cyber hacking affecting many organizations, centralized organizations could consider transitioning towards a more secure system by building their applications on the blockchain. Building cryptographically secure applications on the blockchain, as well as removing the vulnerability of a single point of failure, can greatly boost an organization’s security against cyber threats.
Records and data will not be forgeable or manipulated if they are built on the blockchain. For consumers, this could apply to supply chain awareness. Products from diamonds to luxury handbags, to apples from the supermarket, can be traced from the point of inception on the blockchain — ensuring customers that their products are authentic and safe, and were not obtained by illegal means at any point along the supply chain.
The blockchain is a fascinating new technology, built upon the foundations in cryptography, data systems, Byzantine general problem, and so much more. It still faces many limitations such as adoption, scalability, and deployment issues. Only time will tell if blockchain technology will continue to shape our world.