Get yourself up to speed with Blockchain
“What the internet did for communications, blockchain will do for trusted transactions.” -
Ginni Rometty, CEO of IBM
Blockchain technology has the potential to revolutionize many industries and businesses. It is a secure, decentralized, and distributed ledger system that can be used to store records of transactions in a secure way. By using blockchain technology, businesses can reduce costs associated with transaction intermediaries and increase transparency in their operations. Furthermore, it enables faster transfer of data and assets across multiple parties without any third-party interference. This makes it an ideal solution for industries such as banking, healthcare, insurance, logistics, etc., which require secure data storage and transactions.
The purpose of this article is to explain some of the most common terms and topics used with Blockchain and DLT, hopefully this will facilitate your learning process.
What is Distributed Ledger Technology?
Distributed Ledger Technology (DLT) is a type of digital database that allows multiple parties to have simultaneous access to the same data, while also ensuring that the data remains secure and tamper-proof. DLT is distributed because it is not controlled by a single entity or central authority, but rather is maintained by a network of computers that all have a copy of the ledger.
What is blockchain?
The blockchain is just a new type of decentralized database. Blockchains are just ways of organizing data. That’s all there is to it. Blockchains are ledgers: A file that keeps track of accounting records.
Blockchain is a type of DLT where transactions are recorded with an immutable cryptographic signature called a hash. Transactions are then grouped in blocks and each new block includes a hash of the previous one, chaining them together, hence why distributed ledgers are often called blockchains.
There are three types of blockchains: permissioned, permissionless, and hybrid.
What are peer-to-peer networks?
In the context of Distributed Ledger Technology (DLT), a peer-to-peer (P2P) network refers to a network of nodes that collaborate to maintain and update a shared ledger, without the need for a central authority or intermediary.
Every one of these nodes stores a complete, updated version of the blockchain. Every time a new block is added, all the nodes update their blockchain.
Additionally, a distributed ledger is a peer-to-peer network that uses a consensus mechanism to prevent modifications to an ordered series of time-stamped records. Consensus mechanisms include Proof of stake, Proof of Work, Federated Byzantine Agreement …
What is the consensus mechanism?
A consensus mechanism is a key component of DLT, it enables multiple nodes in a peer-to-peer network to work together without having to know or trust each other.
“The purpose of a consensus algorithm is to allow for the secure updating of a state according to some specific state transition rules, where the right to perform the state transitions is distributed among (…) users which are given the right to collectively perform transitions through an algorithm” — Vitalik Buterin
There are several different types of consensus mechanisms used in DLT, each with its own advantages and limitations. Some of the most well-known consensus mechanisms include:
· Proof of Work (PoW): This is the consensus mechanism used by Bitcoin and many other cryptocurrencies. It requires nodes to perform complex computations to validate transactions, which can be energy-intensive and slow.
· Proof of Stake (PoS): This is a newer consensus mechanism that requires nodes to stake a certain amount of cryptocurrency to participate in the consensus process. This can be more energy efficient than PoW but can also be vulnerable to certain types of attacks.
· Delegated Proof of Stake (DPoS): This is a variation of PoS that allows nodes to delegate their voting power to other nodes in the network, to increase efficiency.
· Byzantine Fault Tolerance (BFT): This is a consensus mechanism that is designed to be resilient to Byzantine faults, or failures of nodes that act maliciously or incorrectly. It is often used in permissioned blockchain systems, where the nodes are known and trusted.
How blocks are to be added to the chain?
When blocks are valid
When a miner solves the puzzle and mines the block, all the nodes in the network will check if the block is valid and add it to their copy of the chain. The nodes first need to reach consensus on the validity. Only then the network synchronizes and the state of the blockchain updates.
How conflicts of truth are resolved
It can occur that, on accident, two miners add a valid block to the chain at the same time.
When we have an unintentional fork, some miners will start mining on one chain, and others will start mining on another chain. Inevitably, one chain will have more miners than the other, and as such, will add new blocks to its chain faster.
What is a private blockchain?
A private blockchain is often referred to as a ‘permissioned’ blockchain. A private blockchain is usually managed and operated by an entity (the “trusted intermediary”) rather than public blockchains, where anyone can download the software, form a node, view the ledger, and interact with it.
The trusted intermediary will control who will be able to access the private blockchain and what kind of access each participant will have since it runs the blockchain. For example, some participants may be restricted to viewing (some or all) the data on the ledger, while others may also be allowed to submit new transactions for recording on the blockchain.
What is a smart contract?
A smart contract is a computer program that is stored on a blockchain and is designed to automatically execute the terms of a contract when certain conditions are met. Smart contracts are self-executing, meaning that once they are deployed on the blockchain, they can operate independently without the need for human intervention.
They rely on data from outside entities referred to as “oracles,” and can act on data associated with any public address or with another smart contract on the blockchain.
Smart contracts are typically written in programming languages that are specifically designed for blockchain, such as Solidity, and are deployed on a blockchain platform that supports smart contracts, such as Ethereum.
What is a blockchain wallet?
A blockchain wallet is a digital wallet or software application that enables sending and receiving cryptocurrencies such as Bitcoin, Ethereum, etc. It stores the record of transactions as well as public and private keys, which are used to perform transactions
A public key is like an account number. You may share your public keys to receive transactions.
A private key is like an account password. Only the account holder knows the private key. The private key is used to send money.
What is the difference between Hot Wallet and Cold Wallet?
Hot storage is like the wallets that you carry around in your pocket. Cold storage is somewhat like your savings bank account.
What are the applicable uses of this technology?
Audit
Blockchain offers what is essentially a permanent record of transactions, which creates an easy-to-follow paper trail for audits, both internal and governmental.
Quality Assurance
if there is the need for a recall or investigation into where something went wrong, blockchain offers a definitive, contiguous ledger to immediately identify the problem.
Smart contracts
Smart contracts enable a way for organizations to handle large amounts of transactions, such as those that run across supply chains, automatically. They can be used to integrate services across different businesses without divulging sensitive or proprietary information.
Supply chain management
Blockchain can track goods and materials within an organization, as well, such as throughout the supply chain of a manufacturing company.
Voting
Just like currency, votes can be moved along a blockchain in a neutral, accurate and secure way.
In conclusion, blockchain technology has the potential to revolutionize various industries by providing secure and transparent decentralized systems. The technology’s ability to create trust among network participants without the need for intermediaries has paved the way for new business models, improved efficiency, and increased accountability.
While blockchain technology is still in its early stages, it has already been adopted by many businesses and governments worldwide. As technology continues to evolve, we can expect to see further advancements and applications in areas such as supply chain management, healthcare, finance, and more.
