Understanding the Basics of Blockchain Technology
Many organizations have been looking to implement blockchain technology, or more accurately known as Distributed Ledger Technology(DLT). The idea of DLT is to create a governance driven database, therefore erasing the necessity for a centralized ledger. This can improve trust within the transactions, and provides a way to monitor and verify everything that happens on the chain. However, blockchain is still viewed as a mystical uncharted technology, and many are skeptical of its benefits. In this article, we demystify distributed ledger technology.
A Brief History
DLT is nothing more than a complex type of database. It’s a revolutionary way to look at data. Most all data related transactions utilize a type of database called a relational database. Invented by Edgar F. Codd in the 1970s, relational databases changed the database industry forever.
“Early databases used either a rigid hierarchical structure or a complex navigational plan of pointers to the physical locations of the data on magnetic tapes. Teams of programmers were needed to express queries to extract meaningful information. While such databases could be efficient in handling the specific data and queries they were designed for, they were absolutely inflexible. New types of queries required complex reprogramming, and adding new types of data forced a total redesign of the database itself.”
This change led to programmers to simpler queries, therefore leading to the birth of SQL. The idea was a radical concept at that time, and many people were skeptical. They didn’t believe that machine-made relational queries would be able to perform as well as hand-tuned programs written by expert human navigators. Although the invention of the relational database was incredibly innovative, it wasn’t invasive among everyday people. In fact, it was hardly known about; It was an underlying technology that affected people without their knowledge.
Distributed ledger technology doesn’t have to replace any current technologies, but rather work in tandem with them. DLT, like relational databases, is an underlying technology that serves to improve the way that programs utilizing it function. Blockchain disrupts any industry that relies on a central authority to confirm authenticity.
Types of Blockchains
When choosing blockchain, the question of whether to use a permissioned, or public blockchain comes up. A permissioned blockchain(private blockchain), requires pre-verification of the participating parties within the network, and these parties are usually known to each other. A public blockchain is anonymous, and relies on miners to seamlessly execute transactions. In Ethereum, both miners and gas are used for transactions. Gas is a unit of work used to measure how computationally expensive an Ethereum operation will be. Gas costs are paid with small amounts of ether. Because of this, transaction costs can get expensive.
When choosing whether to use public or private, ask “Who should be able to write data to the blockchain?” If you want to restrict users, keep it private. If you want the blockchain to be accessible to all, keep it public. When choosing between permissioned and permissionless, ask “Are all users equal or not?” This depends on whether you want certain users on the chain to have access to all information on the chain, or whether you want restrictions within the blockchain.
Types of Byzantine Fault Tolerant Mechanisms
In the absence of Byzantine Fault Tolerance, a peer is able to transmit and post false transactions. This effectively obviates the blockchain’s reliability. To make things worse, there is no central authority to take over and repair the damage. To curb this, mechanisms are constructed to protect the integrity of the blockchain.
Proof-of-Work is a mechanism that leverages computation costs to self-regulate the network and allow fair participation. This works great in anonymous, open networks where competition for cryptocurrency promotes security on the network. However, in private networks the underlying ether has no value. The reward is given to the first miner who solves the problem of the block, and network minors compete to find a solution first. The mining serves to verify the legitimacy of a transaction, therefore avoiding the double spending problem. This mechanism also creates new digital currencies as a way of rewarding the minor for using their computation power. However, because nodes are awarded by the amount of mining power they use, it causes people to use massive amounts of electricity — 54 terawatt hours of electricity, which could power about 5 million households in the USA.
Proof-of-Stake is a different way to validate transactions in the distributed consensus. Validators serve to validate the blocks on the chain. To be allowed to validate, a node must deposit a certain amount of coins into the network as stake. It’s almost like a security deposit. The more coins a node deposits, the more likely they are to be chosen to validate the next block. Unlike proof-of-work, proof-of-stake miners are awarded based on their wealth, or how much coin they already have. The minters take transaction fees. This mechanism can be more cost effective than POW since it requires less computing power.
Both Proof-of-Stake, and Proof-of-Work are great on public blockchains, but prove to be rather ineffective in private permissioned chains. This is where Proof-of-Authority comes in. It is more suitable for permissioned networks where all participants are known and reputable. Without the need for mining, Proof-of-Authority is more efficient while still retaining Byzantine fault tolerance. There is a low requirement of computation power, no requirement of communication between nodes to reach consensus, and nodes are pre-approved and trusted.
Data on the Blockchain
When data is added to a blockchain, it can provide an immutable, secure record for the creation of intellectual property, and any changes to the data can be easily detected.
A blockchain may record a hash of a document. A hash is a function that converts an input of letters and numbers into an encrypted output of a fixed length. Using a fixed length output increases security, since anyone trying to decrypt the hash won’t be able to tell how long or short the input is simply by looking at the length of the output. This means that hashes are safe and secure. As an example, companies could place a hash of their unique digital documents on the blockchain. The hash of a digital document will be constant so long as the file has not been altered. Therefore, the blockchain can control and track the distribution of the document, detect the introduction of counterfeit files, and be used to resolve disputes as to who first introduced the file. By placing a hash of intellectual property documents on the blockchain, a party can publicly demonstrate data ownership, without revealing the actual data. In addition to the hash, you may also choose to store the location of the file in the database, which could be used for retrieval.
Smart contracts on the blockchain allow for contractual agreements to be automatic and secure. They are just like real life contracts. They are small programs stored on the blockchain. Two users can agree on the exchange of a good by utilizing a blockchain. if Node A is selling an apple to Node B. The Node B can send their money through the blockchain, and the smart contract will hold onto the money until Node A sends the apple. Once Node B has received the apple, the funds can then be released to Node A. This is a small-scale yet trusted way to handle transactions. Because the smart contract is immutable and distributed, neither node can lie about the deal, and neither node can alter the contract.
A smart contract does not currently initiate the retrieval of external data. Instead, one or more trusted parties must create a transaction which embeds that data in the chain. This data is often gathered and stored in a traditional database. Any interaction between a blockchain and the outside world is restricted to regular database operations. This allows for the data to be safely used in a smart contract computation.
Overall, Blockchain technology can easily be summarized as: append only, immutable databases. Blockchain is likely to change the way companies manage and distrubute their data. Companies like Hyperledger(Proof-of-Authority) and Ethereum(Proof-of-Work) are at the forefront for blockchain adoption. Games like Cryptokitties have been created using Ethereum, and decentralized social media platforms are in the works.
Large companies are beginning to test the waters of blockchain. If you would like to read more about blockchain’s effect on the financial world, here is an article:
