Crash Course: Blockchain
What is the underlying technology Bitcoin is built on top of?
Each block stores data and is connected to the previous block via a unique hash code, forming the infamous chain.
What is the Blockchain?
A blockchain, as a short-term definition, is an immutable and decentralized distributed database that stores data as interconnected blocks. Let’s expand upon what this actually means:
Immutable: Once data is added to the blockchain, the data cannot be altered or changed. This feature is to ensure the integrity of transactions (note that these can be both transactions of data or fiat) and that no one can tamper with the blockchain database.
Decentralized: The blockchain, in theory, should have no central governing authority over the data. The data is distributed across all active participants in the network, known as node operators. All nodes will have a copy of the blockchain stored on their device. To better illustrate how this works, let's compare the blockchain to traditional cloud storage:
Traditional Cloud Storage
In the world of the cloud, devices rely on a centralized data storage company to actively manage uploading and downloading of files. A prime example of this would be Google Drive: we establish a connection to one of Google’s cloud devices and write our content that will be stored in one of their databases. If files need to be retrieved, we would send a request to the Google device to download the file.
This makes sense for traditional collaboration methods. However, when transactions of data require integrity through a tamper-proof design, the cloud fails. This is where the blockchain comes in.
Blockchain Database
Instead of all the data being stored by a central authority, a copy of the blockchain will be distributed across all network participants. If any file needs to be transferred across the network, it is done through a Peer-to-Peer (P2P) model. This means that I will be sending the file directly to the device I am transacting with.
Note that it is common for people to refer to the method of blockchain storage as distributed ledger technology, where ledgers are the node operators.
There is one caveat to the P2P model. Each blockchain network will have its own consensus model where node operators validate a transaction to ensure its legitimacy. Consensus models will be elaborated on in the next section.
Consensus Models: Proof of (fill in the blank)
In order for data blocks to be added to the blockchain, transactions need to go through a consensus protocol to ensure the integrity of the transaction. Consensus protocols are where the real innovation comes from and much research can still be done in this area. Depending on the blockchain environment, varying consensus models will be chosen. Currently, the two most well-known consensus models are:
Proof of Work: Miners compete to compute a hash key value that links blocks.
Proof of Stake: Validators stake money for each transaction and receive a reward for doing so.
Miners/Validators keep the integrity of the blockchain database.
Trustless System
The blockchain acts as a trustless system. This means that all network participants are held accountable to store the proper data and not trust a central authority to manage data changes. This is because each node operator has a copy of the data stored on their device, enabling all network participants to validate data changes through their own stored data.
How the Blockchain Can be Hacked
Public blockchains are prone to be hacked when a single person or entity gains 51% control of the network. Blockchain confirmations rely on a majority consensus to add transactions onto the blockchain. If a malicious actor with a majority stake in the network were to add a faulty transaction to the blockchain, they would diverge the blockchain.
Malicious actors altering the network should be less of a concern for private blockchains.
Risks in Using Blockchain Technology
Blockchain technology is still early and in its infancy. This leads to:
- Shortage of people who understand the technology, let alone have the experience to implement the blockchain.
- Shortage in development tools for blockchain developers. This significantly increases project durations.
- It is unclear which blockchain networks / frameworks will be utilized in the future or deemed successful. Because of this, there is hesitation to pick a reliable framework to use as it may not be relevant in the future.
The majority emphasis of blockchain development is in decentralized finance. However, I believe that we have only scratched the surface of potential blockchain use cases. Within the next 10–20 years, it will be interesting to see what further solutions are built using blockchain technology.
