Blockchain — A Digital Ledger

Blockchain is a system of recording information in a way that makes it difficult or impossible to change, hack, or cheat the system. A blockchain is essentially a digital ledger of transactions that is duplicated and distributed across the entire network of computer systems on the blockchain. Each block in the chain contains a number of transactions, and every time a new transaction occurs on the blockchain, a record of that transaction is added to every participant’s ledger. The decentralised database managed by multiple participants is known as Distributed Ledger Technology (DLT).

How does Blockchain Work?

Blockchain aims at allowing recording and distribution of digital information without its editing. In this way, a blockchain is the foundation for immutable ledgers — records of transactions that cannot be altered, deleted, or destroyed. This is why blockchains are also known as a distributed ledger technology (DLT).

The blockchain concept was first proposed as a research project in 1991 and predated its first widespread application in use — Bitcoin — in 2009. In the years since, the use of blockchains has exploded via the creation of various cryptocurrencies, decentralised finance (DeFi) applications, non-fungible tokens (NFTs), and smart contracts.

Transaction Process:

The transaction process in the working of blockchain technology works in a series of steps:

1. A new transaction is entered.
2. The transaction is transmitted to a network of peer-to-peer computers scattered across the world.
3. This network of computers solves equations to confirm the validity of the transaction.
4. Once confirmed to be the legitimate transactions, they are clustered together into blocks.
5. These blocks are then chained together creating a long history of all transactions that are permanent.
6. The transaction is now complete.

Blockchain Decentralisation:

A database of all the information is generally stored on a computer or on a cloud network. There may be many cases where the data is lost or corrupted. A blockchain allows the data held in that database to be spread out among several network nodes at various locations. This both creates redundancy and also maintains the fidelity of the data stored therein — if somebody tries to alter a record at one instance of the database, the other nodes would not be altered and thus would prevent someone from doing so. For example: if a user tampers with Bitcoin’s record of transactions, all other nodes could cross-reference each other so as to pinpoint the node with incorrect information. Such a system can establish a transparent order of events. Hence, no single node within the network can alter information held within it.

This system ensures that the information and history (such as transactions of a cryptocurrency) are irreversible. Such a record could be a list of transactions (like that of a cryptocurrency). On the other hand, a variety of other information like legal contracts, state identifications, or a company’s product inventory can also be stored.

Transparency:

Blockchain technology being transparent, all transactions can be transparently viewed by either having a personal node or using blockchain explorers that allow anyone to see live transactions. Each node has its own copy of the chain that gets updated as fresh blocks are added. This implies that you could track the transactions wherever they occur.

Taking the example of Bitcoin again; exchanges have been hacked in the past, where those who kept Bitcoin on the exchange lost everything. The hacker may be anonymous but the extracted Bitcoins can be easily traced. If the Bitcoins stolen in some of these hacks were to be moved or spent somewhere, it would be known.

It is given that the records stored in a particular blockchain are encrypted. This means that only the owner of a record can decrypt it to reveal their identity (using a public-private key pair). As a result, users of blockchains can remain anonymous while preserving transparency.

Types of Blockchains:

1. Public Blockchain Networks — Bitcoin and other cryptocurrencies originated from public blockchains, which also played a role in popularising distributed ledger technology (DLT). Public blockchains help eliminate several issues like security flaws and centralization. With DLT, data is distributed across a peer-to-peer network, rather than being stored in a single location. A consensus algorithm is used for verifying information authenticity.
2. Private Blockchain Networks — Private blockchains operate on closed networks, and tend to suit private businesses and organisations. Companies can use them to customise their accessibility and authorization preferences, parameters to the network, and other important security options. Only one authority manages a private blockchain network.
3. Consortium Blockchains — Similar to permissioned blockchains, consortium blockchains have both public and private components, except multiple organisations will manage a single consortium blockchain network. These types of blockchains can initially be more complex to set up, but once they are running, they can offer better security. Moreover, consortium blockchains are optimal for collaboration with multiple organisations.
4. Hybrid Blockchain Networks — Also known as permissioned blockchains, permissioned blockchain networks are private blockchains that allow special access for authorised individuals. Organisations typically set up these types of blockchains to get the best of both worlds, since it enables better structure when assigning who can participate in the network and in what transactions.

Why is there so much Hype around Blockchain?

Digital currency had proved itself to be an impossible dream until now. Various people have attempted to create a digital currency but have all failed till the introduction of blockchain technology. The most prominent concern was of trust. How would society guarantee that someone creating a new currency, say ABC dollar, wouldn’t give themselves a million ABC dollars by stealing someone else’s.

Bitcoin was designed to solve this problem by using a specific type of database called a blockchain. Most normal databases have someone in charge who can change the entries (e.g. giving themselves a million ABC dollars). Blockchain differs from normal databases in that it is run by the users. Moreover, bitcoins cannot be faked, hacked or double spent. All of this results in a certain trust among the people that this digital currency has some value.

Bitcoin is not the same as Blockchain:

Blockchain technology was first outlined in 1991 by Stuart Haber and W. Scott Stornetta, who wanted to implement a system where document timestamps could not be tampered with. Blockchain had its first real-world application only when Bitcoin was launched in 2009.

The Bitcoin protocol is built on a blockchain. In a research paper introducing the digital currency, its pseudonymous creator, Satoshi Nakamoto, referred to Bitcoin as “a new electronic cash system that’s fully peer-to-peer, with no trusted third party.”

However, Bitcoin merely uses blockchain so as to record a ledger of payments transparently. However, blockchain can be used to immutably record any number of data points. This could be in the form of transactions, votes in an election, product inventories, state identifications, etc. Taking the case of votes in an election — blockchain’s immutability means that fraudulent voting would become far more difficult to occur. A voting system could provide each citizen of a country with a single cryptocurrency or token. Each candidate would be assigned a specific wallet address, and the voters would send their token or crypto to the address of their chosen candidate. Blockchain’s transparent and traceable nature would eliminate the need for human vote counting and the ability to tamper with physical ballots.

Applications of Blockchain Technology:

Blockchain isn’t only used for financial transactions. The security and transparency it offers proves the technology to be versatile enough to fulfil needs beyond one area of expertise. Industries covering energy, logistics, education and more are utilising the benefits of blockchain every day. Top uses include:

• Cryptocurrency
• Cybersecurity
• Accounting and record keeping
• Supply chain
• Healthcare