An introduction to Blockchain

Some define it as the new internet. Stakeholders across the board are striving to get a grasp on this new technology.

What is Blockchain really about?

This primer will tell you all you need to know about Blockchain.

Bitcoin:

It all started here. Bitcoin is a cryptocurrency. In other words, it is a decentralized and dematerialized currency. The currency was created in 2008 by Satoshi Nakamoto. The aim of Bitcoin was initially to offer an alternative to the centralized institutional banking system. Through this new system, users have access to money in a more direct way. And, to support this new ideal, a technology with integrity and decentralized governance was created: the Blockchain.

Blockchain:

As literal as it sounds — a chain of blocks of information. Each block contains information which was initially representing a movement of bitcoin from a user to another (see Nodes). Each block of the chain is linked to the next one through encrypted information (see Hash).

Cryptocurrency:

A digital currency independent from the conventional banking system. The currency is encrypted for verification and validation matters. Bitcoin is the first cryptocurrency ever publicly traded.

Purpose of blockchain: Initial and evolution.

The initial purpose of blockchain was to make money transfers:

- direct: getting rid of the intermediary, usually banks.

- faster: currency transfers in the blockchain are quasi-immediate versus the usual three days a traditional money transfer takes in the conventional system.

- cheaper: transfer fees within the blockchain are lower than the fees reclaimed by traditional banks.

The technology structure and design offer a wide range of usages. Some of them are:

- Legal: smart contracts are a positive externality of the blockchain technology. They are a new generation of contracts where the blockchain, automated and incorruptible, ensures trust. The two parties can execute the agreements without the need for intermediaries.

An example of a smart contract application: buyer A buys a product or service from seller B. Both can agree on the conditions of delivery of the goods and payment and incorporate it as conditions in the BC. Once a term is filled, the corresponding contract clause is automatically applied — be it payment, delivery, or other. The legal side of the transaction becomes lighter and 100% digitized.

- Business: from improving supply chain operations to creating more transparent and decentralized organizations. (See Private Blockchain for more.) Example: a supply chain team implements devices in trucks to check the temperature conditions of the transport. If a device raises an alert, the blockchain can automatically apply a condition (activate clause A, send a warning, enable a payment, …).

- Data management and protection: one of the government’s’ roles is to collect and store individuals and companies data. Governments and similar bodies need to securely store that data, making sure it is uncorrupted and easy to access. These are all features of the BC technology. In a report about the usage of blockchain in the Public Sector, McKinsey mentions the Estonian government as an example of early adoption of the BC for data management. “KSI (Keyless Signature Infrastructure) creates hash values, which uniquely represent large amounts of data as much smaller numeric values […] stored in a blockchain and distributed across a private network of government computers. […] The electronic health records of all Estonian citizens are managed using KSI technology, and the country is planning to make KSI available to all government agencies and private-sector companies in the country.”

Healthcare: given the intrinsic property of reliable data, BC can be used to store and retrieve patient information. The ownership can even be transferred to the patient. This also makes transferability of data from a Health body to another, nationally and internationally, more seamless than it is today. Another application of BC lays at the manufacturing level — drug authenticity can easily be tracked thanks to the way data is registered in the chain. The same can be applied to results of clinical studies, diagnosis or patient treatment journey. Healthcare is a sector with a deep dependency on trust, and that is precisely what Blockchain can provide. Companies like Farmatrust or Medicalchain already offer such services.

Read our analysis of blockchain applications to the Healthcare industry.

- Identity: to be added to the blockchain, data has to be validated. And, once added, it is very difficult to change. These features are ideal for applications in identity management and protection. Companies such as Token or Civic are doing just that. Using blockchains, they allow businesses and individuals to take control of all the elements that make their identity as members of society — security number, account number, Airbnb ratings, and so on. Individuals can use the data deposited on the blockchain (through an app for Civic, or through a ring for Token) to identify themselves to an airport check, a hotel, their car, their office, and so on.

Qualities of blockchain:

Blockchains have three qualities:

• Decentralized: the chain itself never sits on one computer, it is reproduced throughout the peer-to-peer network. This quality strengthens the entire system as decentralized information is more difficult to hack than a centralized one sitting in a unique location.
• Distributed: every transaction that is created on the network is distributed to all the individual centers (nodes). Distribution makes all the data available to anyone who is part of the system, which gives incontestable transparency and helps governance.
• Quasi-immutable: once a block has been validated and linked to the chain, it is complicated to change it. The difficulty comes from the structure of the chain itself: each block is connected to another through a hash or key, which contains information about the block itself and the previous block. The more blocks there are, the more complex the linking information. Through this compound effect, the longer the blockchain, the more difficult it is to alter the data it holds. Moreover, to change the information in a block, a user has to determine a hash (mathematical computation) as well as perform additional work (see Proof of Work).
• Validation & consensus-based: the chain relies on a system of validation of each block before it can integrate the chain. See more on this in Validation. Moreover, there needs to be a consensus amongst all nodes to validate the specific operation.

Typology of blockchains:

There can be three types of blockchains:

• Public: they are an open network any user can freely join and participate in the daily life of the system. They can create and broadcast transactions, as well as take part in the consensus process. They can become miners too. Bitcoin and Ethereum are open blockchains.
• Consortium blockchains: a chain controlled by a set number of nodes. Controlling nodes set the rules of the chain: general protocol, determination of critical nodes, token allocations, and so on. Consortium blockchains are a hybrid between public and private chains.
• Private blockchains: a chain that is created and open to only a limited group of people, generally a set organization. This type of chains allows companies to benefit from the technology for internal purposes and KPIs such as cost reduction, supply chain management or general management. As did Vitalik Buterin, co-founder of Etherum, explain: [A consortium blockchain] “provides a hybrid between the “low-trust” provided by public blockchains and the “single highly-trusted entity” model of private blockchains, whereas the latter [private blockchain] can be more accurately described as a traditional centralized system with a degree of cryptographic auditability attached.” (1)

Nodes:

Single users in the network of peers. Blockchain networks are usually open (except Private Blockchains); thus, the number of nodes does not have any limit.

Ledger:

Initially a term used in book-keeping, a ledger is the document where transactions of a company are registered. In the context of blockchain and cryptocurrency, it is the central document on which the system the blockchain is transcribed and stored. Every block of the chain, linked one to the other, are registered into a ledger. This ledger is the document that is distributed amongst every node of the system.

Hyperledger:

“Hyperledger is an open source collaborative effort created to advance cross-industry blockchain technologies. It is a global collaboration, hosted by The Linux Foundation, including leaders in finance, banking, Internet of Things, supply chains, manufacturing, and Technology.”

Validation:

A cornerstone of BC.

When a user plans on creating a transaction, they broadcast a block which then has to be validated by the network. The validation lies upon these principles:

• validation of its compliance with the blockchain’s rules
• validation of its digital signature
• validation of its integrity with the previous transaction
• validation is done through calculations which are to be performed by particular nodes called “miners.” (see “miners” and “PoW”).

Miners:

Special nodes which are willing to solve mathematical problems to validate new blocks. When a new block is issued, miners enter in competition to verify the data. The first node to do so gets a bitcoin reward. Miners are the safeguards of the chain. Their plurality ensures the system is self-regulated in a decentralized fashion.

Proof of work (PoW):

To ensure data on the network is upright, users willing to alter data in the chain need to undergo an additional calculation: PoW. The information to be provided in this process is designed to be challenging and complex to produce.

Challenges:

The blockchain technology is still very novel and subsequently, it still faces challenges. Some of these are:

• Scalability: The maximum number of transactions per second a blockchain can support.
• Oracles — Reliable External Data Feeds: Ensuring that interactions the blockchain has with external databases do not harm the chain’s integrity.
• Crypto-economic primitives: cryptography-backed economic tools (primitives) that allow the construction of innovative blockchain application. These tools are still in their infancy so the challenge here will be for them to evolve through trial and error. They will also need to be standardized for broad adoption.

Read more on how the blockchain can reach its full potential here

This wiki was brought to you by the Blockchain team at Swish.

Head to our website for more! We explain what these concepts are:

• Hash
• Genesis block
• ICOs
• Tokens
• Proof of Stake
• Neo
• Ethereum
• Wallet

Originally published on www.swishlabs.com