What is Blockchain Technology? A Step-by-Step Guide
By Soumendu Samanta on The Capital
What is Blockchain Technology?
The blockchain is an incredibly brilliant innovation-the brainchild of a pseudonym-known individual or group of men, Satoshi Nakamoto. But it has since grown into something bigger and the key question every single person asks is: What is Blockchain?
Is Blockchain Technology the New Internet?
By allowing for the sharing but not copying of digital content, blockchain technology provided the foundation of a new type of internet. Bitcoin blockchain, (Buy Bitcoin) initially developed for the digital currency, the tech community has now found other possible applications for the platform.
A blockchain is, in the simplest of terms, a time-stamped series of immutable records of data that is managed by a cluster of computers not owned by any single entity. Each of these blocks of data (i.e. block) is secured and bound to each other using cryptographic principles (i.e. chain). So, what’s so unique about it, and why do we say it has capabilities that disrupt industry?
There is no central authority in the blockchain network — it is the very definition of a democratised system. Since it is a public and permanent ledger, the information found in it is open to all to see. Therefore, whatever is built on the blockchain is transparent by its very existence and those concerned are accountable for their actions.
A blockchain carries no transaction cost
(An network costs yes, but no transaction costs.) The blockchain is an easy but ingenious way of completely automated and secure transfer of information from A to B. One party to a transaction initiates the process via a block formation. This block is checked by thousands of computers, maybe millions, scattered across the net. A chain, which is stored around the net, is attached to the checked block, creating not only a unique record but a unique record with a unique history. In millions of cases, falsifying a single record would mean falsifying the entire chain. That is virtually impossible. Bitcoin uses this money exchange model but it can be implemented in several other ways. Let us see it through an example-
Uber and Airbnb got boosted by blockchain. All you need to do is encode the transactional information for a car ride or overnight stay and again you have a perfectly secure way to disrupt the business model of the companies that have just started to challenge the traditional economy. Not only are we taking out the middle man in charge delivery, but we are also removing the need for the match-making site.
How Does a Blockchain Work?
Information stored on a blockchain operates as a shared database and continuously reconciled. This is a way to use network that has clear advantages. The blockchain database is not stored at any location, which means the records it holds are really public and easily verifiable. There is no centralized version of this information that would confuse a hacker. Hosted simultaneously by millions of machines, the data is available to anyone on the internet.
The reason why the blockchain has gained so much admiration is that:
- It is not owned by a single entity, hence it is decentralized
- The data is cryptographically stored inside
- The blockchain is immutable, so no one can tamper with the data that is inside the blockchain
- The blockchain is transparent so one can track the data if they want to
The Three Pillars of Blockchain Technology
Pillar #1: Decentralization
We ‘d been more used to centralized networks before Bitcoin and BitTorrent came along.
In a decentralized system, there is no single entity that holds the information. In reality, the information is owned by everyone inside the network. If you wanted to communicate with your friend in a decentralized network then you can do so directly without going through a third party. It was behind Bitcoins’ principal philosophy. You are in control of your assets, and you, alone. You can give the money without having to go through a bank to everyone you want.
Pillar #2: Transparency
“Transparency” is one of the most interesting and misunderstood concepts in blockchain. Some people say that blockchain gives you privacy while others say it is transparent. Why do you think it does happen?
Well … the identity of an individual is concealed by complex cryptography and reflected only by his or her public address. So, if you want to look up the transaction history of an individual, you ‘re not going to see “Bob sent 1 BTC” instead of “1MF1bhsFLkBzzz9vpFYEmvwT2TbyCt7NZJ sent 1 BTC.”The following snapshot will show you what I mean by Ethereum transactions:
And while the real identity of the individual is secure, you’ll still see all the transactions that their public address has done. In a financial system, the degree of transparency has never existed before. It provides the extra, and much-needed, degree of transparency that some of these biggest organizations need.
Pillar #3: Immutability
Immutability, in the sense of blockchain, means that it can not be tampered with after it has been inserted into the blockchain.
The reason the blockchain acquires this property is because of the cryptographic hash function. Hashing means, in simple terms, taking an input string of any length and sending out a fixed-length output. In cryptocurrencies such as bitcoin, the transactions are taken as input and run through a hashing algorithm (Bitcoin uses SHA-256) which gives a fixed-length output. For example-
As you can see, in the case of SHA-256, the output will always have a fixed length of 256 bits, no matter how large or small the input is. That becomes crucial when dealing with an immense amount of data and transactions. So essentially, you can only remember the hash and keep track instead of remembering the input data which could be massive.
Maintaining the Blockchain — Network, and Nodes
A peer-to-peer network carries on the blockchain. The network is a set of nodes, which are interconnected. Nodes are individual input-taking computers that perform a function on them and give output. The blockchain uses a special kind of network called “peer-to-peer” which divides its entire workload between participants, all of whom are equally privileged, called peers. There is no longer one central repository, and instead there are many peers that are distributed and decentralized.
Types of Blockchain
#Public Blockchain:
Public blockchains are designed to be completely decentralized, with no one regulating which transactions are registered in the blockchain, or the order in which they are processed. Public blockchains can be highly resistant to censorship, as everyone is open to entering the network irrespective of location, nationality, etc. This makes it incredibly difficult for authorities to shut down on them. For example bitcoin and ethereum.
#Consortium Blockchain:
Consortium blockchains are often considered distinct from private blockchains. The key difference between them is that consortium blockchains are controlled by a single entity rather than a party. This method has the same advantages as a private blockchain and could be considered as a sub-category of private blockchains as opposed to a separate chain type. Hyperledger and Corda are some examples.
#Private Blockchain:
Participants need permission to join the networks Transactions are private and are only open to participants in the community who have been allowed to enter the network. Private blockchains are more centralized than public blockchains.
#Hybrid Blockchain:
A hybrid blockchain combines the advantages of public and private blockchains: hosting an application or service on an independently approved blockchain while using a public blockchain for authentication and settlement is feasible. It enables application developers to receive the best of immutability and confidence from a permissionless public network while maintaining the benefits of a licensed blockchain’s control and performance.
Who Will Use The Blockchain?
Actually finance provides the technology with the best use cases. For example, on foreign remittances. The World Bank reports that in 2015, money transfers were sent to over $430 billion US. And What is Blockchain good for? The market for blockchain developers is strong at the moment.
For these types of transactions the blockchain actually cuts the middleman out. The invention of the Graphical User Interface ( GUI) which took the form of a “desktop” has made personal computing open to the general public. Likewise, the most common Interface developed for the blockchain is the so-called “wallet” applications that people use to purchase Bitcoin stuff and store it with other cryptocurrencies.
What is Blockchain good for: Its future!!
#1 Smart contracts
Distributed ledger technology allows simple contracts to be coded which will be enforced when specified conditions are met. Ethereum is an open-source blockchain project explicitly designed to realize the possibility. Still, Ethereum has the ability in its early stages to harness the power of blockchains on a truly world-changing scale.
#2 The sharing economy
The sharing economy is already an established success, with companies like Uber and Airbnb thriving. Nonetheless, currently, consumers wishing to hail a ride-sharing service will rely on an intermediary like Uber. By allowing peer-to-peer transfers, the blockchain opens the door to direct interaction between parties — resulting in a truly decentralized economy of sharing.
#3 Crowdfunding
With the new peer-to-peer economy, crowdfunding projects such as Kickstarter and Gofundme are doing the advance work. The success of such sites suggests people want a direct say in the production of the product. Blockchains carry the curiosity to the next level, potentially generating venture capital funds from crowdsourced sources.
#4 Governance
By making the results fully transparent and open to the public, distributed database technology may bring full transparency to elections or any other form of poll taking. Smart contracts based on Ethereum help to automate the process.
#5 Supply chain auditing
Increasingly, consumers want to know that the ethical claims that companies make about their products are real. Distributed ledgers provide an easy way to certify genuine back-stories of the things we buy. Transparency comes with blockchain-based time-stamping of a date and location which corresponds to a product number, for example, on ethical diamonds.
#6 File storage
The decentralization of online file storage brings clear benefits. Distributing data across the network protects files from hacking or getting lost.
#7 Protection of intellectual property
Digital content, as is well known, can be replicated infinitely — and spread widely across the internet. This has delivered a goldmine of free content to web users globally. Patent holders, nevertheless, were not so fortunate, losing leverage of their intellectual property, and ultimately suffering financially. Smart contracts will secure copyright and automate online sales of artistic works, removing the possibility of copying and redistributing the files.
Conclusion:
At the early stage of his research and development Blockchain still prevails. In the world of encryption and cryptography, pioneer researchers have come forward to push it further to newer heights. It will help the Financial as well as Non Financial sectors. At the same time it should pay attention to the issues of reliability, security, and mutual knowledge. Since its inception it has been one of the most appealing of technologies. And there are numerous research opportunities in this field and there is an urgent need to explore and look for improvement only by reducing the weaknesses and increasing their performance.
