Basics of blockchain technology

Overview

Blockchain is among the buzzwords of the year. Many products are being built using blockchain technology.

The purpose of this shot is to provide a basic understanding of blockchain technology in a simplified manner. Before we begin, we’d like to emphasize that blockchain is not Bitcoin, cryptocurrency, or Web 3.0, and it is not limited to these three applications.

What exactly is blockchain?

A blockchain consists of a list of records or transactions that are stored in blocks. These blocks are linked together and constitute a chain, which we refer to as a blockchain. These blocks maintain the order of records as they are linked sequentially.

For a block to be added to the blockchain of a particular network, the transactions stored in that block must be verified to have happened, validated, and completed. If a majority of peers on the network agree on the outcome of the records, that is to say, a majority of the peers check the validity of a transaction. If they think the transaction is valid, it is then added to the blockchain.

Once a record is written on the blockchain, it cannot be modified or deleted. All participants on the network have a single, shared source of truth. This is the key to the immutability feature of the blockchain.

There are no restrictions on the types of records that can be stored in a Blockchain. Records of medical transactions, patients, management activities, and many others can be stored on the Blockchain. The data of the first ever created block on a particular blockchain can be accessed by traversing from the last created block to the first block (or the block we want to access).

The blocks on a blockchain are secured using strong cryptographic and consensus algorithms. The cryptographic algorithm works as an encryption approach in which the encrypted data is encoded or changed to some extent before it is sent out of a network by the sender, and only authorized parties can access the encrypted data.

Examples of widely used cryptographic algorithms are Blowfish, Twofish, Advanced Encryption Standard (AES), and so on. The AES is the toughest cryptographic algorithm to break.

A blockchain also relies on its network nodes for the security and smooth running of the system. The consensus algorithm is implemented as part of the node applications. It provides the rules for how the blockchain network will arrive at a single viewpoint.

Some examples of the consensus algorithm include proof-of-work, proof-of-stake, proof-of-elapsed time, practical byzantine fault tolerance (PBFT), and so on.

In a nutshell, blockchain technology can be defined as an immutable, decentralized digital ledger (or database) that is duplicated and distributed across an entire network. Chain is based on the Distributed Ledger Technology (DLT) principle, which means that the system is managed by peers across the network. The identity of the peers across a network is pseudonymous.

The applications of blockchain technology can be seen in areas such as banking, payment and transfers, healthcare, law enforcement, voting, real estate, and many more.

The key features of blockchain

Blockchain technology’s uniqueness is derived from the following key features:

Decentralized Systems: There is no central governing body or authority. The blockchain network is decentralized as a group of nodes maintain the network.

Distributed Ledger: Every node (peer) on the network has a copy of the stored records. Hence, there is full replication of the blocks on every node. This promotes transparency and trust across the network.

Immutability: Unlike the traditional database where the CRUD (create, read, update, and delete) operations are performed, a blockchain can only perform the “create and read” operations. Blocks of records added to the blockchain can not be updated or deleted. This makes the blockchain immune to corruption.

Improved security: Blockchain uses private key cryptography to improve the security of identities and transaction records stored on the network. A blockchain network cannot be hacked or corrupted unless one has control of more than 50% of the peers or nodes of the network. Encryption is used in blockchain networks to add a layer of security to the network.

Consensus: The consensus algorithm of a blockchain acts as a network servicing protocol as every blockchain has a consensus to help the network make decisions and maintain consistency across the network.

The types of blockchain

The three high-level types of blockchain are:

Public blockchain: This is also known as an “open” or “permissionless” network. The blockchain network is open to anyone to pseudo-anonymously join the network. All nodes can access the blockchain to create and validate new blocks of records. Hence, the public blockchain is a more secure type since many nodes can validate a block of transactions.

A few examples are of public blockchain are Ethereum, Bitcoin, and Monero.

Private blockchain: In this type of blockchain, all permissions are kept centralized within an organization. Only specific people granted permission by the organization can verify and add records of transactions to the blocks, while every other person on the network is allowed to view the blocks. The private blockchain has a short validation time for new records of transactions since only permission nodes can validate a block. However, this attribute makes it vulnerable to fraud.

A few examples of private blockchain are MultiChain LockChain, Stacks (Blockstack), Oracle, and so on.

Consortium: This is a type of private blockchain managed by a group of organizations or individuals. It is also called a federated blockchain. The consortium blockchain is more decentralized and secure than the private blockchain.

An example is the Hyperledger.

Significant limitations of blockchain

There are a few significant limitations to blockchain:

1. The high cost of implementing the blockchain.

2. High energy consumption.

3. Users have to maintain their wallets unless they lose access to them.

4. A blockchain cannot go back in time because the data is immutable.

5. Due to the consensus mechanism, blockchains are harder to scale.

The major limitation of blockchain technology is scalability, which stems from the time it takes for network participants to reach a consensus and the time it takes to record transactions in the block. However, scalability options are being developed and integrated into the Blockchain to solve its scalability problem.

Some examples of the scalability options include the lightning network, Segregated Witness (SegWit), sharding, and increasing block size.

Conclusion

The way we trust and exchange value is being transformed by blockchain technology, and just like the internet, blockchain technology is here to stay.

Though blockchain technology is still in its early stages of development and widespread adoption, it has advanced rapidly since its inception. It has resulted in a more accurate, efficient, and secure method of conducting business and other online activities without the use of intermediaries.