Blockchain Technology Explained
Last Updated: 1st November 2018
Blockchain technology was invented in 2008, by a pseudonymous group or individual operating under the moniker: Satoshi Nakamoto. The manner in which this technology was deployed by Satoshi Nakamoto was to serve as a transactional ledger for the Bitcoin cryptocurrency. Utilizing blockchain in this manner allowed for the very first digital currency to overcome the double-spend problem, which is the risk that a digital currency is capable of being spent twice.
Blockchain technology is an invention that can be thought of as a ledger that keeps a record of economic transactions or anything of value. Each group of transactions that is made on a blockchain is referred to as a block, with each block then being combined chronologically to form a chain, hence the term blockchain. Each block contains a cryptographic hash of the previous block, a timestamp, and batched transactions. Each linked block solidifies the integrity of the previous block, making them extremely tamper resistant and secure. The rate at which a network generates one extra block for a blockchain is known as the ‘block time’. By the time of a block completion, data included in the block becomes verifiable. Some chains can generate blocks extremely quickly, having block times as low as five seconds. Bitcoin, currently one of the more popular blockchains in existence, currently possesses a block time of approximately 10 minutes.
A blockchain is usually managed by a second-layer network of peer-to-peer computing nodes. These nodes are simply computers that are running a client that allows them to be connected to the blockchain network. Each node on the network receives a fully copy of the blockchain, which is automatically downloaded upon joining the network. Nodes are usually responsible for validating and relaying transactions on the network. Nodes that are tasked with validating transactions on the network are usually referred to as ‘mining nodes’. This subset of nodes secure the network by ensuring that only valid transactions are included on the chain. In exchange for securing the network, these mining nodes are rewarded with cryptocurrencies such as Bitcoin, which effectively serves as an incentive mechanism that is designed to safeguard the network. This process is known as proof-of-work, and it is a consensus algorithm that ensures that consensus as to the shared state of the blockchain can be reached. Proof-of-work is a very popular consensus algorithm, and it is utilized in networks such as Bitcoin. However, numerous consensus algorithms can exist on other blockchains, such as: proof-of-stake, delegated proof-of-stake and proof-of-importance.
Decentralization and Transparency
The idea of decentralization that is so often attached to blockchain technology is embodied within this second-layer of peer-to-peer nodes. Anyone in the world can take up the responsibility of validating and relaying transactions on the network. Data on the chain exists as a globally shared database and is not centrally held by any one individual. This makes it all the more difficult for any hacker to corrupt the database, as a copy of the blockchain is held by numerous nodes on the network and is not stored in any single location. This effectively means that a blockchain possesses no single point of failure. Blockchains are also often described as being transparent. All transactional data that is included on the blockchain is easily verifiable by others on the network, as everyone has access to the same information. Data on the blockchain can effectively be regarded as being incorruptible, because altering information on the blockchain would require an enormous amount of computing power and considerable financial cost to override the entire network.
The characteristics that are exhibited by blockchains make it a very promising piece of technology in numerous areas. The most well known use case for blockchain technology is in the realm of cryptocurrency. However, blockchain could also be effective in areas such as:
- Supply Chain Management
- Digital Identity
- Sharing Economy
A list of promising blockchain use cases.
Types of Blockchains
Blockchains can generally be subdivided into the following categories: public blockchains, private blockchains, and consortium blockchains.
Public blockchains – These types of blockchains are characterized as having no access restrictions. This means that absolutely anyone with a device that is capable of accessing the internet can operate on the network. Individuals are able to execute transactions or even become validators on the network. The largest and more popular public blockchains currently in existence are Bitcoin and Ethereum.
Private blockchains – These blockchains differ to public blockchains because they are permissioned. Access to a private blockchain requires that existing members on the private network invite outsiders to join. Private blockchains are usually associated with enterprise use, and are considered a middle-ground for companies that are not comfortable with the lack of centralized control that are inherent in public blockchains.
Consortium blockchains – These types of blockchains are often regarded to be semi-decentralized. On one hand, consortium blockchains share similar traits to private blockchains in the sense that, they too are permissioned. However, on the other hand, consortium blockchains are controlled by a number of companies, instead of a single organization. Administrators of a consortium blockchain can possess powers that include: restricting the rights of other network participants on the chain, and limiting the number of nodes that are able to partake in the consensus algorithm process.