Blockchain Technology|Everything you need to know

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Blockchain

Overview

You may be familiar with the term “blockchain” if you have been following banking, investing or cryptocurrency over the last 10 years. It is the record-keeping technology behind the Bitcoin network. Blockchain is a distributed, decentralized and public ledger. But it is quite easier to learn than it sounds.

What is Blockchain?

Have you ever thought that if this technology is so complex then why its name is blockchain? Actually, at its most basic level, blockchain is literally just a chain of blocks but not in the traditional sense of those words.

When we say the words “block” and “chain” in this context, we are actually defining the two terms. Here the “block” means digital information and “chain” means public database. It is actually the digital information stored in a public database.

What are the uses of blocks?

“Blocks” in the word blockchain are made up of digital pieces of information. Specifically, they have three parts:

1. Blocks store information about transactions

The information is about the date, time and dollar amount of your most recent purchase from any online website.

2. Blocks store information about who is participating in transactions.

A block for your splurge purchase from online sites will record your name. Your purchase is recorded without any identifying information instead of using your actual name.

It is actually recorded using a unique “digital signature” or a username.

3. Blocks store such information which makes them different from other blocks.

Each block stores a unique code called a “hash” that allows us to distinguish it from other blocks. Hashes are cryptographic codes that are created by special algorithms.

Let us see an example. If you made your splurge purchase on Amazon but while it is in transit then you decide that you just can’t resist and need a second one. Even though all the details of your new transaction would look nearly identical to your earlier purchase. But we can still tell that the blocks are apart because of their unique codes.

While the block in the above example is being used to store a single purchase from Amazon, the reality is something different. A single block on the Bitcoin blockchain can actually store up to 1MB of data. This means a single block can house a few thousand transactions under one roof depending on the size of transactions.

How does blockchain work?

When a block stores new data, it is added to the blockchain. Blockchain consists of multiple blocks strung together. In order for a block to be added to the blockchain, however, four things must happen:

1. A transaction must occur

Let’s continue with the example of your impulsive Amazon purchase. After hastily clicking through multiple checkout prompt, you go against your better judgment and make a purchase.

A block will group together potentially thousands of transactions. Hence your Amazon purchase will be packaged in the block along with other users’ transaction information as well.

2. That transaction must be verified

After making that purchase, your transaction must be verified. With other public records of information, there is also someone in charge of getting new data entries.

With blockchain, however, that job is left up to a network of computers. When you make your purchase from Amazon, that network of computers rushes to check that your transaction happened in the correct way. They confirm the details of the purchase including the transaction’s time, dollar amount and participants.

3. That transaction must be stored in a block

After your transaction has been verified as accurate, it gets the green light. The transaction’s dollar amount, your digital signature are all stored in a block. There the transaction will likely join hundreds or thousands.

4. That block must be given a hash

Once all of a block’s transactions have been verified, it must be given a unique and identifying code called a hash. The block is also given the hash of the most recent block added to the blockchain. Once the block is hashed, the block can be added to the blockchain.

When that new block is added to the blockchain, it becomes publicly available for anyone to view.

Is blockchain private?

Anyone can view the contents of the blockchain but users can also opt to connect their computers to the blockchain network as nodes. In doing so, their computers receive a copy of the blockchain that is updated automatically whenever a new block is added that gives a live update whenever a new status is posted.

Each computer in the blockchain network has its own copy of the blockchain which means that there are thousands or in the case of Bitcoin, millions of copies of the same blockchain.

Fact about the security of blockchain

Although each copy of the blockchain is identical spreading that information across a network of computers makes the information more difficult to manipulate. With blockchain, there isn’t a single and definitive account of events that can be manipulated. Instead, a hacker would need to manipulate every copy of the blockchain on the network. This is meant by block down being a distributed ledger.

However, you will notice that you do not have access to identifying the information about the users making transactions.

Although transactions on the blockchain are not completely anonymous, personal information about users is limited to their signature or username.

This raises an important question: if you cannot know who is adding blocks to the blockchain then how can you trust blockchain or the network of computers upholding it?

Is blockchain secure?

Blockchain technology accounts for the issues of security and trust in several ways. First new blocks are always stored linearly and chronologically. That is they are always added to the end of the blockchain. If you take a look at Bitcoin’s blockchain, you will see that each block has a position on the chain called a height.

After a block has been added to the end of the blockchain, it is very difficult to go back and alter the contents of the block. That’s because each block contains its own hash along with the hash of the block before it. Hash codes are created by a math function that turns digital information into a string of numbers and letters. The hash code changes as well when the information is edited.

Do you know?

Let’s say a hacker attempts to edit your transaction from Amazon so that you actually have to pay for your purchase twice. As soon as they edit the dollar amount of your transaction, the block’s hash will change. The next block in the chain will still contain the old hash and the hacker would need to update that block in order to cover their tracks. However, doing so would change that block’s hash.

In order to change a single block, then a hacker would need to change every single block after it on the blockchain. Recalculating all those hashes would take an enormous and improbable amount of computing power. In other words, once a block s added to the blockchain it becomes very difficult to edit and impossible to delete.

The truth behind the security of blockchain

To address the issue of trust, blockchain networks have implemented tests for computers that want to join and add blocks to the chain.

The tests called “consensus models”, require users to prove themselves before they can participate in a blockchain network. One of the most common examples employed by Bitcoin is called proof of work.

In the proof of work system, computers must prove that they have done work by solving a complex computational math problem. If a computer solves one of these problems, they become eligible to add a block to the blockchain.

But the process of adding blocks to the blockchain, what the cryptocurrency world calls “mining” is not easy.

In fact, the odds of solving one of these problems on the Bitcoin network were about one in 15.5 trillion in January 2020. To solve complex math problems at those odds, computers must run programs that cost them significant amounts of power and energy.

Blockchain vs Bitcoin

Blockchain technology

The goal of blockchain is to allow digital information to be recorded and distributed but not edited. That concept can be difficult to wrap our heads around without seeing the technology in action so let’s take a look at how the earliest application of this technology actually works.

Blockchain technology was first outlined in 1991 by two researchers named Stuart Haber and Scott Stornetta who wanted to implement a system where document timestamps could not be tampered with. But it wasn’t until almost two decades later with the launch of Bitcoin in January 2009 that blockchain had its first real-world application.

Bitcoin system

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

You have all these people all over the world who have Bitcoin. There are likely many millions of people around the world who own at least a portion of a bitcoin. Let’s say one of those millions of people wants to spend their bitcoin on groceries. This is where the blockchain comes in.

When it comes to printed money, the use of printed currency is regulated and verified by a central authority. It is usually a bank or government but no one controls the Bitcoin. Instead, transactions made in bitcoin are verified by a network of computers. This is meant by the Bitcoin network and hence it is decentralized.

The race between Bitcoin and Blockchain

When one person pays another for goods using bitcoin, computers on the Bitcoin network race to verify the transaction. In order to do so, users run a program on their computers and try to solve a complex mathematical problem called a hash.

When a computer solves the problem by hashing a block, its algorithmic work will also have verified the block’s transactions. The completed transaction is publicly recorded and stored as a block on the blockchain at which point it becomes unalterable.

In the case of Bitcoin and most other blockchains, computers that successfully verify blocks are rewarded for their labor with cryptocurrency. This is referred to as mining.

Advantages and Disadvantages of Blockchain

For all its complexity, blockchain’s potential as a decentralized form of record-keeping is almost without limit. From greater user privacy and heightened security to lower processing fees and fewer errors, this technology may very well see applications beyond those outlined above.

Pros

  •  improved accuracy by removing human involvement in verification
  •  cost reductions by eliminating third-party verification
  •  decentralization makes it harder to tamper with
  •  transactions are secure, private and efficient
  •  transparent technology

Cons

  •  significant technology cost associated with mining bitcoin
  •  low transactions per second
  •  history of use in illicit activities
  •  susceptibility to being hacked