Introduction to Blockchain - Part One

Introduction 

Blockchain is the innovative database technology that’s at the heart of nearly all technological conversations happening today. Blockchain makes it very difficult to hack or cheat the system by distributing identical copies of a database across an entire network. The technology offers the potential to serve a very wide range of applications. At its core, blockchain is a distributed digital ledger that stores data of any kind. While any conventional database can store this sort of information, blockchain is unique in that it’s totally decentralised. Rather than being maintained in one location, by a centralized administrator — think of an Excel spreadsheet or a bank database — many identical copies of a blockchain database are held on multiple computers spread out across a network. These individual computers are referred to as nodes. In this blog, we are going to look at the basics of blockchain along with how it works, how is it used, and its advantages and disadvantages. 

How does blockchain work? 

The digital ledger is often described as a ‘chain’ that’s made up of individual ‘blocks’ of data. As fresh data is periodically added to the network, a new ‘block’ is created and attached to the ‘chain’. This involves all nodes (individual computers) updating their version of the blockchain ledger to be identical. How these new blocks are created is key to why blockchain is considered highly secure. A majority of nodes must verify and confirm the legitimacy of the new data before a new block can be added to the ledger. 

A point to consider is that one person can make changes to a standalone database or spreadsheet, without oversight. Once there is consensus, the block is added to the chain and the underlying transactions are recorded in the distributed ledger. Blocks are securely linked together, forming a secure digital chain from the beginning of the ledger to the present. Transactions are typically secured using cryptography, meaning the nodes need to solve complex equations to process a transaction. As a reward for their efforts in validating changes to the shared data, nodes are typically rewarded with new amounts of the blockchain’s native currency — for example — new Bitcoin on the Bitcoin blockchain. 

Public vs Private Blockchains 

There are both public and private blockchains. In a public blockchain, anyone can participate meaning they can read, write, or audit the data on the blockchain. Notably, it is very difficult to alter transactions logged in a public blockchain as no single authority controls the nodes. A private blockchain, meanwhile, is controlled by an organization or group. Only it can decide who is invited to the system plus it has the authority to go back and alter the blockchain. This private blockchain process is more similar to an in-house data storage system except spread over multiple nodes to increase security. 

How is Blockchain Used? 

Blockchain technology is used for many different purposes, from providing financial services to administering voting systems. 

Cryptocurrency 

The most common use of blockchain today is as the backbone of cryptocurrencies, like Bitcoin or Ethereum. When people buy, exchange or spend cryptocurrency, the transactions are recorded on a blockchain. The more people use cryptocurrency, the more widespread blockchain could become. Because cryptocurrencies are volatile, they are not yet used much to purchase goods and services. But that is changing as PayPal, Square and other money service businesses make digital asset services broadly available to vendors and retail customers. 

Banking 

Beyond cryptocurrency, blockchain is being used to process transactions in fiat currency, like dollars and euros. This could be faster than sending money through a bank or other financial institution as the transactions can be verified more quickly and processed outside of normal business hours. 

Asset Transfers 

Blockchain can also be used to record and transfer the ownership of different assets. This is currently very popular with digital assets like non-fungible tokens (the NFTs), representation of ownership of digital art and videos. However, blockchain could also be used to process the ownership of real-life assets, like the deed to real estate and vehicles. The two sides of a party would first use the blockchain to verify that one owns the property and the other has the money to buy; then they could complete and record the sale on the blockchain. Using this process, they could transfer the property deed without manually submitting paperwork to update the local county’s government records; it would be instantaneously updated in the blockchain. 

Smart Contracts 

Another blockchain innovation is self-executing contracts commonly called ‘Smart Contracts’. These digital contracts are enacted automatically once conditions are met. For instance, a payment for a good might be released instantly once the buyer and seller have met all specified parameters for a deal. We see great potential in the area of smart contracts — using blockchain technology and coded instructions to automate legal contracts. A properly coded smart legal contract on a distributed ledger can minimise, or preferably eliminate, the need for outside third parties to verify performance. 

Supply Chain Monitoring 

Supply chains involve a massive amount of information, especially as goods go from one part of the world to the other. With traditional data storage methods, it can be hard to trace the source of problems, like the origin of a vendor’s poor quality goods. Storing this information on the blockchain would make it easier to go back and monitor the supply chain, such as with IBM’s Food Trust, which uses blockchain technology to track food from its harvest to its consumption. 

Voting 

Experts are looking into ways to apply blockchain to prevent fraud in voting. In theory, blockchain voting would allow people to submit votes that couldn’t be tampered with as well as would remove the need to have people manually collect and verify paper ballots. 

Read Part Two to know the advantages and disadvantages of Blockchain.