If you’ve followed banking, investing, or cryptocurrency in the last ten years, you might have heard the term “blockchain ,” the archival technology behind the Bitcoin network and other cryptocurrencies. -currencies .
KEY POINTS TO REMEMBER
- Blockchain is a specific type of database.
- It differs from a classic database in the way it stores information; blockchains store data in blocks which are then chained together.
- As new data arrives, it is entered into a new block. Once the block is filled with data, it is chained to the previous block, causing the data to be chained in chronological order.
- Different types of information can be stored on a blockchain, but the most common use so far is as a transaction ledger.
- In the case of bitcoin, the blockchain is used in a decentralized way, so that no one person or group has control of it: on the contrary, all users retain collective control of it.
- Decentralized blockchains are immutable, which means that the data entered is irreversible. For bitcoin, this means that transactions are permanently recorded and can be viewed by anyone.
What is Blockchain?
Blockchain sounds complicated, and it certainly can be, but its basic concept is really quite simple. A blockchain is a type of database. To understand the blockchain, you must first know what a database is.
A database is a collection of information stored electronically on a computer system. The information, or data, in databases is usually structured in the form of tables to make it easier to find and filter specific information.
What is the difference between a person who uses a spreadsheet to store information and a database?
Spreadsheets are designed so that one person, or a small group of people, can store and view limited amounts of information. In contrast, a database is designed to hold much larger amounts of information, which a large number of users can access, filter, and manipulate quickly and easily at once.
Large databases achieve this by hosting the data on servers consisting of powerful computers. These servers can sometimes be built from hundreds or thousands of computers in order to have the necessary computing power and storage capacity to allow many users to access the database simultaneously. While a spreadsheet or database may be accessible to any number of people, it is often owned by a company and managed by a designated person who has full control over its operation and the data it contains.
How is a blockchain different from a database?
One of the main differences between a classic database and a blockchain is the way the data is structured. A blockchain gathers information into groups, also called blocks, which contain sets of information. Blocks have a certain storage capacity, and when filled, they are chained to the previously filled block, forming a chain of data called a “blockchain”. All new information that follows this freshly added block is compiled into a newly formed block which will then also be added to the chain when completed.
A database structures its data in the form of tables, while a blockchain, as the name suggests, structures its data in the form of chunks (blocks) that are chained together. So, all blockchains are databases, but not all databases are blockchains. This system also inherently allows for an irreversible timeline of data when implemented in a decentralized fashion. When a block is completed, it is set in stone and becomes part of this timeline. Each block in the chain receives an exact timestamp when added to the chain.
Attributes of cryptocurrencies
To understand the blockchain, it is instructive to consider it in the context of its implementation by Bitcoin. Like a database, Bitcoin needs a set of computers to store its blockchain. For Bitcoin, this blockchain is just a specific type of database that stores every Bitcoin transaction ever made. In the case of Bitcoin, and unlike most databases, these computers are not all under the same roof, and each computer or group of computers is managed by a unique individual or group of individuals.
Imagine that a company has a server consisting of 10,000 computers with a database containing all the information about its customers’ accounts. This company has a warehouse containing all these computers under one roof and has full control over each of these computers and all the information they contain. Similarly, Bitcoin is made up of thousands of computers, but each computer or group of computers that contains its blockchain is in a different geographical location and they are all operated by separate individuals or groups of people. These computers that make up the Bitcoin network are called nodes.
In this model, the Bitcoin blockchain is used in a decentralized way. There are, however, private and centralized blockchains, in which the computers that make up the network are owned and operated by a single entity.
In a blockchain, each node has a complete record of the data that has been stored on the blockchain since its inception. For Bitcoin, the data is the complete history of all Bitcoin transactions. If a node has an error in its data, it can use the thousands of other nodes as a benchmark to correct itself. In this way, no node in the network can modify the information it contains. As a result, the transaction history of each block that makes up the Bitcoin blockchain is irreversible.
If a user tampers with Bitcoin’s transaction record, all other nodes will cross-check and can easily identify the node with the incorrect information. This system makes it possible to establish an exact and transparent order of events. For bitcoin, this information is a list of transactions, but it is also possible for a blockchain to contain a variety of information such as legal contracts, status identifications or a company’s product inventory.
To change the operation of this system or the information stored in it, the majority of the computing power of the decentralized network must agree on these changes. This ensures that the changes that occur are in the best interest of the majority.
Due to the decentralized nature of Bitcoin’s blockchain, all transactions can be viewed seamlessly, either by having a personal node or by using blockchain explorers that allow anyone to view ongoing transactions. Each node has its own copy of the chain which is updated as new blocks are confirmed and added. This means that if you want, you can follow bitcoins wherever they go.
For example, exchanges have been hacked in the past and those who held bitcoins on these exchanges lost everything. Although the hacker may be completely anonymous, the bitcoins he has mined are easily traceable. If the bitcoins stolen in some of these hacks were to be moved or spent somewhere, it would be known.
Is the blockchain secure?
Blockchain technology addresses security and trust issues in several ways. First, new blocks are always stored linearly and chronologically. In other words, they are always added to the “end” of the blockchain. If you look at the Bitcoin blockchain, you will see that each block has a position on the chain, called a “height”. As of November 2020, the block height has reached 656,197 blocks to date.
After a block has been added to the end of the blockchain, it is very difficult to go back and change the contents of the block unless a majority has reached consensus to do so. Indeed, each block contains its own coding code, as well as the coding code of the previous block, and the timestamp mentioned previously. Encryption codes are created by a mathematical function that transforms numeric information into a string of numbers and letters. If this information is changed in any way, the encoding code also changes.
Here’s why it’s important for security. Suppose a hacker wants to modify the blockchain and steal bitcoins from everyone else. If he modifies his own copy, it will no longer be aligned with everyone else’s. When everyone else compares their copies to each other, they will see that copy stand out, and that pirate’s version of the chain will be rejected as illegitimate.
To succeed in such a hack, the hacker would have to simultaneously control and modify 51% of the copies of the blockchain so that his new copy becomes the majority copy and therefore the agreed chain. Such an attack would also require a huge amount of money and resources, as all the blocks would have to be redone, as they would now have different timestamps and encoding codes.
Due to the size of the Bitcoin network and the rapidity of its growth, the cost of achieving such a feat would likely be insurmountable. Not only would that be extremely expensive, but it would also likely be unsuccessful. Such an action would not go unnoticed, as members of the network would see such drastic changes on the blockchain. Network members would then branch off to a new version of the channel that was unaffected.
The value of the attacked version of bitcoin would then drop, rendering the attack useless since the malicious actor would control a worthless asset. The same would happen if the malicious actor attacked the new bitcoin fork. The network is built in this way, so it is much more economically interesting to take part in the network than to attack it.
bitcoin and blockchain
The purpose of the blockchain is to allow the recording and distribution of digital information, but not its modification. Blockchain technology was first described in 1991 by Stuart Haber and W. Scott Stornetta, two researchers who wanted to implement a system in which document timestamps could not be changed. But it wasn’t until almost two decades later, with the launch of bitcoin in January 2009, that blockchain saw its first real-world application.
The Bitcoin protocol is built on a blockchain. In a research paper introducing digital currency, bitcoin pseudo-creator Satoshi Nakamoto described it as “a new, entirely peer-to-peer e-money system with no trusted third parties.”
What you need to understand here is that bitcoin just uses blockchain as a way to transparently record a ledger of payments, but blockchain can, in theory, be used to immutably record any number of data points. As discussed above, these can include transactions, votes in an election, product inventories, status identifications, property deeds, and much more.
Currently, there are a wide variety of blockchain-based projects that seek to implement blockchain in ways that help society in ways other than just recording transactions. A good example is the use of blockchain as a means of voting in democratic elections. The immutability nature of the blockchain means that fraudulent voting would become much more difficult to achieve.
For example, a voting system could work such that each citizen of a country would receive a single cryptocurrency or token. Each candidate would then be assigned a specific wallet address, and voters would send their token or cryptocurrency to the address of the candidate they wish to vote for. The transparent and traceable nature of blockchain would eliminate the need for human vote counting as well as the ability for bad actors to tamper with physical ballots.
How is blockchain used?
As we now know, blockchain blocks store data about monetary transactions. But it turns out that the blockchain is also a reliable way to store data on other types of transactions.
Some of the companies that have already integrated blockchain include Walmart, Pfizer, AIG, Siemens, Unilever and many more. For example, IBM created its Food Trust1 blockchain to trace the journey of food products to their locations.
Why do this? The food industry has seen countless outbreaks of e Coli, salmonella, listeria, as well as hazardous materials accidentally introduced into food. In the past, it took weeks to find the source of these outbreaks or the cause of illness in what people ate.
The use of blockchain gives brands the ability to follow the journey of a food product from its origin, through each stop it makes, and finally its delivery. If food is found to be contaminated, it can be traced back to its origin at every stage. In addition, these companies can now see everything the food may have come in contact with, helping to identify the problem much faster and saving lives. This is an example of blockchain in practice, but there are many other forms of blockchain implementation.
Bank and finance
The banking sector may have the most to gain from integrating blockchain into its business operations. Financial institutions operate only during office hours, five days a week. This means that if you try to deposit a check on Friday at 6 p.m., you’ll probably have to wait until Monday morning to see that money in your account. Even if you make your deposit during business hours, it may take 1-3 days for the transaction to be verified due to the sheer volume of transactions banks have to settle. Blockchain, on the other hand, never sleeps.
By integrating blockchain into banks, consumers can have their transactions processed in just minutes, the time it takes to add a block to the blockchain, regardless of holidays or time of day or week. With blockchain, banks also have the ability to exchange funds between institutions faster and more securely. In the stock trading industry, for example, the settlement and clearing process can take up to three days (or more, in the case of international trades), which means that money and shares are frozen during this period. .
Given the large sums involved, even the few days that the money is in transit can entail significant costs and risks for banks. European bank Santander and its research partners estimate the potential savings to be between $15 billion and $20 billion per year. Capgemini, a French consulting firm, estimates that consumers could save up to $16 billion in banking and insurance fees each year thanks to blockchain-based applications.
Blockchain is the foundation of cryptocurrencies like bitcoin. The US dollar is controlled by the Federal Reserve. In this central authority system, a user’s data and currency are technically at the mercy of their bank or government. If a user’s bank is hacked, the customer’s private information is at risk. If the client’s bank collapses or if they live in a country with an unstable government, the value of their currency may be at risk. In 2008, some of the cash-strapped banks were partially bailed out with taxpayers’ money. It is from these concerns that bitcoin was conceived and developed.
By spreading its operations over a network of computers, blockchain allows bitcoin and other cryptocurrencies to operate without the need for a central authority. This not only reduces risk, but also eliminates a large portion of processing and transaction fees. It can also give people in countries with unstable currencies or financial infrastructures a more stable currency, with more applications and a wider network of people and institutions with whom they can do business, both domestically than international.
Using cryptocurrency wallets for savings accounts or as a means of payment is especially important for people who don’t have national identification. Some countries may be war-torn or have governments that lack the proper infrastructure to provide identification. Citizens of these countries do not necessarily have access to savings or brokerage accounts and therefore have no means of storing their wealth securely.
Healthcare providers can leverage blockchain to securely store their patients’ medical records. When a medical record is generated and signed, it can be entered into the blockchain, providing patients with proof and confidence that the record cannot be altered. These personal medical records could be encrypted and stored on the blockchain with a private key, so that they are only accessible to certain people, which guarantees confidentiality.
A smart contract is computer code that can be integrated into the blockchain to facilitate, verify, or negotiate a contractual agreement. Smart contracts operate under a set of terms that users agree to. When these conditions are met, the terms of the agreement are automatically executed.
Let’s say, for example, that a potential tenant wants to rent an apartment using a smart contract. The owner agrees to give the tenant the access code to the apartment as soon as the tenant has paid the security deposit. The tenant and landlord send their respective part of the agreement to the smart contract, which automatically stores and exchanges the access code for the security deposit on the lease start date. If the landlord does not provide the door code on the lease date, the smart contract refunds the security deposit. This would eliminate the costs and procedures usually associated with using a notary, third-party mediator or lawyer.
As in the IBM Food Trust example, suppliers can use blockchain to record the origin of materials they have purchased. This would allow companies to verify the authenticity of their products, as well as common labels such as “organic”, “local” and “fair trade”.
As Forbes reports, the food industry is increasingly embracing the use of blockchain to track the path and safety of food through delivery to the customer.
As mentioned, blockchain could be used to facilitate a modern voting system. Blockchain voting carries the potential to eliminate voter fraud and boost voter turnout. Using blockchain in this way would make votes nearly impossible to tamper with. The blockchain protocol would also maintain the transparency of the electoral process, reducing the personnel needed to hold an election and providing officials with near-instantaneous results. This would eliminate the need for recounts or any real fear that fraud could threaten the election.
Advantages and disadvantages of blockchain
For all its complexity, the potential of blockchain as a decentralized form of archiving is nearly limitless. Whether it’s better user privacy, increased security, lower processing fees, or fewer errors, blockchain technology could very well find applications beyond those described above. But there are also disadvantages.
What is the future of blockchain?
First proposed as a research project in 1991, blockchain is now turning 30 years old. Like most millennials his age, blockchain has received significant public attention over the past two decades, with businesses around the world speculating on the technology’s capabilities and how it will evolve in coming years.
With many practical applications of the technology already implemented and explored, blockchain is finally making a name for itself, thanks in large part to bitcoin and cryptocurrencies. Blockchain is expected to make business and government operations more accurate, efficient, secure, and cheaper, with fewer middlemen.
As we prepare to enter a new era of blockchain, the question is no longer “if” traditional businesses will adopt the technology, but “when”.