A blockchain is a decentralized technology that acts as a digital open distributed ledger and is used to record transaction data between two parties that is both verifiable and permanent. Made famous, or infamous, by Bitcoin, this article will separate the entities and focus on the technology behind blockchain, and its potential application. Blockchains are composed of a block, a timestamp, and the transaction data, as well as a cryptographic hash of the previous block that links the two by cryptography. A single blockchain exists within a network of computers and cannot be edited without changing all other blocks – by design, making them permanent and resistant to change. As such, participants can track, control, and verify transactions efficiently and securely. A good example is to picture a blockchain as a giant spreadsheet that has been shared hundreds of times across a network of computers that exist solely to update the spreadsheet regularly.
How does it work?
This first section will provide a layman’s overview of what composes a blockchain. At the bottom of the article, sources with more technical explanation will be provided for those looking to learn more. So, at its core, a block is a container data structure, which consists of a header and a list of transactions. The header is composed of the cryptographic hash – using an algorithm of the previous block to create the new block hash – the mining competitions, and the merkle tree root. The mining competition serves to validate the hash, which consists of the timestamp, the nonce, and the difficulty. The final part is the merkle tree root, which is a data structure that recaps the transactions within the block. Merkle trees also serve to prove that a transaction is included in a specific block by creating an authentification path, which allows users to see what data is included in specific blocks.
There are four main components of a blockchain: a node application, a shared ledger, a consensus algorithm, and a virtual machine. The node application allows the user to participate in the specific blockchain ecosystem – this application can either be permissionless or private and for individuals or organizations. The distributed ledger is within the node application and allows the user to access the ledger’s contents in that specific system. In layman’s terms, the shared ledger differentiates from the distributed ledger because the distributed ledger is within the node application, while the shared ledger is what allows the participants to see and add to the specific blockchain network. Regardless of how many different systems are running at the same time, there will be one shared ledger per system. The consensus algorithm serves to provide the rules of how users will see a single view of the ledger. As mentioned before, since blockchains are distributed across a network of computers, this ensures that all aspects of the chain are consistent and honest. The final aspect of the blockchain is the virtual machine. The virtual machine is essentially a representation of how a physical computer changes its state in response to commands – in a physical computer, this might be shown by displaying graphics or by playing a sound – but in the blockchain, it is completely intangible. These components, within the individual block and the chain as a whole, are what constitute a blockchain.
As previously mentioned, a blockchain database is cataloged across a network of computers, which serves to protect the data from any modifications and keep the system secure. The network is powered by collaboration and can be described as a value-exchange protocol. Like Bitcoin, the distributed network means there is no central database to hack. Additionally, the blockchain is encrypted with public and private keys to ensure the data’s security. The unique nature of the blockchain solves the problem of double-spending and prevents the information from being entered multiple times, overall allowing for exchanges to be completed quicker, safer, and cheaper than traditional methods.
How can it be used?
When most people think of blockchain, they think of bitcoin. And, although cryptocurrencies are one of the most common ways blockchain is used today, there are a multitude of potential and realized methods to utilize this technology. Since the primary design of blockchain creates a secure record of a transaction between two parties, regardless of association, this technology can be applied to any field that needs similar interactions – such as stock market trades, land registry, or other commodity or monetary exchanges.
Finance is one of the strongest use cases for blockchain technology, due to its successes supporting the bitcoin system. Examples of use include international remittances, which would make the process more direct by protecting their exchanges and cutting out middlemen companies traditionally used when sending sums overseas. Similarly, blockchain technology would easily facilitate cross-border trades and exchanges by companies and individuals, as it removes human interaction that is normally hindered by time zones and middlemen. Another avenue for use is in the realm of start-ups or app development, as blockchain technology could be used to create and support wallet apps that allow users to make smartphone purchases.
Blockchain can also be used to create smart contracts or cloud storage systems. An example of a possible smart contract would be a contract that ensures payment on receipt of a shipment. The smart contract would automatically issue partial payments once agreed-upon checkpoints are reached. Due to the secure nature of blockchain, the contract would be impervious to hacking or change, and the contract would become public record and unable to be manipulated later. The concept of blockchain cloud storage, so creating a network without a central database that can be hacked, is already being worked by several companies to overall reduce user dependency on one entity or server.
What do people think about blockchain?
Currently, the conversation is mixed – some believe the technology is all hype, with no realistic possibilities, and others stress the technology itself is sound, but the programs it hosts (ex. bitcoin) are the real problem. General issues with blockchain are that it’s a new technology, so inherently a risk, and businesses are hesitant to implement something that most consumers do not understand. Most companies in favor of blockchain liken it to the internet – a technology that took decades for society to catch on to but is now considered integral to daily life.
Sources Used and Related Links:
https://www.economist.com/briefing/2015/10/31/the-great-chain-of-being-sure-about-things
https://dev.to/damcosset/blockchain-what-is-in-a-block-48jo
https://www.wired.com/story/guide-blockchain/
https://www.wired.com/insights/2015/01/block-chain-2-0/
https://medium.com/@neocapita/the-logical-components-of-blockchain-870d781a4a3a
https://www.coindesk.com/information/what-is-blockchain-technology/
https://blockgeeks.com/guides/what-is-blockchain-technology/
https://marketexclusive.com/blockchain-successfully-reestablishes-trust-nonprofits/2018/04/
