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Blockchain Explained: The Guide to Understand How Blockchain Works
Hey there, soon-to-be blockchain experts. Today is the day that marks the birth of your full understanding of blockchain technology. Here, you’ll get the complicated blockchain explained in simple words.
As I’m sure you are aware, trying to understand how the blockchain works is like trying to understand the science behind the universe – it’s confusing! Which is exactly why you’re here.
In this blockchain tutorial, I will get to know what is blockchain from the basics, including the advantages of its technology and how the blockchain will benefit the way the world operates in the future.
As this is a blockchain for dummies guide, let’s make one thing clear before we begin.
There are two big “b” words in the blockchain industry. The first (yes, you’ve guessed it) is “Blockchain”, and the second is “Bitcoin”. Newbies will often confuse themselves by believing that these are the same thing, which they are not.
However, they are very closely related. Bitcoin — put simply — is a digital currency. Blockchain, on the other hand, is the technology that is used by Bitcoin to allow secure, public and anonymous transactions to take place.
Just think of blockchain as an operating system (like Windows or Mac OS) and Bitcoin as an application that runs on that operating system. Simple! Let’s move on.
So, what is blockchain?
It’s one of the most puzzling questions we find ourselves trying to answer when first discovering cryptocurrencies. So getting blockchain explained is essential.
The blockchain is an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value.
Don & Alex Tapscott, authors Blockchain Revolution (2020)
Ready? Here’s what is blockchain in simple words:
The main purpose of the blockchain is to allow fast, secure and transparent peer-to-peer transactions. It is a trusted, decentralized network that allows for the transfer of digital values such as currency and data.
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Now, as we’re all newbies here. Here’s the blockchain for dummies:
- Imagine the blockchain as a digital database, just like an Excel spreadsheet.
- This database is typically shared across a large network containing many computers (known as “nodes”) and it is completely public. I say “typically” because it can technically be formed by any number of nodes. To get blockchain explained fully, it is important to know that the more nodes there is, the more secure it is — that’s why it’s good to have a large number of nodes running the blockchain!
- Every time the network makes an update to the database, it is automatically updated and downloaded to every computer on the network.
- Blockchain technology is secured with cryptographic techniques, making it near impossible for hackers to make changes to it. The only way to make changes would be to hack more than half of the nodes in the blockchain, which again, is why it is more secure to have more nodes/computers running the blockchain.
That’s your blockchain explained in simple words. So, now when someone asks you “what is blockchain?”, you have two strong answers to choose from. You can thank us later…
Table of Contents
How does blockchain work in the case of Bitcoin?
Bitcoin was the first cryptocurrency to use blockchain technology. It was invented by the person, or group of people, that go by the name of Satoshi Nakamoto. (Strangely enough, nobody knows who Satoshi Nakamoto is.)
The sole purpose of Bitcoin is to act as a store of value. It allows for peer-to-peer transactions that do not need a third party, such as PayPal or a bank.
Getting Bitcoin blockchain explained is essential to understanding how blockchain works. The Bitcoin blockchain is a database (known as a “ledger”) that consists only of Bitcoin transaction records. There is no central location that holds the database, instead, it is shared across a huge network of computers. So, for new transactions to be added to the database, the nodes must agree that the transaction is real and valid.
This group agreement is also known as a “consensus”. It occurs during the process of mining.
Once the nodes agree that the transaction is real, it is then added to a “block” (which is why it is called a blockchain) and is placed below the previous block of transactions in the ledger.
For a transaction to be valid, the computers on the network must confirm that:
(1) The account holds the amount of bitcoin that the user wants to send.
(2) The amount hasn’t already been sent to someone else.
For example, let’s imagine that Tom tries to send $10 of Bitcoin to Ben. Tom only has $5 worth of Bitcoin in his wallet. Because Tom doesn’t have the funds to send $10 to Ben, this transaction would not be valid. The transaction will not be added to the ledger.
This means that nobody can ever spend the same money twice! This can often be a big problem for standard banks and payment systems.
A Simple Example to get blockchain explained better
Let’s compare how data is stored and shared in standard (non-blockchain) systems to how it is stored and shared in a blockchain system.
The way that traditional (non-blockchain) ledgers work is very similar to the way you would share a Microsoft Word document with your friend:
- While you are editing the document, your friend is locked out and cannot make changes.
- Once you have finished making your changes, you send it to your friend to edit it further.
- Now while your friend is editing the document, you are locked out and cannot make changes until they are finished and send it back to you.
In a blockchain system, however, all users can view the changes while they are being made.
The data is accessible in a secure and shared environment, instead of being locked to one company or person at a time (at the risk of losing the data). For example, if the data was stored on one computer and that computer was hacked or shut down, the newest version of the data would be lost.
Now to get blockchain explained: with the blockchain, the data is stored on all the computers/nodes that run it. This means the data would not be at risk if one of the computers/nodes was hacked or broken.
As you can see, blockchain technology does not just benefit cryptocurrencies. It benefits many different industries. Imagine the amounts of legal, health, accounts and customer data, etc. that should be used this way.
This is just one of the many advantages of blockchain technology! Now, let’s look at some of the others.
Most businesses use different systems, so it is hard
for them to share a database with another business.
|Trust & Transparency
Trust is an essential part of getting the difficult
world of blockchain explained.
As the blockchain is a trusted peer-to-peer network,
it removes the need for a central third party.
Once a transaction is confirmed, it is stored on the
ledger and protected using cryptography.
Blockchain is a decentralized peer-to-peer network
and there is no central point of failure.
Decentralization is one of the cores — and most
important — advantages of blockchain technology.
Decentralization is one of the core — and most important — advantages of blockchain technology. It has been a highly-desired concept for many years, but it was blockchain technology that made it possible.
Now to get the blockchain explained in simple words, it requires no central server to store blockchain data, which means it is not centralized. This is what makes the blockchain so powerful. Instead of the server being stored in one place, it is stored on the blockchain and is powered by many different computers/nodes. This means there is no third party to trust and pay a fee to.
Once a transaction is confirmed, it is stored on the ledger and protected using cryptography. It cannot be changed or deleted without a consensus (the group agreement), which makes the blockchain unbreakable. Pretty cool, eh?
Trust and transparency
Trust is an essential part of getting the difficult world of blockchain explained. As it is a shared database, everyone can view the full details of the transactions within it. These include the source, date, time and the destination of the transaction.
As the blockchain is a trusted peer-to-peer network, it removes the need for a central third party. This is one of the major benefits for businesses as it completely removes the costs that are required to pay third parties.
Let’s use a real-world example:
Imagine that you want to send a payment to someone in another country. Without the help of blockchain technology, you would normally need to pay expensive fees (to the banks) and the transaction may take 3-10 days to be processed.
Using blockchain, this can be done almost instantly and at a much cheaper cost.
Yes, we know — it’s impressive, isn’t it?
Blockchain is a decentralized peer-to-peer network and there is no central point of failure. Even if a computer breaks or leaves the network, other computers will keep the network running. That’s why this is a huge, huge advantage.
To get the blockchain explained even clearer, just imagine a hospital server: it contains important data that needs to be accessed at all times. If the computer holding the latest version of the data was to break, the data would not be accessible. It would be very bad if this happened during an emergency!
If the hospital used a blockchain, however, it wouldn’t matter if a computer broke. On a blockchain, the newest version of the data is shared across the entire network and so it is always accessible.
Simplifying Business to Business
Most businesses use different systems, so it is hard for them to share a database with another business. That’s why it can make it very difficult for them. So, the answer is blockchain technology!
As a blockchain can act as a single shared database for both businesses to work from, sharing data is much easier for them on a blockchain system.
Blockchain in real-world industries
To help you understand some of the other advantages that blockchain offers to businesses, here are some examples of industries that are currently using blockchain technology. This will surely get blockchain explained:
Cybersecurity threats are a huge problem in the identity management industry. In the current world, our identity is controlled by large companies. Whether that be Netflix, Facebook, Instagram or even the companies we work for.
People are always under the threat of having their identities stolen by cyber-thieves — also known as hackers. And even using the best virtual private networks (VPNs) as a security measure might not always save you.
All of these companies use centralized servers. For example, Netflix is the central point of the Netflix server — if Netflix is hacked, all the data they hold for their customers is at risk.
It was only recently that Equifax’s data was hacked.
Equifax is one of the largest credit reporting agencies that hold personal information of over 800 million customers. This caused the data of over 145 million users to be stolen.
So, how can personal data hacking be stopped using the blockchain?
Well, your data is currently held in a centralized database (just like at Equifax). A centralized database is much easier to hack into because it uses one main server. In this case, all the hacker must do to steal the data, is hack the main server. In a blockchain, there is no main server — there is no central point for a hacker to attack! Here’s a great advantage of blockchain explained.
Banking and Payments
This is how important blockchain technology is for the financial industry. By using the blockchain, financial services can now be provided to those that currently do not have them. That’s over 2 billion people!
Let’s use Bitcoin again as an example — thanks to the Bitcoin blockchain, anyone in the world who has access to the internet can now send digital payments. It’s the future! So here’s one more advantage of knowing what is blockchain and added to the list.
As well as helping those that do not have financial services, blockchain is also helping the banks themselves. Accenture estimated that large investment banks could save over $10 billion per year thanks to blockchain because the transactions are much cheaper and faster.
In the past, people had only one option to receive energy — through a centralized source.
However, we are now able to gather renewable energy from our own devices, or from new grid systems called “microgrids”. Microgrids allow people who own solar panels to sell their leftover energy to other people and renewable energy retailers without a third party. So, let’s get another advantage of blockchain explained.
Before blockchain technology, people could only sell their leftover energy to retailers (the third party). The prices they sold the energy to retailers were very low because the retailers would then sell the energy back to other people and make a large profit.
As blockchain technology removes the third party, people can agree on a price that is fair for them both — cutting out the cost that was previously taken by the retailers.
Blockchain will change the way that many more industries currently operate
The examples above are only a small part of what is possible using the blockchain. Blockchain is being applied to many more industries than the ones listed above.
Here are some of the other industries that are currently using blockchain to improve the way they operate:
- Education (like BitDegree!)
- Marketing & advertising
- Supply-chain management
- Government systems
- Music & video sharing
With so many advantages to using blockchain, the possibilities are endless! Blockchain gives us all something to look forward to.
Let’s think about what we’ve learned in this blockchain explained guide and highlight some of the most important features of the blockchain to remember:
What is blockchain?
- A peer-to-peer network that removes the need for trusted third parties
- Transactions are processed quicker and cheaper than standard (non-blockchain) systems
- It is a public database and all transactions are visible on the network, preventing cyber attacks
- The database cannot be changed without more than half of the network agreeing, making it much more secure
- It is not controlled by one single company and it has no single point of failure
- Blockchain can be used in many different industries — not just digital currencies
How does blockchain work?
- It works as a large database that is shared across a network of nodes (computers)
- The nodes on the network work together to verify transactions and are rewarded with the blockchain’s currency — a process known as mining
- Once a transaction is verified by the network, the transaction is placed in a block
- New transaction blocks are placed — in order — below the previous block of transactions
- All transactions are stored in a distributed database (ledger)
- It is extremely difficult for a hacker to change the transactions because they need control of more than half of the computers on the network
How will this benefit large industries?
- It removes the cost of third parties
- Payments and data are processed much quicker
- Database management between businesses is much easier
- Data protection/security is improved on a large scale
Final words to getting blockchain explained
Blockchain technology will change and improve the way businesses operate, but that’s not all it will change. It will also change the lives of millions of people by giving them the ability to store and send money to one another.
Thanks to blockchain, the world can become a better place.
So, there you have it — understanding blockchain for beginners. It can be a lot to take in, but I hope that your understanding is much better now than it was before you started reading.
Here’s a little test to help you remember what you’ve learned:
Try to think about how the blockchain could be used to better the industry that you work in, have worked in or are interested in.
Go ahead; try it. Now that you’ve got yourself the blockchain explained, should be pretty easy! There is so much that can benefit from the blockchain!
How Does Blockchain Technology Work? Explained!!
The blockchain technology is beyond cryptocurrencies. It’s time we got over Bitcoins.
Updated on March 23, 2020
Bitcoin has been making quite a buzz since November 2020. Its prices skyrocketed in December and went surprisingly low in the first week of February 2020.
The debate on this fluctuation is for another day as Bitcoin is merely a small part of the ever-changing, revolutionizing technology – Blockchain. You must have heard about it and you might have dug your grey cells while browsing the web to understand the term.
“There are important counter-trends to this – like encryption and cryptocurrency — that take power from centralized systems and put it back into people’s hands. But they come with the risk of being harder to control.”
If you’re still wondering what Blockchain is and it seems like a difficult venture to grasp at once, understand that you’re not the only one. The technology itself is very complicated to comprehend.
Even tech giants like Mark Zuckerberg and Jack Ma are studying blockchain regularly to explore its usefulness in the technical industry. This is why most industries rely on top blockchain companies to get work done with utter perfection.
Highlights of the Article
- The basics of blockchain and bitcoin
- The basic terms associated with Blockchain
- Insights on how the process begins
- A brief on bitcoin balance
- Explanation of bitcoin security
- Fraud possibilities with bitcoin
- What is bitcoin mining?
- Bitcoin: benefits and limitations
Most tech giants and business leaders claim that the blockchain technology holds the power to revolutionize the financial sector. Only when we really take a dive into the waters of blockchain can we really figure out the things it has to offer beyond cryptocurrencies. Bitcoin is just a powerful example of what blockchain is capable of and the amount of transforming capabilities it holds.
With the help of this article, you will gain insight into how this technology works in the simplest manner possible. Before digging deep into the technical aspects and the trends of the blockchain technology, let us first understand the fundamental structure of this wonderful creation.
A Basic Idea of Blockchain
To understand why even we need blockchain in the first place, let us consider the following scenario.
Your friend and you have bet $100 on an el-Classico match (football match). You chose Barcelona and your friend says that Real Madrid will win (sorry, Ronaldo Fan).
Your friend and you trust each other and the one who loses gives $100 to the winner. But what if the loser backs out and refuses to pay the bet? To resolve this, you could
- Make a legal contract and write the rules in the agreement. This way, if one decides to back out, the other has the right to take legal action. But then again, this will require the winner to put in extra resources and money into filing the case along, not to mention the long trial.
- Involve a third-party, like a bank, so it can collect $100 from each party and give the money to the winner. However, this can’t be trusted either. What if the third party runs away or turns to be a fraud?
This is where the blockchain technology comes to the rescue. It will work as a transaction medium but is a more decentralized and open network, as compared to the banks. The betting money will be safe and secure and it will send the money to the winner after confirming the bet result from various sources.
Before we move on with this, let’s take a look at the basic terms involved in the world of cryptocurrencies to garner a better understanding of the blockchain technology.
Terms Associated With Bitcoin
- Ledger: In order to keep records of all Bitcoin transactions, the technology uses a digital file known as a leader.
- Node: Every computer connected to the blockchain network using the internet connection is treated as a node.
- Wallet: Digital wallets are to maintain and contain cryptocurrencies.
- Inputs: Previous incoming transactions.
In order to make the whole process decentralized, blockchain shares ledgers with every node in the network. This means that every active node in the network has a copy of the ledger and it gets updated every time a transaction takes place.
For a better understanding, let’s compare this with a centralized bank unit, where all the details of the transaction are controlled by one entity. Here, everything is controlled and maintained by one resource, whereas the blockchain network provides all the details to everyone involved in the network and makes it open, which secures it as no one can manipulate or exploit it.
To make it even simpler, let us consider that you want to send 6 BTC to a writer for writing a book on your life. You will send a message to the blockchain network that your Bitcoin balance should go down by 6 BTC and the writer’s be increased by the same amount.
The message will be delivered to all the nodes across the network and every node will update the account balance with new transactions. This means that everyone knows everything here and collectively work as a single unit system.
How Does the Process of Blockchain Begin?
So far, we’ve used cryptocurrencies (Bitcoin) to explain the blockchain, so let’s go on to understanding the Bitcoin exchange process. To make a transaction, one needs a crypto-wallet to save, receive, and spend Bitcoins. These are digital wallets built using cryptography. Every crypto-wallet comes with a private and public key.
The public key is treated as the address of the user’s wallet and the private key is the password that is required by the blockchain network to encrypt or decrypt a message. If a user encrypts a message with a specific public key then only the paired private key can decrypt it and vice versa.
For instance, let us consider Tom, who wants to send Bitcoins to a party. This means that he needs to send an encrypted message using his private key across the blockchain network. The message will be sent to every node in the network and they can decrypt the message using Tom’s public key and know that the transaction was originated from Tom’s wallet.
A question that must have popped up in your head is if the message is shared with all the nodes, how it can be secured?
While encrypting a transaction message from the wallet, you are generating a digital signature using your private key. The blockchain computers use this signature to check the source and authenticity of the transaction. The signature contains strings of text that are unique and cannot be used for any other transaction.
So, if you make a change of even a single character in the transaction message, the signature will automatically change in the network and become invalid. This protects the process from any potential fraud and prevents the attacker from changing the amount of transaction.
The private key is confidential that will enable you to access your wallet and encrypt any transaction message. You can only broadcast a message when you’ve first encrypted it.
How to Know Your Bitcoin Balance?
The blockchain network does not maintain balance records. So, how does one figure out their bitcoin balance and make a transaction? The blockchain system doesn’t record the balance, instead, it just maintains the records of each transaction ever made.
The ledger contains only the details about the transaction, not the balance. In order to make a transaction, the blockchain network uses previous transaction links in the ledger.
Consider this: you want to send 9 BTC to your friend. While making the transaction, you need to generate a request including the link to previous incoming transactions whose total should be equal to or more than 9 BTC. Theses previous transactions are also called inputs. Now, the blockchain will verify these inputs with every node across the network to confirm it.
As every input has been generated from the wallet, it contains a reference to your public key. Every node in the network has the details of these inputs in their copy of the ledger. So, it is almost impossible to spend double money using received Bitcoins.
No wonder Morgan Stanley ended up saying, “Bitcoin could become a “normal” trading purchase”.
Is blockchain Safe or Is Everyone Just Exaggerating?
While it might seem like a far-fetched thought, blockchain really is introducing the safest way to transact and maintain accounts, but there are some issues associated. Here’s why the public thinks so!
1. Identity theft
As mentioned before, to become a part of the blockchain network you need to own a wallet that will contain a private and public key. But, by using a VPN network or TOR Network, anyone can access the Bitcoin community without revealing anything.
Along with this you can also create as many wallets as you want and make a number of transactions and no one will be able to find out that you own all these wallets.
However, if you keep using the single public key every time or converge the Bitcoins from all wallets to one, it is possible to know that it belongs to a single owner.
2. Recalling the Spent Bitcoins
The blockchain has a potential loophole in its security. The spent bitcoins can be recalled after the transaction by using this flaw. All the transactions are passed node to node in the network.m So, the order of 2 transactions reaching each node could be different. This could be exploited by ordering another transaction to yourself.
For example, Jim sends a few Bitcoins to Molly and waits for Molly to ship his product. Later, he generates the request for the same number of bitcoins to be sent to his own wallet. In this case, some networks will receive the second transaction before the first one and will define the first payment invalid, since it would seem to them that the inputs were already spent.
This leads to a disagreement among the nodes and opens space for a fraudster to make illegal bitcoins. To overcome this, the blockchain has been designed to use nodes agreement to order the transaction and prevent this from happening.
3. Double-Spent Fraud
In the blockchain network, transactions are collectively gathered to create a group called blocks. These blocks contain the transactions and link to the previous block. The transactions that take place at the same time are taken into a single block and the transaction out of the blocks is treated as unconfirmed.
These blocks are created by the nodes and broadcasted to the network as a suggestion for a new block in the chain. This is why technology has been given the name Blockchain.
Now, an important question arises, who is the person responsible for deciding which block will be the next? Let’s break it this way.
Every node sends an answer to a cryptographically created mathematical question to get their block selected as the next one. The node that solves the right answer first gets to own the right to place its block next in the chain. The answer to such problems could be given by guessing some random numbers that are combined with the previous block content and give a definite result.
The typical computer would take a year to guess the right answer to this problem. But, as the blockchain network contains several numbers of nodes, it takes only 10 minutes to crack the question.
Now, what happens if more than one node solves the problem at the same time? In this case, both the blocks will be broadcast to the network. The node receiving the blocks first will build on that block, but the blockchain system wants the nodes to build the longest chain.
This will create an ambiguity about the last block. So, as soon as the following block gets verified by the networks, all the nodes will immediately join the longest chain.
This last block ambiguity generates a space for double-spending fraud. Imagine that you pay a vendor for a pair of shoes by sending bitcoins. If the vendor is able to generate the longest chain, including a reverse transaction, then you won’t be getting any money or even your shoes.
However, the double-spending fraud is quite impossible practically as it will require the vendor to place their block within a limited time by solving a mathematical problem. And guessing the right answer is almost impossible in such a short time period.
If anyhow, the vendor is still able to solve the problem, they would need to place 2 or 3 more blocks in the line to create the longest chain as they would be against the whole network.
Talking about the practical analysis of the attack, it would require the vendor to have 50% of the network to get only a 25% chance to succeed. Even with the help of a supercomputer, it is impossible to do a double payment fraud.
This proves that the passing time makes the transaction more secure and irreversible. Since a new block adds to the chain after every 10 minutes, the block added 1 hour ago is perfectly secure from any potential attack.
And thus, Winklevoss Twins’ saying, “Increased Regulation Is Bullish for Bitcoin and cryptocurrency”, holds true.
What is Bitcoin Mining?
You may have come across this term before and wondered what it means. In order to make sure that Bitcoins remain stable and the blockchain networks work without any errors, a reward is provided to those who solve block broadcasted mathematical problems. The process of running the Blockchain software without any issue to acquire Bitcoin rewards is called mining.
The people with individual nodes form bigger groups to solve the block problem. This group uses the strength of nodes to solve the block faster and stabilize the blockchain to get the reward. This group of nodes is known as the mining pools, and there are some mining pools that comprise 20% of the whole network.
These collective groups of nodes charge the rewards from users to deliver faster transactions. It’s simple, the more the reward you pay, the faster will you get the transaction and vice versa.
The Benefits of Blockchain
As of now, you have a pretty good idea of how the blockchain technology works. Now let’s take a look at its benefits and limitations.
- There is no third party involvement in the process so you have all the power in your own hands, making it secure.
- It is the safest transaction method and can’t be exploited by anyone to perform fraudulent activities.
- The transaction can be done from any part of the planet with a very low transaction fee.
- It is purely decentralized, which can be used to build more applications for managing and transferring the information without any threat to get manipulated.
- The technology makes the system fully transparent.
Limitations of Blockchain
- The network could be used anonymously by anyone without revealing his or her identity. This could encourage illegal activities over the network and no one can even track the people doing it.
- The complexity is another reason as the technology is fairly new to the world. This makes people hesitate to adopt it on a large scale.
- A factor of human error could be a big problem in this technology as the system works on a database. So, it is important to enter the data carefully.
So far, you’ve been introduced to the world of how blockchain works and studied its applications along with the safeguard against attacks. Needless to say, it is quite a revolutionizing technology. Removing the centralized system and offering transparency where we can own our transactions is the ideal way to process things.
However, the technology is still in its infancy and needs to evolve more so people can really understand how to use blockchain to their advantage.
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All you need to know about blockchain, explained simply
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Many people know it as the technology behind Bitcoin, but blockchain’s potential uses extend far beyond digital currencies.
Its admirers include Bill Gates and Richard Branson, and banks and insurers are falling over one another to be the first to work out how to use it.
So what exactly is blockchain, and why are Wall Street and Silicon Valley so excited about it?
What is blockchain?
Currently, most people use a trusted middleman such as a bank to make a transaction. But blockchain allows consumers and suppliers to connect directly, removing the need for a third party.
Have you read?
Using cryptography to keep exchanges secure, blockchain provides a decentralized database, or “digital ledger”, of transactions that everyone on the network can see. This network is essentially a chain of computers that must all approve an exchange before it can be verified and recorded.
How does it work in practice?
In the case of Bitcoin, blockchain stores the details of every transaction of the digital currency, and the technology stops the same Bitcoin being spent more than once.
Why is it so revolutionary?
The technology can work for almost every type of transaction involving value, including money, goods and property. Its potential uses are almost limitless: from collecting taxes to enabling migrants to send money back to family in countries where banking is difficult.
Blockchain could also help to reduce fraud because every transaction would be recorded and distributed on a public ledger for anyone to see.
Who is using it?
In theory, if blockchain goes mainstream, anyone with access to the internet would be able to use it to make transactions.
Currently only a very small proportion of global GDP (around 0.025%, or $20 billion) is held in the blockchain, according to a survey by the World Economic Forum’s Global Agenda Council.
But the Forum’s research suggests this will increase significantly in the next decade, as banks, insurers and tech firms see the technology as a way to speed up settlements and cut costs.
Companies racing to adapt blockchain include UBS, Microsoft, IBM and PwC. The Bank of Canada is also experimenting with the technology.
A report from financial technology consultant Aite estimated that banks spent $75 million last year on blockchain. And Silicon Valley venture capitalists are also queuing up to back it.
Blockchain Explained: How It Works, Who Cares and What Its Future May Hold
Is Blockchain the Swiss Army Knife to All of Our Cyber-Insecurities?
Best known as the immutable database that runs underneath cryptocurrencies like Bitcoin and Ethereum, blockchain is poised to play a critical role in every industry imaginable as businesses seek ways to cash in on the distributed ledger technology’s promise of enabling a “trustless” consensus to validate transactions.
Financial transactions are typically guaranteed by a trusted third party (such as PayPal) and blockchain can be used to automate that process, reducing overall costs by cutting out the middleman with autonomous smart contracts acting as trusted intermediaries between parties on the network.
Blockchain is expected to be so influential over the coming years that some technologists foresee it ushering in a new type of Internet, one that stores and authenticates information about every asset, device and individual, opening the door to a range of new technological capabilities.
Besides simply being the backbone of cryptocurrency exchanges, the most powerful uses of blockchain technology are yet to emerge. It’s envisioned by many to become a decentralized, real-time global distributed digital ledger of things for everything from tracking food supplies to managing identities.
click to enlarge
Despite the disruptive effects that the platform could soon have on industries that reach into core areas of our lives, it’s difficult to find someone who can say more than a few words about what it is, how it works or what may become of rolling it out on such a massively conceived scale.
How Blockchain Works
Anders Brownworth, who taught about blockchain at MIT, illustrates the technology by explaining it as “a giant spreadsheet for registering all assets” and he provides a visual demonstration of the concept with a video series as well as a website where you can test his blockchain mockup.
An essential feature of blockchain is its ability to encrypt each “block” of data for a unique hash output that is also stamped onto the succeeding block, creating a chain of sequential information which is then verified through a consensus of activity across a network of participants. This works in conjunction with digital signatures to prove identity, authenticity and enforce data access rights.
Sharing those encrypted “spreadsheets” to every node or validator on the network creates a distributed system where each device can access the transaction data and make additions to the distributed ledger, which is then shared with everyone in real time (akin to Google Docs), acting as a form of data security/redundancy.
The process of encrypting blocks is best recognized as “mining” in cryptocurrency, which uses blockchain as a proof of work mechanism whereby people can participate in the network by performing “work” (your spare computing resources are used to encrypt and validate blocks).
Should a machine on the network attempt to alter an old block, the new data would result in a different hash for that block, breaking the chain of successively shared encryption outputs. The rest of the network participants would recognize this and reject the corrupt node.
Blockchain’s encryption, consensus mechanisms and auditable databases have many outfits considering its viability for storing personal data (legal, health, financial and property records), while others are looking at uses ranging from autonomous smart contracts to uploading mind files.
Who’s Interested in Blockchain?
Harvard Business Review sees a startlingly successful future for blockchain beyond cryptocurrencies, imagining a world in which “contracts are embedded in digital code and stored in transparent, shared databases, where they are protected from deletion, tampering, and revision.”
“. every agreement, every process, every task, and every payment would have a digital record and signature that could be identified, validated, stored, and shared. Intermediaries like lawyers, brokers, and bankers might no longer be necessary. Individuals, organizations, machines, and algorithms would freely transact and interact with one another with little friction.”
Text in the US government’s NDAA 2020 Modernizing Government Technology Act suggests the use of blockchain and smart contracts as part of a broad cost-savings upgrade/migration strategy aimed at replacing the aging, inefficient infrastructure for human records keeping.
As part of a continuing government assessment of the cybersecurity risks associated with blockchain, the NDAA 2020 requires that the Pentagon monitor government agency rollouts of the technology to survey the infrastructure’s security and then brief Congress within 180 days.
Amid the growing adoption of blockchain, DARPA is also funding efforts to determine if the encrypted and distributed nature of blockchains could help secure highly sensitive data pertaining to everything from nuclear weapons to military satellites.
Likewise, the medical industry is looking to surf the coming wave of blockchains, seeing a purpose for the technology in storing and sharing patient/doctor data throughout healthcare ecosystems. This could include bio-data feeds from wearable IoT sensors and smart apps for instance, and blockchains could even be used to house DNA sequences.
Healthcare vendors such as IBM have already started integrating AI as a solution to analyze patients’ blockchain data while looking at health parameters for signs of illness or to find cures based upon a patient’s distinct personal health information.
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With the popularity and adoption of cryptocurrencies, the financial industry is also eyeing an upgrade. ‘FinTech,’ as the emerging 21st century financial services sector is so often called, is pushing new frontiers with market trend prediction and automatic securities trading, leading to the development of ‘distributed autonomous organizations’ (DAOs).
A DAO can run and scale without human involvement, and transactions are completed autonomously between two parties based upon a set of parameters, allowing financial exchanges to happen automatically without human intervention on a per-transaction basis.
Founded by AI researcher Ben Goertzel, ‘Aidyia’ is one example of a ‘FinTech DAO.’ Based out of Hong Kong, the company can trade US equities on Wall Street as a fully autonomous hedge fund with no humans in the mix by using AI to process, learn and adapt models for price prediction.
“If we all die,” says Goertzel, “it would keep trading.”
Stocks, mutual funds, bonds and pensions may one day be stored on blockchains as many financial organizations explore the technology, and it’s worth noting that Ethereum already supports DAO functionality for autonomous transactions and smart contracts.
Identity management is another prime candidate for blockchain technology, with Microsoft, Accenture, Hyperledger Alliance and the Rockefeller Foundation working alongside the United Nations on the ID2020 initiative to provide all humans with a global digital ID and identity verification services.
“Decentralized, user-controlled digital identity holds the potential to unlock economic opportunity for refugees and others who are disadvantaged, while concurrently improving the lives of those simply trying to navigate cyberspace securely and privately,” says David Treat, MD of the global blockchain practice at Accenture.
Blockchain is also being considered for managing access rights to assets in situations where people are sharing a car or other piece of property, which could have locks linked up to a blockchain network that authorize someone’s use after the owner received a payment.
With our digital world being so insecure and blockchain looking like the cure to so many cybersecurity ills, it’s no surprise that the technology is gaining global support, though some researchers are also questioning whether the technology is actually as secure as it initially seemed.
Blockchain Security & Scalability
Putting a large amount of faith in a nascent open-source technology could prove disastrous under the right circumstances, so it seems prudent to consider the wildest potential consequences before actually adopting blockchain as our go-to solution for storing every asset, transaction, piece of property, proof of ownership or drop of private information.
Those in the security field are known to live by the mantra that “nothing is secure” and that is also true of blockchain. Here are five ways that the platform isn’t quite bulletproof.
Immutability Myth – Being “immutable” (unchangable) is perhaps blockchain’s biggest selling point and yet this isn’t thought to be true by many people involved with the industry. As noted by Gideon Greenspan of MultiChain, a platform for private blockchains: “. the chain’s behavior depends on a network of corporeal computer systems, which will always be vulnerable to destruction or corruption.”
“Nonetheless, it’s important to remember that each node is running on a computer system owned and controlled by a particular person or organization, so the blockchain cannot force it to do anything. The purpose of the chain is to help honest nodes to stay in sync, but if enough of its participants choose to change the rules, no earthly power can stop them. That’s why we need to stop asking whether a particular blockchain is truly and absolutely immutable, because the answer will always be no.”
Scalability – The supported frequency of transactions on a blockchain have been an ongoing limitation compared to traditional financial networks, which can support tens of thousands of transactions per second versus single digits for most blockchain-based infrastructure. Startups including Billion and Zilliqa have introduced developments such as sharding (splitting the network into smaller pieces) to increase that throughput, but much of the issue surrounding scalability currently boils down to a compromise between performance and security.
Malware – Interpol raised concerns over the potential for blockchain infections during Black Hat Asia 2020, noting that all the current applications of malware on the Internet could also be deployed on a blockchain and that they could mutate over time through modules in proceeding blocks. If an infection managed to reach all of the peers involved on a network and there were no way to delete it, all versions of the database could become corrupt. One should question the potential for creating botnets as well.
51% Attack - Although hypothetical, a group who controlled more than half of a network’s encryption power would determine whether or not a block was validated, which is to say that they could validate bogus blocks and corrupt the other 49%. This is easier to pull off on blockchains with less nodes, which is one of the concerning factors about some of the methods for improving scalability as they involve splitting up a network into smaller ones, making them more susceptible to 51% style attacks.
Quantum Computing – The boost in horsepower that quantum computing is expected to bring over the coming years could enable encryption cracking that isn’t possible on conventional hardware. A report from a group of universities warn that by 2027, quantum computing could pose a risk to blockchain as it may be powerful enough to crack blockchain encryption or mount a 51% attack.
Though expensive, countries working on large amounts of quantum research, such as China, may have a bank of quantum machines that could be used to take control of a blockchain. To combat against this threat, NIST began working in 2020 on post-quantum cryptography standards to ensure future ciphers will be secure against quantum machines.
Additionally, ‘The Distributed Futures’ research program, a group researching AI, cryptocurrencies and blockchain, has announced a project called “The Quantum Countdown: Quantum Computing And The Future Of Distributed Ledger Encryption” to help secure encryption algorithm strength against future quantum machines.
Future Use Cases for Blockchain
Although many of its potential uses are forwarding-looking at the moment, blockchain infrastructure is being considered for purposes ranging from GeneCoins to Brain DAOs.
DAO – Mentioned briefly above, ‘decentralized autonomous organization’ functionality is already supported by Ethereum and is essentially an organization that runs by rules encoded as computer programs called smart contracts which can be maintained on a blockchain. Smart contracts are software-based transaction protocols that negotiate, verify and execute agreements autonomously.
In the context of a DAO, a blockchain is meant to serve as a leaderless group of people authorized to act as a single economic entity through the execution of smart contracts via hardcoded rules that are digitally enforced. Participants in a DAO can vote on the direction of the organization as a ‘digital democracy’ where they can contribute to group decisions about adding or changing rules, removing a participant or funding a project as a crowdsourcing vehicle.
IoT – Securing the ever-increasing numbers of connected devices has become a concern for the technology industry as it approaches the ‘Internet of Things’ era. Security is tantamount for exchanging high-value data between IoT devices, especially if a global rollout is to be successful, and the worry of botnet attacks involving millions of compromised IoT devices has prompted a search for potentially wide-reaching solutions.
Adding blockchain as a foundational element of IoT is looking to be the fix everyone has been waiting for: natively encrypted transactions, a distributed architecture and consensus-verified data blocks make blockchain an attractive option for securing transactions between IoT devices.
Genecoins – To borrow text from the theoretical whitepaper Meet Genecoin: The Bioeconomy Currency. “Think of [Genecoins] as your robot friends that encode your genetic material on new networks as they develop. Similar to the way that Google discovers new websites, we’ll be able to jump from chain to chain. Our aim is to turn Genecoin into a Decentralized Autonomous Organization that preserves your genetic material indefinitely.”
Brain DAOs – Other papers propose the concept of using blockchain to store the digitized contents of human brains in “mindfiles,” which may be aided by advancements in optogenetic brain mapping. Mindfiles could open the door to possibilities such as versioning and backups of your memories, the ability to explore other peoples’ mindfiles, and ideas such as organizing mindfiles into a DAO/DAC (distributed autonomous corporation) and creating self-mining brain ecologies. Developments in this area would likewise aid artificial intelligence and the integration of man and machine.
AI – The combination of AI, 5G, IoT and blockchain would provide the ability to extract intelligence from a global ecosystem of always-connected sensors, with real-time tracking and documentation of everything that happens to a package or pallet along the supply chain.
Companies are working on solutions where this technology could be used for tracking fresh food from the grower to grocer (reducing waste and costs), documenting inspections, and recording the chain of custody through time-stamped blockchain transactions. With the addition of technologies such as AI, blockchain could be the solution to creating a worldwide distributed asset and records management system.
Someday, you might be able to monetize home devices or wearable IoT sensor data by selling data feed subscriptions in a trusted transaction between you and an organization paying for the data through a blockchain. Selling your real-time IoT data streams such as shopping habits or biostats could become commonplace.
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