Blockchain Fully Explained

Blockchain technology is to 2021, what the Internet was in the late 1990s. It feels more like science fiction than reality. No more queues at banks and signing forms to deposit millions, or paying ridiculously high bank fees.

To many, blockchains are a fad that would come and go. But just like the Internet stuck around, blockchains do not look like they are leaving anytime soon.

Cryptocurrency, an application of blockchains, has changed the way we do our banking. Yet, few understand the technology that has made this possible.

In this article, I’ll be telling you all you need to understand blockchains.

WHAT IS BLOCKCHAIN

Thousands of cryptocurrency transactions are made per second. These transactions are recorded in digital ledgers. The ledgers, in turn, are put in data structures called blocks. Blocks are immutable, which means once ledgers are recorded they cannot be changed.

Each block has a hash and a timestamp which contains information from previous and subsequent blocks. Because these blocks are immutable, the information gotten can also not be changed. The block receiving them becomes immutable by default. 

All the blocks stacked together in a chain are what we call a blockchain.

HISTORY OF BLOCKCHAINS

The idea of a blockchain was first proposed by a cryptographer named David Chaum in 1982. The concept of consortiums was introduced by Stuart Haber and W. Scott Stornetta in 1991.  

The first blockchain was developed by Satoshi Nakamoto in 2008. Satoshi Nakamoto is a pseudonym and its owner is still unknown.

In 2009, Satoshi founded the Bitcoin network which implemented blockchain technology and bitcoin became the world’s first digital currency.

HOW IT WORKS

To understand how a blockchain works you would have to be familiar with some concepts. 

Decentralization

A database needs computers to store its data. In a tech company like Facebook, there are hundreds of computers stored in a central room that serves this purpose. The company also has full control over the data.

However, this poses a huge security risk. If the room is breached and the computers are tampered with, the data that would be lost ( or stolen) would be huge. The company could also tamper with the data and this could affect the entire information stored.

Blockchains evade this risk by having the computers ( which are called nodes) distributed across the globe. Different groups control these computers and none have full control. This is decentralization.

Each node has a complete record of all data on the network. Thus, if an error occurs in one node, it can simply access the data from another node and make corrections. If the data is breached, the other nodes can easily identify it too.

Hash

To understand a hash, think of a written text that is held in front of a mirror. The text is converted to an anagram that has to be decoded. A hash is a mathematical algorithm created through cryptography that encodes certain information in a block.

A hash cannot be reversed. It is also impossible to find multiple data that would give the same hash.

Attempting to decode a hash is infeasible. In the bitcoin network, the cost of decoding the hash is so large that no one would even try to attempt it.

Timestamp

A timestamp is critical for the security of cryptocurrencies. It is a method of ascertaining the exact time a transaction is done.

A timestamp is created from a hash so once created it cannot be altered even by the owner of whatever is been stamped.

SECURITY

The hash and timestamp make a blockchain very secure but could a hacker still manage to hack it?

Although it is difficult, blockchains can be hacked. In August 2021, @PolyNetwork announced on Twitter that it had been hacked.

To do this, the hacker would have to simultaneously alter 51% of the blocks. If they were to alter just their copy, it would be easily identified and rejected by other copies. But if at least 51% of all copies of the blockchain are changed, they get the majority and can manipulate the blockchain.

However, to execute a hack like this would require a colossal amount of money and resources. 

Also, the Bitcoin network grows rapidly each day. When members notice an alteration, they would simply fork (move) to another chain. This would plunge the monetary value of the stolen Bitcoins, making them worthless.

Ethereum forked and created Ethereum Classic after it was hacked. It forked again to create Altair though it was not because of a hack. Bitfly announced the then-forthcoming fork in a tweet: The Altair hardfork is going live in 21 days!

CONSENSUS

The most important function of blockchain is that there is no need for a third party during transactions. All transactions are peer-to-peer.

This is achieved using consensus mechanisms. The major types are:

Proof of work

This is known informally as mining. PoW makes use of cryptography when validating transactions.

PoW requires a lot of electricity. It also has a low number of transactions that can be processed at the same time. In Bitcoin, this number is seven.

These transactions take about ten minutes in Bitcoin but could take longer if the network traffic is congested. Bitcoin and Ethereum use PoW but Ethereum intends to switch to Proof-of-Stake in 2022.

Proof-of-Stake

In this method, a validator is chosen based on the number of coins they have. This is called a ‘stake’.

Cryptography is also used in PoS for validations but this is not mining. The chances a person has of being chosen as a validator increase with an increase in stake.

Proof-of-Stake transactions are done in seconds. The NEO and Dash are examples of cryptocurrencies using PoS.

TYPES OF BLOCKCHAINS

There are four types of blockchain

Public blockchain

This type of block chains is the oldest and  most popular block chain. Public blockchains are permissionless and can be accessed by anyone. They are also open source which leaves their source code visible to the public. Bitcoin and Ethereum are common examples.

Public blockchains are transparent and independent. It is controlled by all members but if a member can control 51% of the blockchain, they can alter it as they wish.

Private blockchain

The operations of private and public blockchains are similar. Both use peer-to-peer network and decentralized nodes. However, private blockchains uses permissions and restricts access to a small group. It is also centralized which means an entity controls the entire blockchain.

Some argue that private blockchains are not true blockchains because they lack decentralization. But private blockchains are more secure than public blockchains. Hyperledger is an example of a private blockchain.

Hybrid blockchain

A hybrid blockchain, is a combination of  public and private block chains. There is no universal agreement on consortiums. Some make them distinct as public or private blockchains while others see them as both. 

Hybrid blockchains give the transparency of a public blockchain while retaining the security of a private blockchain. R3, Energy Web Foundation and Dragonchain belong to this category of blockchains.

Side chains

A blockhain can break off from a parent chain and run parallel to it. These blockchains are known as sidechains and allows for digital assets to be exchanged between the different blockchains.

ADVANTAGES OF BLOCKCHAIN

It is trustless: Blockchains can automatically make trusted transactions between two or more parties that do not know each other. 

It is unstoppable: There are programmed conditions that must be met before transactions are executed. If these conditions are met, a transaction is initiated. Once a transaction is initiated, it cannot be stopped.

It is immutable: The blocks in a blockchain cannot be altered — Bitcoin has never been hacked. This makes the records in a blockchain secure and safe.

Low cost: Unlike banks that charge high fees for transactions, blockchains have no third parties and the fees are much lower.

Universal banking: There are security risks posed by having cash in physical locations. In blockchains, there is no need for a physical bank and a bank account.

DISADVANTAGES OF BLOCKCHAINS

Environmental impact: Bitcoin consumes a huge amount of electricity during mining and this affects the climate. According to researchers, Bitcoin consumes more energy than small European countries. Here is a comparison of Bitcoin’s energy consumption and those of some countries.

Personal responsibility: The biggest advantage of Blockchain technology is that it makes YOU a bank. You own and control your money fully. But this is also a big disadvantage. If you lose your seed phrase (the password to your account) you would lose all your money and there is no means of retrieving them.

CONCLUSION

Getting a basic understanding of blockchains to useful to both the Wall Street financier and the small-time crypto investor. Both need it to make faster transactions and better decisions.

With the increasing use in real-time applications such as smart contracts, it is safe to say blockchain technology is here to stay. As companies realize their potentials and commit their resources, the future beneficial uses of the technology are limitless.