A blockchain is a digital database distributed among nodes or computers in one network. Primarily, blockchains are associated with cryptocurrency as they ensure encrypted (read completely secure) transactions and storing of information on them. The most known blockchains are Bitcoin and Ethereum. The primary difference between blockchain and other databases is the decentralized character and the exclusion of third parties in transactions which minimizes security concerns and costs.
The information in blockchains is stored in blocks. Each block contains groups or sets of information. A block has a certain storage capacity and when it is reached, it closes and is linked to the other blocks in the chain. The sequence of blocks is basically what blockchain is. Any new information that is to be added to the blockchain adds to the new block which then also attaches to the chain of blocks.
This is a pretty big structuring difference from conventional databases that store data in tables.
The blockchain’s data structuring essentially creates an irreversible data timeline while being completely decentralized. Once each block is filled, it is permanently closed and cannot be changed within the chain. Then, it is given a unique time stamp and becomes a part of this timeline which is why it is irreversible.
- Blockchain is a technology for storing data that differs from conventional databases by the way the data is stored. Instead of tables, it is stored in blocks each of which has its unique time stamp and cannot be changed. The blocks form the chain of data.
- Once the storage capacity of one block is reached, it is closed and added to the end of the chain. The blocks are linked by cryptography. All blocks are stored in chronological order due to time stamps and cannot be changed. Blockchains can store an array of information. However, currently, they mostly store information on cryptocurrency transactions.
- Blockchains are decentralized databases meaning there is no single governing body. It is the users of the chain who have control over the operations.
- The decentralization of blockchains makes data storage immune to any changes. Thus, any transaction or data once added to the block is irreversible. Besides, for example, with the Bitcoin blockchain, transactions are not only permanent but also transparent to everyone.
What’s the principle of blockchain work?
The idea of blockchain is to create a very reliable and secure data registry or ledger where data cannot be altered post-factum, i.e., once the transaction is complete. Thus, the principle of blockchain is the immutability of data, implying that the data cannot be changed, deleted, or destroyed. The other name of blockchain is distributed ledger technology (DLT).
First, the idea of such technology occurred in 1991. But the implementation happened 18 years later with the development of Bitcoin in 2009. In the next years, the technology widely spread through the occurrence of different cryptocurrencies, the creation of decentralized finance (DeFi) apps, non-fungible tokens (NFTs), and smart contracts.
Transaction Process. Attributes of Cryptocurrency. Blockchain Decentralization
A regular server of a company consists of a premise with numerous computers that maintain a database. Such a database contains information on all clients. This doesn’t sound like a very safe solution, isn’t it? Imagine if something happens to the premise. For example, if it catches fire or is flooded. Or if there is a simple power outage or the internet connection is lost? One premise where all data is stored creates a single point of failure. If something happens to it, all data can be lost forever.
This is where blockchain is head and shoulders above other types of information storage. In the chain, there is no single point of failure because data isn’t stored on a single computer or server. There are thousands or even millions of nodes that contain the same information all around the world by containing their versions of the blockchain. This protects information not only from natural disasters or other force majeure but also from hacking. To be altered by hackers, information on all nodes in the chain must be affected which is literally impossible. And if a hacker alters just one node, all other nodes that have the true version of the blockchain will verify with each other and quickly figure out which node had been hacked. This approach aids in creating a clear and precise sequence of events. This prevents any one node in the network from changing the data it contains.
This ensures that the data and history of any transactions are irreversible and immutable. Nowadays, such sequences contain data on transactions with cryptocurrencies but the technology can be used for a range of different kinds of data, for example, company inventory, birth and death certificates, legal contracts, VIN of motorcycles and so on.
The information in each block must be confirmed by the majority of nodes or computing entities within the chain. You may ask what if several nods are affected by hackers who can validate false transactions? For the prevention of such fraud, special consensus protocols are used. It could be proof of work (PoW) or proof of stake (PoS). In such a way, the validation is distributed among multiple nodes, and only if the majority of them validate the transaction it actually happens.
Due to the decentralized nature of the Bitcoin blockchain, all transactions can be viewed through a private node or through blockchain explorers in real-time. Each node in the network contains a copy of the chain, which is updated as new blocks are filled, validated, and added. Basically, you can track the whole way of a Bitcoin from point A to point B. For instance, when a hacker steals Bitcoins from an exchange, they can stay completely anonymous but the stolen coins are traceable on the entire way. Everyone can see how they are spent or what wallet they are on.
However, you cannot find out the name of the participant of the transaction or any other information about them since the records are encrypted. Only the owner of the wallet can disclose themselves using their private and public keys. Thus, the transactions on the blockchains are transparent though completely anonymous.
Is blockchain secure?
Security and trust in the blockchain are reached through several means. First of all, all blocks are stored in the chain chronologically and linearly as they are always added to the end of the chain. Once the block is added to the blockchain, it is virtually impossible to alter the data within it since to verify it the consensus of the majority of chain nods is required. Naturally, in a hack, it won’t be happening. This is ensured by the assignment of a hash to each block while it also contains the hash of the previous block and the time stamp. Hash codes are codes created by a mathematical function. It turns digital information into a line of code, i.e., a string of letters and numbers. If that information is somehow edited, the hash code also changes.
Suppose a hacker who also operates a node in a blockchain wants to change blockchain data and steal money from other users. They can alter the chain version only on their own node. Then, it will no longer correspond to the version of the blockchain on other nodes. When everyone else matches their copies against each other, they will see that this single copy stands out, and the hacker’s version of the chain will be discarded as invalid.
To succeed, a hacker would need to control more than 51% of the blockchain and alter as many copies as there are nodes in this share. Only when the majority of the chain will agree that this version is valid the hacker can succeed and steal the money. It’s possible only in theory, because in reality to carry out the necessary calculations (and this is the recalculation of the hashes of all existing blocks of the chain) it would take all the computers on Earth and decades.
Naturally, it is impossible to do due to decentralization and the number of nodes in the network. Due to the fact that every block would need to be recreated because of the new timestamps and hash codes, such a hack would also demand an enormous sum of money and resources. Besides, even with enormous resources involved, such an attack would likely be fruitless since the such event cannot go unnoticed. The owners of other nodes would see the alterations to the blockchain and make a hard fork of the chain, i.e., create their own version of the unaltered blockchain to protect the data. This would result in a sharp drop in the original cryptocurrency value. So, basically, the hacker’s stolen cryptocurrency wouldn’t cover the expenses as then it will cost nothing or close to nothing.
The same is also relevant in case of an attack on a hard fork of blockchain, i.e., a new version of the blockchain verified by the unhacked participants. Economically, blockchain is built in such a way that it is far more profitable to participate in it than try to hack or otherwise attack it.
Bitcoin vs Blockchain
For people far from blockchain technology, blockchain and Bitcoin may seem like synonyms. However, first, the idea of blockchain was developed by two mathematicians Stuart Haber and W. Scott Stornetta in 1991. They were working on a database system where time stamps couldn’t be altered. Yet the technology was first applied namely with Bitcoin when it was launched almost 20 years later, in 2009.
The author of Bitcoin known under the pseudonymous Satoshi Nakamoto presented Bitcoin as a new entirely peer-to-peer, i.e., with no trusted middlemen electronic currency system. He admits that it is built on the basis of blockchain technology.
In short, blockchain and Bitcoin are absolutely different things. Bitcoin is a currency that uses blockchain as a registry or a ledger to record transactions. But the technology can be used for any other kind of data storage and processing.
Fortunately, many tech-savvy people and companies already understand that and are tirelessly working on integrating blockchain technology into other day-to-day processes. There are thousands of such projects from all over the world. Some are focused on integrating blockchain into the healthcare system, others into the voting process, as a registry of legal contracts, and many more. Blockchain can eliminate an enormous amount of fraud and mistakes related to the human factor in all industries. For instance, in the voting process, the system could work like this – each voter is given a unique cryptocurrency coin or token while each candidate is given an individual address or wallet. Then, when a voter wants to give their vote to a particular candidate, they simply transfer their coin or token to their wallet. This easy and fully traceable process will eliminate the need of counting votes by humans. This can easily eliminate fraud and mistakes.
Blockchain vs Banks
The banking system is afraid of blockchain and to be honest, they do have a reason. Banks and blockchains differ greatly. Although now banks are still the major financial institutions, it could change since blockchain offers an array of advantages. Let’s see how banks and blockchains differ in more detail in the example of Bitcoin.
Banking and financial system
Although the crypto realm competes with banks, actually banking can benefit from integrating blockchain maybe more than any other industry. For instance, currently, financial institutions operate only 5 days a week and have pretty short working hours. This means that if you try to transfer money on Friday evening, most likely they will come to the receiver’s account or card only on Monday or even Tuesday if there are too many transactions in line. Besides, even if you try to make a transaction during working hours in the middle of the week, a simple money deposit to your account can take from one to three hours. This slow system can be very irritating especially if you are in hurry. And it’s the major difference between banking and blockchain. Blockchain operates 24/7.
If banking integrates blockchain, customers can expect transactions to be much faster. For example, transferring money or depositing them into your bank account can take only 10 minutes instead of hours. Besides, blockchain allows transferring funds more securely and promptly between financial institutions. It is a crucial improvement for the stock trading business where the clearing process happens within 3 or more days if it is an international transaction. Basically, now when you participate in such operations you get your money and stocks frozen for that amount of time. Naturally, the nature of the stock market and sums that go through it in such delays imply significant risks of losses.
Blockchain and currency
All cryptocurrencies including Bitcoin are based on decentralized blockchains. The currencies of different countries are controlled by governmental institutions. For instance, in the U.S. it is Federal Reserve. Such systems are very centralized. Basically, such institutions solely manage the data and money of people who use it. This creates significant risks for ordinary currency users. For instance, if a bank is robbed or hacked, a person can lose all of the money stored there. And if a bank is located in a country with an unstable government, war, or economy, the risks are even higher. Then an individual can lose not only their savings in the banks but the savings can simply depreciate because of currency depreciation.
In the USA, in 2008, a number of failing banks were saved by the government with the money of taxpayers. Naturally, it also puts a strain on the economy. Precisely these existing financial system failures and drawbacks led the creator of Bitcoin to the idea of decentralized currency. The decentralization, i.e., the spreading of resources through thousands of nodes in the networks allows cryptocurrencies to be managed without a single centralized authority. It not only lowers the risks but also cuts the costs of transactions since no middlemen are involved.
For people in developing countries with unstable currency and poor financial infrastructure, cryptocurrency is a more stable alternative currency than their national one with numerous ways of use both within and outside the country. In many underdeveloped countries, some people do not even have their state IDs. For them, it is impossible to create bank accounts and savings accounts. Thus, crypto wallets are the only opportunity for such people to safeguard their savings.
How blockchains are used by different industries today?
We have already explained that blockchain is a digital decentralized registry or ledger that for Bitcoin and other cryptocurrencies is used to store data on monetary transactions but it can store a wide range of different data.
Some large corporations have already integrated blockchain in their operations, among them are Walmart, Pfizer, AIG, Siemens, Unilever, IBM, and many others. They use blockchain also to store data on transactions, but not with cryptocurrency. Some, like IBM, have created a special system for tracking their food products under the Food Trust blockchain.
You may think why is it important to track food? The thing is that with disease outbreaks it is quite difficult to find out the origin of the infection when the foodstuff travels across the globe. With blockchain technology, when every step is tracked and immutable, it is much easier to find the precise time and place where the product became contaminated. It also allows tracking what the foodstuff was in contact with and eliminating that element from the delivery chain in the future without conducting expensive investigations and spending a lot of time. And of course, quick identification of the problem and its elimination can save thousands of lives. This is just one of many examples of how blockchains can be used outside the cryptocurrency industry.
Blockchain and healthcare
Blockchain for healthcare means that providers can drastically improve the level of security of patients’ data. Once a medical record is made in a blockchain-backed system, it cannot be altered or accessed without a public and private key. This means no data can be altered and medical history can be seen only by the professionals the patient goes to.
Blockchain for property records
If you have ever dealt with Recorder’s Office, you know that the processes there are very slow and inefficient. The procedure to register property requires you to bring the property deed to an official at the office who will then enter all the data manually into the county’s central database and public index. In case you wish to dispute property rights, the claim must be reconciled with the public index. Even reading the description of the procedure you may conclude that it is quite a time-consuming and costly process. Besides, it leaves a lot of room for human error.
Blockchain can solve all of these problems first of all because it eliminates the need for physical copies of deeds. Once property ownership is established on a blockchain, the data is immutable and securely saved so there is no need to make copies, have physical documents, and reconcile with other authorities. The immutability and permanent storage of data is in the nature of blockchain.
This is especially relevant for countries where there are open war conflicts, and poor or non-existent government or financial infrastructure. In such conditions, it’s impossible to safeguard physical property deeds. However, blockchain can help store actual information on all property including transactions with property without any physical papers.
Smart contracts in blockchain
When you searched for information on blockchain before, you probably heard about smart contracts. In short, smart contracts are lines of code that set the conditions for a deal and execute the deal once the set conditions are met by both parties of the agreement.
Here is a simple example of how a smart contract can work. Suppose there is a landlord who wants to rent out an apartment. They enter their data in the smart contract with the condition that they give the entry code for the apartment once the tenant transfers them the security deposit. If both parties provide proof that their part of the deal is complete to the smart contract, it is executed. However, if one of the parts fails to fulfill its obligations, for example, a landlord doesn’t provide access to the apartment, the security deposit returns to the tenant. All of this is made by a single smart contract or a line of code that eliminates the need for middlemen and greatly cuts the costs of any of such or other deals.
Blockchain for supply chains
In this article, we have already mentioned the IBM Food Trust which integrated blockchain to track their foodstuffs throughout their whole route from the place of origin to the end consumer, and how it can help both the business and the consumers. Besides, blockchain tracking allows businesses to track not only their products but also authenticate such labels as “organic”, “local”, and so on.
According to Forbes, more and more food industry companies have been already implementing blockchain for route tracking and food safety all the way from farmer to consumer.
Blockchain for voting
Blockchain can free the voting process of fraud and human errors. Besides, it can also improve the turnout of voters as people wouldn’t even need to leave their homes to vote as they can simply send individually assigned tokens to the wallet of their candidate. The midterm elections in West Virginia in November 2018 have proven that indeed people are more willing to vote with the use of blockchain. The use of blockchain ensures transparency and also significantly reduces the need for personnel for the conduction of the elections. Besides, the counting of votes can be done basically instantly once the elections are over because there is no need to count for physical ballots which also eliminates human errors, duplications, and fraud.
Pros and Cons of Blockchain
We have already mentioned a lot of pros of blockchain as a system to keep records safe from alterations frauds, and other corruptions. It also greatly reduces costs and has basically unlimited possibilities for use. However, as with any other system, it has its cons.
- High cost of technology implementation due to Bitcoin mining.
- Small number of transactions per second.
- Tarnished reputation due to the use in illicit transactions on the dark web.
- Storage restrictions.
- Different jurisdictions have different regulations creating uncertainty.
- Better accuracy by eliminating human verification.
- Elimination of third-party verification and respective cost lowering.
- Virtual inability to forge data due to decentralization.
- Security, privacy, and efficiency of transactions.
- Technology transparency.
- Can replace baking for data and money savings methods in countries with unstable economies or governments.
Key benefits of Blockchains
High level of chain accuracy
Bitcoin blockchain eliminates the human factor error possibility as all computations and verifications are made by machines. Due to high decentralization, even if one or several machines make an error, the network still remains accurate since only the copies of the chain on those few computers are affected. For the error to be relevant for the whole chain, it should be verified by 51% of computers in the network which is impossible due to the huge number of nodes in the network.
Reduction of costs
At the moment, any transaction requires an intermediary. For example, a bank, a notary, or another regulator. This inevitably increases the cost of transactions. In a blockchain, all transactions are verified without middlemen. Thus, the costs are significantly reduced. For example, when you transfer from one bank account to another, you pay fixed fees by intermediaries. In a blockchain, you still pay a fee for transaction processing but it depends on the network and is usually much lower.
Decentralization means that the data recorded in the blockchain isn’t stored in a single location. The data on the blockchain is copied and spread among the nodes. The information is stored in the blocks that add to the end of the chain once they are filled in. Each copy then receives a copy of the block. This system means there is no single point of failure and that it is virtually impossible to hack the network to alter any information or steal or corrupt data or money.
In blockchain transactions can happen almost instantly as it operates 24/7, unlike banks that work 5 days a week till 5 pm. When you are trying to put money o your bank account or another person’s or company’s bank account, it can take up to a week while with blockchain it can happen within minutes. This is especially beneficial for international transactions that take the longest time if you use banking services. For example, international stock trading can take up to a week during which the stocks and funds are basically frozen due to numerous verifications through middlemen.
Confidentiality of transactions
Although blockchain is a transparent registry where you can track the money from point A to point B easily, you cannot see private information about the parts of the deal. To see personal data, you need public and private keys that are available only to a particular participant in the transaction.
You can always check the public addresses of people who purchase Bitcoins or other cryptocurrencies, but you cannot find out their names, address, and other data. However, when a person buys Bitcoin or other cryptocurrencies through an exchange for fiat money, they still need to provide their personal information to the exchange. But even in this case, the other part of the transaction won’t see any personal data of the other part.
The security of transactions on the blockchain is ensured not by the trusted third party but by the thousands of computers that verify the transaction. Once the majority of the network confirms that the details of the transaction are correct, the records on it are added into a block with a unique hash code. The block has a certain storage capacity and when it is filled, it closes and is added to the end of the chain. The information in the block cannot be changed, edited, or corrupted. If someone tries to do so, the block’s hash code changes and all other computers in the network see it and discard the changes as incorrect. So it is basically impossible to hack the system and the transactions on the blockchain are absolutely secure.
The majority of blockchain codes can be viewed by virtually anyone since they are open-sourced. This creates an unsurpassed level of transparency – anyone can play a role of an auditor and check various cryptocurrencies, for example, Bitcoin, for security. Also, there is no single authority that controls the blockchain code. Anyone can propose changes and improvements that will come into force if the majority of network participants agree with them.
Providing banking services where banks are unavailable
The undeniable benefit of blockchains and cryptocurrencies over baking is that anyone can use them even if they live in a country where there is a very poor to the non-existent banking system. The World Bank reports that currently there are around 1.7 billion adults who don’t have any bank accounts or any safe means to store their savings. Naturally, the majority of these people are from developing countries with unstable economies, governments, and, respectively, banking systems. There the only way of storing wealth is cash or other physical assets. Cash and physical assets then are stored at homes where they can be easily stolen.
Bitcoin and other cryptocurrencies, on the other hand, are a means to safeguard savings. All a person has to keep at home is a small piece of paper with private and public keys to their wallet. Agree, it is much easier to hide a piece of paper with a coded address that seems like gibberish and is less attractive to robbers than cash or gold. Besides, if necessary, a person can even memorize the code to reduce the risk of robbery to a minimum.
What is a blockchain platform?
A blockchain platform is like any other development platform but for Web3. It allows developers and even simple users to find new ways of using and applying blockchain based on the existent open-source decentralized infrastructure. For example, the Ethereum blockchain allows creating smart contracts for various deals and businesses, non-fungible tokens (NFTs), and even tokens for ICO (initial coin offerings) while having its own cryptocurrency ether (ETH).
How many blockchains exist at the moment?
The number of blockchains grows almost daily. Currently, there are over ten thousand blockchains with their own cryptocurrencies. Also, there are hundreds of non-cryptocurrency blockchains.
What are private and public blockchains?
A public or open blockchain is a blockchain that anyone can join with their own computer. To ensure security in such open blockchains, cryptography, and proof of work protocol (PoW) are used. Only when consensus in the PoW is achieved, a transaction becomes valid.
A private blockchain requires permission to join the network. Thus, to get added to the network all nodes are prior verified. This facilitates security and reduced the need for extra security measures.
Who invented blockchain?
First, the idea of blockchain was conceived in 1991 by two mathematicians Stuart Haber and W. Scott Stornetta. Their idea was to create a registry or a ledger where it is impossible to alter time stamps. Later during the same decade, a cypherpunk Nick Szabo suggested that blockchain can be used as a system for secure digital payments. He even came up with the name – “bit gold”. However, this idea has never been implemented.
What expects blockchain in the future?
In 2023, we can already witness numerous applications of blockchain and experiments with its integration and implementation. Naturally, we can thank cryptocurrencies, and in particular Bitcoin for raising awareness about blockchains. However, now it becomes clear and proven in practice that blockchains can be used not exclusively for finances and cryptocurrency but for many other facets of life.
We have already discussed the main benefits of blockchains such as speed of transactions, round-of-clock working hours, lack of middlemen, reduction of costs, high level of security, and inability to tamper with recorded data, and many others. Naturally, all of this can be beneficial for many businesses and even entire countries. We have no doubts that major corporations will integrate blockchain into their operations.
The only question is how soon it will become our new reality. We believe that it is going to happen during the next decades that our world will be hugely transformed by blockchains.