What is Blockchain?
In short, a blockchain is a digital ledger with collective memory, where added information becomes immutable. It stays there, forever (almost always). The ledger is shared and is accessible by anyone who runs a blockchain node, or simply said, a computer with a specific code (the blockchain) connected to other similar computers through the internet. The data stored on the blockchain could be anything, including insurance claims, digital money or cryptocurrency (such as Bitcoin), or even physical property shares such as real estate. Traditional ledgers/databases are stored on a single server; on the contrary, the blockchain ledger is spread out on a massive network of computers (nodes). That implies that since the system is distributed throughout numerous nodes, there is no centralized point of failure.
In order to add new information, such as asset metadata, transaction details, contracts, etc. to the blockchain, these nodes work together. The new information is added to the blockchain in bundles known as blocks. Every addition of a new block of information is chained to the previous one linearly, forming the blockchain.
Since blockchain has a relatively decentralized nature, there is no one single unit that has the power to change the blockchain ledger state and conduct actions such as seizing funds or shutting down accounts, unlike e.g. banks.
How exactly does Blockchain work?
A blockchain functions by storing an immutable (unchangeable) record of various transactions. This happens as a result of all the nodes or computers reaching a consensus on the network. For any addition to occur in the blockchain (adding the next block, for example), the majority of the nodes present in that specific blockchain must agree to conduct that change, since blockchains are made up of a distributed network of computers that are not governed by a central authority. The system becomes more decentralized as the number of nodes increases in the network, subsequently improving security. As a result, blockchain could be considered one of the best examples of a decentralized system.
Consensus is the agreement between nodes that implicates the blockchain's true state of affairs. If one of the nodes attempts to lie, then there will be a mishap between its record and other nodes on the blockchain; thus, it will automatically be ignored. The security of the blockchain is built fundamentally on the system of consensus.
Private keys protect personal data on the blockchain. A private key is a password consisting of lengthy characters and symbols that provide you access to a digital wallet where all your personal data is kept. The data could be anything from your last medical check-up to digital money. The most significant benefit of a private key is that there is no prerequisite to store it on a central server, contrary to passwords for regular websites like Facebook or Google, which are prone to hacks.
There are various consensus mechanisms:
- Proof of Work Blockchain (PoW): this type of consensus mechanism is decentralized in nature. It requires members of a given network to use computational power in an effort to solve a quite complicated mathematical puzzle, which in turn prevents anybody from abusing the system. PoW is widely used for validating transactions and mining new tokens (cryptocurrency).
- Proof of Stake Blockchain (PoS): this type of consensus mechanism is performed by achieving a distributed consensus in a cryptocurrency blockchain network. In a Proof of Stake-based cryptocurrency, the next block's creator is chosen via different combinations of random selection and age or wealth (i.e., the stake).
- Proof of Authority Blockchain (PoA): This type of consensus mechanism gives power to a designated and small number of actors in the blockchain to validate transactions or interactions regarding the network and update the registry (which is more or less distributed).
What problems does Blockchain necessarily solve?
On a blockchain network, you can ask for payment from an individual that you have never met in your life, and when it arrives, you can be absolutely sure that it is verified and legitimate, all within the span of a few minutes or seconds. Existing systems similar to the SWIFT banking network could take a few days to complete the same task.
Another essential issue that blockchains solve is the double-spend issue. The issue basically revolves around the idea that on a given database, an individual could input an entry and then return and change it to their liking if they have the authority or power to do so. This could allow someone to spend the same amount of money twice.
Blockchain is a solution for this problem through a combination of factors:
- Each and every transaction is kept in the correct order and is timestamped.
- All nodes present in the system are required to have a copy of the exact same ledger to acquire a consensus and to further continue the blockchain.
- Nodes that have a copy of the ledger that doesn't directly match with the majority of the foreign nodes will be overlooked. That is, if an individual makes an attempt to spend the same amount of money twice by sending it to two separate nodes, then only the node that directly matches the other nodes part of the network will have the ability to be accepted in the following block of data.
What else can a blockchain do?
Blockchains are widely known as distributed ledger technologies (DLT). This classification of technology has been around for a mere decade or so but is firmly receiving growing development and attention. Similar to the internet, additional technologies and protocols are being assembled on top of blockchains to further their possibilities.
- Cryptocurrencies: the new generation of currency, otherwise known as digital "coins," are native to their blockchain and are usually used as means of reward for the node operators that verify transactions and help secure the network.
- Tokens: are also digital assets that are traded and stored on a blockchain. But unlike cryptocurrencies, in straightforward terms, they are programmed "on top" of a blockchain, which allows them to basically piggyback the already present network infrastructure.
- Smart Contracts: these are digital contracts that anyone can program to their specific needs to perform a set of functions. Similar to a physical contract, it requires the fulfillment of the contract where all parties meet certain conditions, but dissimilar to a physical contract, a smart contract automatically executes the terms once the predetermined conditions are met. Furthermore, these contracts are exceptional regarding their ability to execute the terms without a middleman, thus reducing potential costs while increasing accuracy and speed.
- Supply Chain Management: supply chains are supported by blockchains that can add a vital level of trust and authenticity, which is missed by legacy systems to a very high degree.
Well, what about issues with Blockchain?
Blockchain technology has issues similar to any technology out there; it largely depends on the particular blockchain. Criticism often revolves around centralization issues (or, in some instances, decentralization), speed, privacy, and adoption complexity.
Some of the mentioned issues have quite simple solutions, such as creating a new interface to directly improve usability or choosing a private blockchain to enhance privacy.
However, there is one major issue that is a direct result of many of these more minor issues contributing - the problem of scalability,
Scalability is the ability (or in some instances lack thereof) for blockchains to scale upwards when more users join the given network. As the number of users increases, size (bandwidth) and speed are required to increase to process all the newly added data. Currently, most blockchains face such a struggle and conduct the upscaling while trading off in other areas, namely security and decentralization.
The three-way trade-off among security, decentralization, and scalability has evolved into the well-known Blockchain Trilemma.
There are various use cases for blockchain adoption, including healthcare, media, government and voting, banking, real estate, cybersecurity, etc. This article touched upon the core components of a blockchain network, but the possibilities that such an astounding piece of revolutionary technology can create are limitless.