The Big Q: What is Blockchain?
The Big A: Blockchain is easier to understand than that definition sounds, here goes…
At its basic level, blockchain is a chain of blocks, when we say the words “block” and “chain” in this context, we are actually talking about digital information (the “block”) stored in a public database (the “chain”).
“Blocks” on the blockchain are made up of digital pieces of information, they have parts:
- Blocks store information about transactions like the date, time, and dollar amount of your most recent e-Commerce purchase.
- Blocks store information about who is participating in transactions. Instead of using your actual name, your purchase is recorded without any identifying information using a unique “digital signature,” like a username.
- Blocks store information that distinguishes them from other blocks. Much like you and I have names to distinguish us from one another, each block stores a unique code called a “hash” that allows us to tell it apart from every other block.
While the block in the example above is being used to store a single purchase the reality is a little different. A single block on the blockchain can actually store up to 1 MB of data. Depending on the size of the transactions, that means a single block can house a few thousand transactions under one roof.
How Blockchain Works
When a block stores new data it is added to the blockchain. Blockchain, as its name suggests, consists of multiple blocks strung together. In order for a block to be added to the blockchain, however, four things must happen:
- A transaction must occur.
- That transaction must be verified. After making that purchase, your transaction must be verified. With other public records of information, like the Securities Exchange Commission, Wikipedia, or your local library, there’s someone in charge of vetting new data entries. With blockchain, however, that job is left up to a network of computers. When you make your purchase, that network of computers rushes to check that your transaction happened in the way you said it did. That is, they confirm the details of the purchase, including the transaction’s time, USD amount, and participants.
- That transaction must be stored in a block. After your transaction has been verified as accurate, it gets the Green light. The transaction’s USD amount, your digital signature, and seller’s digital signature are all stored in a block. There, the transaction will likely join thousands, of others like it.
- That block must be given a hash Once all of a block’s transactions have been verified, it must be given a unique, identifying code called a hash. The block is also given the hash of the most recent block added to the blockchain. Once hashed, the block can be added to the blockchain.
When that new block is added to the blockchain, it becomes publicly available for anyone to view. If you take a look at Bitcoin’s blockchain, you will see that you have access to transaction data, along with information about when, where, and by who the block was added to the blockchain.
Is Blockchain Private?
Anyone can view the contents of the blockchain, but users can also opt to connect their computers to the blockchain network. In doing so, their computer receives a copy of the blockchain that is updated automatically whenever a new block is added.
Each computer in the blockchain network has its own copy of the blockchain, which means that there are thousands, or in the case of Bitcoin, millions of copies of the same blockchain. Although each copy of the blockchain is identical, spreading that information across a network of computers makes the information more difficult to manipulate. With blockchain, there is no a single, definitive account of events that can be manipulated. Instead, a hacker would need to manipulate every copy of the blockchain on the network.
Looking over the Bitcoin blockchain you will notice that you do not have access to identifying information about the users making transactions. Although transactions on the blockchain are not completely anonymous, personal information about users is limited to their digital signature or username.
Is Blockchain Secure?
Blockchain technology accounts for the issues of security and trust in several ways.
1st, new blocks are always stored linearly and chronologically. That is, they are always added to the “end” of the blockchain. If you take a look at Bitcoin’s blockchain, you’ll see that each block has a position on the chain, called a “height.
After a block has been added to the end of the blockchain, it is very difficult to go back and alter the contents of the block because each block contains its own hash, along with the hash of the block before it. Hash codes are created by a math function that turns digital information into a string of numbers and letters. If that information is edited in any way, the hash code changes too.
Here is why that’s important to security. Let us say a hacker attempts to edit your transaction so that you actually have to pay for your purchase 2X. As soon as they edit the USD amount of your transaction, the block’s hash will change. The next block in the chain will still contain the old hash, and the hacker would need to update that block in order to cover their tracks. However, doing so would change that block’s hash, and so on.
In order to change a single block, then, a hacker would need to change every single block after it on the blockchain. Recalculating all those hashes would take an enormous and improbable amount of computing power. In other words, once a block is added to the blockchain it becomes very difficult to edit and impossible to delete.
To address the issue of trust, blockchain networks have implemented tests for computers that want to join and add blocks to the chain. The tests, called “consensus models,” require users to “prove” themselves before they can participate in a blockchain network, 1 of the most common examples employed by Bitcoin is called “proof of work.”
In the proof of work system, computers must “prove” that they have done “work” by solving a complex computational math problem. If a computer solves one of these problems, they become eligible to add a block to the blockchain. But the process of adding blocks to the blockchain, what the cryptocurrency world calls “mining,” is not easy. In fact, the odds of solving 1 of these problems on the Bitcoin network were about 1 in 5.8-T in February 2019. To solve complex math problems at those odds, computers must run programs that cost them significant amounts of power, energy and money.
Proof of work does not make attacks by hackers impossible, but it does make them somewhat useless. If a hacker wanted to coordinate an attack on the blockchain, they would need to solve complex computational math problems at 1 in 5.8-T odds. The cost of such an attack would almost certainly outweigh the benefits.
Blockchain Vs Bitcoin
The goal of blockchain is to allow digital information to be recorded and distributed, not edited. That concept can be difficult to understand without seeing the technology in action, so let us take a look at how the earliest application of blockchain technology works.
Blockchain technology was 1st outlined in Y 1991 by Stuart Haber and W. Scott Stornetta, 2 researchers who wanted to implement a system where document timestamps could not be tampered with. But it was not until 20 yrs later, with the launch of Bitcoin in January 2009, that blockchain had its 1st real application.
The Bitcoin protocol is built on the blockchain. In a research paper introducing the digital currency, Bitcoin’s pseudonymous creator Satoshi Nakamoto referred to it as “a new electronic cash system that’s fully peer-to-peer, with no trusted 3rd party.”
Here is how it works.
You have all these people, all over the world, who have Bitcoin. According to a Y 2017 study by the Cambridge Centre for Alternative Finance, the number may be as many as 6-M. Let us say 1 of those people wants to spend their Bitcoin on groceries. This is where the blockchain comes in.
When it comes to printed ‘fiat’ money, the use of printed currency is regulated and verified by a central authority, usually a bank or government but Bitcoin is not controlled by anyone. Instead, transactions made in Bitcoin are verified by a network of computers.
When person pays another for goods using Bitcoin, computers on the Bitcoin network race to verify the transaction. In order to do so, users run a program on their computers and try to solve a complex mathematical problem, called a “hash.” When a computer solves the problem by “hashing” a block, its algorithmic work will have also verified the block’s transactions. The completed transaction is publicly recorded and stored as a block on the blockchain, at which point it becomes unalterable. In the case of Bitcoin, and most other blockchains, computers that successfully verify blocks are rewarded for their labor with cryptocurrency.
Although transactions are publicly recorded on the blockchain, user data is not in full. In order to conduct transactions on the Bitcoin network, participants must run a program called a “wallet.” Each wallet consists of 2 unique and distinct cryptographic Keys: a public Key and a private Key. The public Key is the location where transactions are deposited to and withdrawn from. This is also the Key that appears on the blockchain ledger as the user’s digital signature.
Even if a user receives a payment in Bitcoins to their public Key, they will not be able to withdraw them with the private counterpart. A user’s public Key is a shortened version of their private Key, created through a complicated mathematical algorithm.
But, due to the complexity of this equation, it is next to impossible to reverse the process and generate a private Key from a public Key. For this reason, blockchain technology is considered confidential.
Public and Private Key Basics
Here’s the ELI5—“Explain it Like I’m 5”—version. You can think of a public Key as a school locker and the private Key as the locker combination. Teachers, students, and even your crush can insert letters and notes through the opening in your locker. However, the only person that can retrieve the contents of the mailbox is the 1 that has the unique Key. It should be noted that while school locker combinations are kept in the principal’s office, there is no central database that keeps track of a blockchain network’s private Keys. If a user misplaces their private Key, they will lose access to their Bitcoin wallet.
A Single Public Chain
In the Bitcoin network, the blockchain is not only shared and maintained by a public network of users, but is also agreed upon. When users join the network, their connected computer receives a copy of the blockchain that is updated whenever a new block of transactions is added.
But what if, through human error or the efforts of a hacker, 1 user’s copy of the blockchain manipulated to be different from every other copy of the blockchain?
The blockchain protocol discourages the existence of multiple blockchains through a process called “consensus.” In the presence of multiple, differing copies of the blockchain, the consensus protocol will adopt the longest chain available. More users on a blockchain mean that blocks can be added to the end of the chain quicker. By that logic, the blockchain of record will always be the 1 that most users trust. The consensus protocol is 1 of blockchain technology’s greatest strengths but also allows for 1 of its greatest weaknesses.
Theoretically, it is possible for a hacker to take advantage of the majority rule in what is referred to as a 51% attack. Here’s how it would happen.
Let us say that there are 6-M computers on the Bitcoin network. In order to achieve a majority on the network, a hacker would need to control at least 3-M and 1 of those computers. In doing so, an attacker or group of attackers could interfere with the process of recording new transactions. They could send a transaction, and then reverse it, making it appear as though they still had the coin they just spent. This vulnerability, known as double-spending, is the digital equivalent of a perfect counterfeit and would enable users to spend their Bitcoins 2X.
Such an attack is extremely difficult to execute for a blockchain of Bitcoin’s scale.
When Bitcoin was founded in Y 2009 and its users numbered in the dozens, it would have been easier for an attacker to control a majority of computational power in the network. This defining characteristic of blockchain has been flagged as a Key weakness for nascent cryptocurrencies.
User fear of 51% attacks can actually limit monopolies from forming on the blockchain.
By March 2014 Bitfury was positioned to exceed 50% of the blockchain network’s total computational power. Instead of continuing to increase its hold over the network, the group elected to self-regulate itself and vowed never to go above 40%. Bitfury knew that if they chose to continue increasing their control over the network, bitcoin’s value would fall as users sold off their coins in preparation for the possibility of a 51% attack. In other words, if users lose their faith in the blockchain network, the information on that network risks becoming completely worthless. Blockchain users, then, can only increase their computational power to a point before they begin to lose money.
Blockchain’s Practical Application
It turns out that blockchain is a pretty reliable way of storing data about many types of transactions, as well. In fact, blockchain technology can be used to store data about property exchanges, stops in a supply chain, and even votes for a candidate.
Professional services network Deloitte recently surveyed 1,000 companies across seven countries about integrating blockchain into their business operations. Their survey found that 34% already had a blockchain system in production in mid-2019, while another 41% expected to deploy a blockchain application within the next 12 months. In addition, nearly 40% of the surveyed companies reported they would invest $5-M or more in blockchain in the coming year.
Below are some of the most popular applications of blockchain being explored now, as follows:
Perhaps no industry stands to benefit from integrating blockchain into its business operations more than banking. Financial institutions only operate during business hours, 5 days a week. That means if you try to deposit a check on Friday at 6:00p, you likely will have to wait until Monday morning to see that money hit your account. Even if you do make your deposit during business hours, the transaction can still take 1-3 days to verify due to the volume of transactions that banks need to settle. Blockchain, on the other hand, never sleeps.
By integrating blockchain into banks, consumers can see their transactions processed in as little as 10 mins, basically the time it takes to add a block to the blockchain, regardless of the time or day of the week.
With blockchain, banks also have the opportunity to exchange funds between institutions more quickly and securely. In the stock trading business, for example, the settlement and clearing process can take up to 3 days or longer, if banks are trading internationally, meaning that the money and shares are frozen for that frame.
Given the size of the sums involved, even the few days that the money is in transit can carry significant costs and risks for banks.
Santander, a European bank, put the potential savings at $20-B a year. Capgemini, a French consultancy, estimates that consumers could save up to $16-B in banking and insurance fees each year through blockchain-based applications.
Use in Cryptocurrency
Blockchain forms the bedrock for cryptocurrencies like Bitcoin. Currencies like the USD are regulated and verified by a central authority, usually a bank or government. Under the central authority system, a user’s data and currency are technically at the use of their bank or government. If a user’s bank collapses or they live in a country with an unstable government, the value of their currency may be at risk. These are the worries out of which Bitcoin was born.
By spreading its operations across a network of computers, blockchain allows Bitcoin and other cryptocurrencies to operate without the need for a central authority. This not only reduces risk, but also eliminates many of the processing and transaction fees. It also gives those in countries with unstable currencies a more stable currency with more applications and a wider network of individuals and institutions they can do business with, both domestically and internationally, this is the goal.
Healthcare providers can leverage blockchain to securely store their patients’ medical records. When a medical record is generated and signed, it can be written into the blockchain, which provides patients with the proof and confidence that the record cannot be changed. These personal health records could be encoded and stored on the blockchain with a private Key, so that they are only accessible by certain individuals, thereby ensuring privacy
Property Records Use
If you have ever spent time in your local Recorder’s Office, you will know that the process of recording property rights is both burdensome and inefficient.
Now, a physical deed must be delivered to a government employee at the local recording office, where is it manually entered into the county’s central database and public index. In the case of a property dispute, claims to the property must be reconciled with the public index.
This process is not just costly and time-consuming and riddled with human error, where each inaccuracy makes tracking property ownership less efficient.
Blockchain has the potential to eliminate the need for scanning documents and tracking down physical files in a local recording office. If property ownership is stored and verified on the blockchain, owners can trust that their deed is accurate and permanent.
Use in Smart Contracts
A smart contract is a computer code that can be built into the blockchain to facilitate, verify, or negotiate a contract agreement. Smart contracts operate under a set of conditions that users agree to. When those conditions are met, the terms of the agreement are automatically carried out.
Supply Chain Use
Suppliers can use blockchain to record the origins of materials that they have purchased. This would allow companies to verify the authenticity of their products, along with health and ethics labels like “Organic,” “Local,” and “Fair Trade.”
As reported by Forbes the food industry is moving into the use of blockchain to increasingly track the path and safety of food throughout the farm-to-user journey.
Uses in Voting
Voting with blockchain carries the potential to eliminate election fraud and boost voter turnout, as was tested in the November 2018 mid-term elections in West Virginia. Each vote would be stored as a block on the blockchain, making them nearly impossible to tamper with. The blockchain protocol would also maintain transparency in the electoral process, reducing the personnel needed to conduct an election and provide officials with instant results.
Advantages and Disadvantages of Blockchain
For all its complexity, blockchain’s potential as a decentralized form of record-keeping is almost without limit. From greater user privacy and heightened security to lower processing fees and fewer errors, blockchain technology may very well see applications beyond those outlined above.
- Improved accuracy by removing human involvement in verification
- Cost reductions by eliminating third-party verification
- Decentralization makes it harder to tamper with
- Transactions are secure, private and efficient
- Transparent technology
- Significant technology cost associated with mining bitcoin
- Low transactions per second
- History of use in illicit activities
- Susceptibility to being hacked
Below are the selling points of blockchain for businesses on the market today in more detail, as follows:
Accuracy of the Chain
Transactions on the blockchain network are approved by a network of thousands or millions of computers. This removes almost all human involvement in the verification process, resulting in less human error and a more accurate record of information. Even if a computer on the network were to make a computational mistake, the error would only be made to one copy of the blockchain. In order for that error to spread to the rest of the blockchain, it would need to be made by at least 51% of the network’s computers, a near impossibility.
Typically, consumers pay a bank to verify a transaction, a notary to sign a document, or a minister to perform a marriage. Blockchain eliminates the need for 3rd-party verification and, with it, their associated costs. Business owners incur a small fee whenever they accept payments using credit cards because banks have to process those transactions. Bitcoin does not have a central authority and has virtually no transaction fees.
Blockchain does not store any of its information in a central location. Instead, the blockchain is copied and spread across a network of computers. Whenever a new block is added to the blockchain, every computer on the network updates its blockchain to reflect the change. By spreading that information across a network, rather than storing it in one central database, blockchain becomes more difficult to tamper with. If a copy of the blockchain fell into the hands of a hacker, only a single copy of the information, rather than the entire network, would be compromised.
Transactions placed through a central authority can take up to a few days to settle. Transactions can be completed in about 10 mins and can be considered secure after just a few hours. This is particularly useful for cross-border trades, which usually take much longer because of time-zone issues and the fact that all parties must confirm payment processing.
Many blockchain networks operate as public databases, meaning that anyone with an internet connection can view a list of the network’s transaction history. Although users can access details about transactions, they cannot access identifying information about the users making those transactions. It is a common misperception that blockchain networks like Bitcoin are anonymous, when in fact they are just Confidential.
Once a transaction is recorded, its authenticity must be verified by the blockchain network. Thousands or even millions of computers on the blockchain rush to confirm that the details of the purchase are correct. After a computer has validated the transaction, it is added to the blockchain in the form of a block. Each block on the blockchain contains its own unique hash, along with the unique hash of the block before it. When the information on a block is edited in any way, that block’s hash code changes—however, the hash code on the block after it would not. This discrepancy makes it extremely difficult for information on the blockchain to be changed without notice.
Even though personal information on the blockchain is kept private, the technology itself is almost always open source. That means that users on the blockchain network can modify the code as they see fit, so long as they have a majority of the network’s computational power backing them. Keeping data on the blockchain open source also makes tampering with data that much more difficult. With millions of computers on the blockchain network at any given time it is unlikely that anyone could make a change without being noticed.
Disadvantages of Blockchain
While there are upsides to the blockchain, there are also challenges to its adoption. The roadblocks to the application of blockchain technology are not just technical. The real challenges are political and regulatory, for the most part, to say nothing of the thousands of hours of custom software design and back-end programming required to integrate blockchain to current business networks.
Below are some of the challenges standing in the way of widespread blockchain adoption, as follows:
Although blockchain can save users money on transaction fees, the technology is not free. The “proof of work” system that bitcoin uses to validate transactions, for example, consumes vast amounts of computational power.
All of that energy costs money and according to a recent study from research company Elite Fixtures, the cost of mining 1 Bitcoin varies by location, from just $531 to a staggering $26,170.
Based on average utility costs in the United States, that figure is closer to $4,758.
Despite the costs of mining Bitcoin, users continue to drive up their electricity bills in order to validate transactions on the blockchain. That is because when miners add a block to the Bitcoin blockchain, they are rewarded with enough Bitcoin to make their time and energy worthwhile.
When it comes to blockchains that do not use cryptocurrency, however, miners will need to be paid or otherwise incentivized to validate transactions.
Bitcoin is a perfect case study for the possible inefficiencies of blockchain. Bitcoin’s “proof of work” system takes about 10 mins to add a new block to the blockchain. At that rate, it is estimated that the blockchain network can only manage seven transactions per second (TPS). Legacy brand Visa, for context, can process 24,000 TPS.
While confidentiality on the blockchain network protects users from hacks and preserves privacy, it also allows for illegal trading and activity on the blockchain network.
Current US regulation prevents users of online exchanges, like those built on blockchain, from full anonymity. In the United States, online exchanges must obtain information about their customers when they open an account, verify the identity of each customer, and confirm that customers do not appear on any list of known or suspected terrorist organizations.
Central Bank Concerns
Several central banks, including the Fed, the Bank of Canada and the Bank of England, have launched investigations into digital currencies. According to a Bank of England research report, “Further research would also be required to devise a system which could utilize distributed ledger technology without compromising a central bank’s ability to control its currency and secure the system against systemic attack.”
Newer cryptocurrencies and blockchain networks are susceptible to 51% attacks. These attacks are extremely difficult to execute due to the computational power required to gain majority control of a blockchain network, but NYU computer science researcher Joseph Bonneau said that might change. Mr. Bonneau released a report estimating that 51% attacks were likely to increase, as hackers can now simply rent computational power, rather than buying all of the equipment.
Like most millennials its age (30ish), blockchain has seen its fair share of public scrutiny, with businesses around the world speculating about what the technology is capable of and where it is headed in the years to come.
With many practical applications for the technology already being implemented and explored, blockchain is finally making a name for itself at 29 anni, in no small part because of Bitcoin and cryptocurrency. As a buzzword of every investor in the nation, blockchain stands to make business and government operations more accurate, efficient, and secure.
As we prepare to head into the 3rd decade of blockchain, it is no longer a question of “if” legacy companies will catch on to the technology, it is a question of “when.“
Have a terrific weekend