What is Blockchain?

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Trajectus 5 Minute read
A blockchain is a decentralized, distributed, and oftentimes public, digital ledger consisting of records called blocks that is used to record transactions across many computers so that any involved block cannot be altered retroactively, without the alteration of all subsequent blocks. This allows the participants to verify and audit transactions independently and relatively inexpensively. A blockchain database is managed autonomously using a peer-to-peer network and a distributed timestamping server. They are authenticated by mass collaboration powered by collective self-interests. Such a design facilitates robust workflow where participants' uncertainty regarding data security is marginal.

KEY TAKEAWAYS

  • Blockchain is a type of shared database that differs from a typical database in the way that it stores information; blockchains store data in blocks that are then linked together via cryptography.
  • As new data comes in, it is entered into a fresh block. Once the block is filled with data, it is chained onto the previous block, which makes the data chained together in chronological order.
  • Different types of information can be stored on a blockchain, but the most common use so far has been as a ledger for transactions.
  • In Bitcoin’s case, blockchain is used in a decentralized way so that no single person or group has control—rather, all users collectively retain control.
  • Decentralized blockchains are immutable, which means that the data entered is irreversible. For Bitcoin, this means that transactions are permanently recorded and viewable to anyone.
The goal of blockchain is to allow digital information to be recorded and distributed, but not edited. In this way, a blockchain is the foundation for immutable ledgers, or records of transactions that cannot be altered, deleted, or destroyed. Therefore, blockchains are also known as a distributed ledger technology (DLT). Blockchain is an especially promising and revolutionary technology because it helps reduce risk, stamps out fraud and brings transparency in a scalable way for myriad uses.

How Does a Blockchain Work?

Blockchain consists of three important concepts: blocks, nodes and miners.

Blocks

Every chain consists of multiple blocks and each block has three basic elements:
The data in the block.
  • A 32-bit whole number called a nonce. The nonce is randomly generated when a block is created, which then generates a block header hash.
  • The hash is a 256-bit number wedded to the nonce. It must start with a huge number of zeroes (i.e., be extremely small).
When the first block of a chain is created, a nonce generates the cryptographic hash. The data in the block is considered signed and forever tied to the nonce and hash unless it is mined.

Miners

Miners create new blocks on the chain through a process called mining.
In a blockchain every block has its own unique nonce and hash, but also references the hash of the previous block in the chain, so mining a block isn't easy, especially on large chains.
Miners use special software to solve the incredibly complex math problem of finding a nonce that generates an accepted hash. Because the nonce is only 32 bits and the hash is 256, there are roughly four billion possible nonce-hash combinations that must be mined before the right one is found. When that happens, miners are said to have found the "golden nonce" and their block is added to the chain.
Making a change to any block earlier in the chain requires re-mining not just the block with the change, but all the blocks that come after. Therefore, it's extremely difficult to manipulate blockchain technology. Think of it as "safety in math" since finding golden nonces requires an enormous amount of time and computing power.
When a block is successfully mined, the change is accepted by all the nodes on the network and the miner is rewarded financially.

Nodes

One of the most important concepts in blockchain technology is decentralization. No one computer or organization can own the chain. Instead, it is a distributed ledger via the nodes connected to the chain. Nodes can be any kind of electronic device that maintains copies of the blockchain and keeps the network functioning.
Every node has its own copy of the blockchain, and the network must algorithmically approve any newly mined block for the chain to be updated, trusted and verified. Since blockchains are transparent, every action in the ledger can be easily checked and viewed. Each participant is given a unique alphanumeric identification number that shows their transactions.
Combining public information with a system of checks-and-balances helps the blockchain maintain integrity and creates trust among users. Essentially, blockchains can be thought of as the scalability of trust via technology.

How Are Blockchains Used?

As we now know, blocks on Bitcoin’s blockchain store data about monetary transactions. Today, there are more than 10,000 other cryptocurrency systems running on blockchain. But it turns out that blockchain is a reliable way of storing data about other types of transactions as well.
Some companies that have already incorporated blockchain include Walmart, Pfizer, AIG, Siemens, Unilever, and a host of others. For example, IBM has created its Food Trust blockchain to trace the journey that food products take to get to their locations.
  • Banking and Finance

    Perhaps no industry stands to benefit from integrating blockchain into its business operations more than banking. Financial institutions only operate during business hours, usually five days a week. That means if you try to deposit a check on Friday at 6 p.m., you will likely 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 one to three days to verify due to the sheer volume of transactions that banks need to settle. Blockchain, on the other hand, never sleeps.

  • Currency

    Blockchain forms the bedrock for cryptocurrencies like Bitcoin. If a user’s bank is hacked, the client’s private information is at risk. If the client’s bank collapses or the client lives 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 first conceived and developed.

    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.

    Using cryptocurrency wallets for savings accounts or as a means of payment is especially profound for those who have no state identification. Some countries may be war-torn or have governments that lack any real infrastructure to provide identification. Citizens of such countries may not have access to savings or brokerage accounts—and, therefore, no way to safely store wealth.

  • Healthcare

    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

    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 permanently recorded.

    In war-torn countries or areas that have little to no government or financial infrastructure, and certainly no Recorder’s Office, it can be nearly impossible to prove ownership of a property. If a group of people living in such an area is able to leverage blockchain, then transparent and clear time lines of property ownership could be established.

  • 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 to which users agree. When those conditions are met, the terms of the agreement are automatically carried out.

  • Supply Chains

    As in the IBM Food Trust example, suppliers can use blockchain to record the origins of materials that they have purchased. This would allow companies to verify the authenticity of not only their products but also common labels such as “Organic,” “Local,” and “Fair Trade.” As reported by Forbes, the food industry is increasingly adopting the use of blockchain to track the path and safety of food throughout the farm-to-user journey.

  • Voting

    As mentioned above, blockchain could be used to facilitate a modern voting system. Voting with blockchain carries the potential to eliminate election fraud and boost voter turnout.

Pros and Cons 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. But there are also some disadvantages.

Pros

  • 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
  • Provides a banking alternative and a way to secure personal information for citizens of countries with unstable or underdeveloped governments

Cons

  • Significant technology cost associated with mining bitcoin
  • Low transactions per second
  • History of use in illicit activities, such as on the dark web
  • Regulation varies by jurisdiction and remains uncertain
  • Data storage limitations

What is a blockchain platform?

Blockchain platforms allow the development of blockchain-based applications. They can either be permissioned or permissionless. Ethereum, Hyperledger, R3, Ripple, and EOS are a few names that have built blockchain frameworks, allowing people to develop and host applications on the blockchain.

How Many Blockchains Are There?

The number of live blockchains is growing every day at an ever-increasing pace. As of 2022, there are more than 10,000 active cryptocurrencies based on blockchain, with several hundred more non-cryptocurrency blockchains.

Types of Blockchains

There are primarily two types of blockchains: Private and Public blockchain. However, there are several variations too, like Consortium and Hybrid blockchains. Every blockchain consists of a cluster of nodes functioning on a peer-to-peer (P2P) network system. Every node in a network has a copy of the shared ledger which gets updated timely. Each node can verify transactions, initiate, or receive transactions and create blocks.
  • Public Blockchain -

    A public blockchain is a non-restrictive, permission-less distributed ledger system. Anyone who has access to the internet can sign in on a blockchain platform to become an authorized node and be a part of the blockchain network. A node or user which is a part of the public blockchain is authorized to access current and past records, verify transactions or do proof-of-work for an incoming block, and do mining. The most basic use of public blockchains is for mining and exchanging cryptocurrencies. Thus, the most common public blockchains are Bitcoin and Litecoin blockchains.

    Example: Bitcoin, Ethereum, Litecoin

  • Private Blockchain -

    A private blockchain is a restrictive or permission blockchain operative only in a closed network. Private blockchains are usually used within an organization or enterprises where only selected members are participants of a blockchain network. The level of security, authorizations, permissions, accessibility is in the hands of the controlling organization. Thus, private blockchains are similar in use as a public blockchain but have a small and restrictive network. Private blockchain networks are deployed for voting, supply chain management, digital identity, asset ownership, etc.

    Examples: Multichain and Hyperledger projects (Fabric, Sawtooth), Corda, etc.

  • Consortium Blockchain -

    A consortium blockchain is a semi-decentralized type where more than one organization manages a blockchain network. This is contrary to what we saw in a private blockchain, which is managed by only a single organization. More than one organization can act as a node in this type of blockchain and exchange information or do mining. Consortium blockchains are typically used by banks, government organizations, etc.

    Examples: Energy Web Foundation, R3, etc.

  • Hybrid Blockchain -

    A hybrid blockchain is a combination of the private and public blockchain. It uses the features of both types of blockchains that is one can have a private permission-based system as well as a public permission-less system. With such a hybrid network, users can control who gets access to which data stored in the blockchain. Only a selected section of data or records from the blockchain can be allowed to go public keeping the rest as confidential in the private network.

    Example: Dragonchain.

What is Blockchain Wallet and How Does It Work?

Cryptocurrencies such as Bitcoin and Ethereum are becoming increasingly popular due to their many improvements over traditional fiat currencies. If you want to use any of these blockchain-based cryptocurrencies, you’ll need to understand how blockchain wallets work.
A blockchain wallet is a cryptocurrency wallet that allows users to manage different kinds of cryptocurrencies—for example, Bitcoin or Ethereum. A blockchain wallet helps someone exchange funds easily. Transactions are secure, as they are cryptographically signed. The wallet is accessible from web devices, including mobile ones, and the privacy and identity of the user are maintained. Examples of blockchain wallets include Electrum, Blockchain.info, Jaxx, Mycelium, Samurai, and Bitcoin paper wallet. There are many more based on the needs you have and the security you require.

Why Use a Blockchain Wallet?

Traditional banking systems pose several problems for doing any transaction. For one thing, transactions are often slow. For another, any transaction has to pass through an intermediary, like a bank, meaning there is a central point of failure. And there are issues in keeping track of all accounts and balances; data can get jeopardized, manipulated, or even corrupted across multiple systems where the accounts and balances are maintained. Blockchain wallets reduce or eliminate these problems.

Blockchain Wallet Features

Now that you know how Blockchain wallets work, it is imperative that you should know about their features. Here are some of the important features of Blockchain wallets:
  • Easy to use. It’s just like any other software or a wallet that you use for your day-to-day transactions.
  • Highly secure. It is just a matter of securing your private key.
  • Allows instant transactions across geographies. And these are barrier-free, without intermediaries.
  • Low transaction fees. The cost of transferring funds is much lower than with traditional banks.
  • Allows transactions across multiple cryptocurrencies. This helps you do easy currency conversions.

Non-Fungible Token (NFT)

Non-fungible tokens (NFTs) are cryptographic assets on a blockchain with unique identification codes and metadata that distinguish them from each other. Unlike cryptocurrencies, they cannot be traded or exchanged at equivalency. This differs from fungible tokens like cryptocurrencies, which are identical to each other and, therefore, can serve as a medium for commercial transactions.
  • NFTs are unique cryptographic tokens that exist on a blockchain and cannot be replicated.
  • NFTs can represent real-world items like artwork and real estate.
  • "Tokenizing" these real-world tangible assets makes buying, selling, and trading them more efficient while reducing the probability of fraud.
  • NFTs can also function to represent individuals' identities, property rights, and more.
Perhaps, the most obvious benefit of NFTs is market efficiency. The conversion of a physical asset into a digital one streamlines processes and removes intermediaries. NFTs representing digital or physical artwork on a blockchain remove the need for agents and allow artists to connect directly with their audiences. They can also improve business processes. For example, an NFT for a wine bottle will make it easier for different actors in a supply chain to interact with it and help track its provenance, production, and sale through the entire process. Consulting firm Ernst & Young has already developed such a solution for one of its clients.

How Can I Buy NFTs?

Many NFTs can only be purchased with Ether, so owning some of this cryptocurrency—and storing it in a digital wallet—is usually the first step. You can then purchase NFTs via any of the online NFT marketplaces, including OpenSea, Rarible, and SuperRare.

What Is a Crypto Commodity?

Crypto-commodity is a general term used to describe a tradable or fungible asset that may represent a commodity, utility, or a contract in the real- or virtual-world through exclusive tokens on a blockchain network.
As the Bitcoin network evolved, it gained popularity for its ease of payment processing and its decentralized nature. Technology stalwarts were quick to realize that blockchain networks could be used for more than simple online payments. This is how Ethereum emerged, a unique smart contract-based crypto-commodity system.
Other blockchain-based platforms that support crypto-commodity trading include NEO, Cardano, and QTUM.

What Is an Initial Coin Offering (ICO)?

An initial coin offering (ICO) is the cryptocurrency industry's equivalent to an initial public offering (IPO). A company seeking to raise money to create a new coin, app, or service can launch an ICO to raise funds.
  • Initial coin offerings are a popular way to raise funds for products and services usually related to cryptocurrency.
  • ICOs are like initial public offerings, but coins issued in an ICO can also have utility for a software service or product.
  • Some ICOs have yielded massive returns for investors. Numerous others have turned out to be fraudulent or have performed extremely poorly.
  • To participate in an ICO, you usually need to first purchase a more established digital currency, plus have a basic understanding of cryptocurrency wallets and exchanges.
  • ICOs are, for the most part, completely unregulated, so investors must exercise a high degree of caution and diligence when researching and investing in ICOs.

Who Can Launch an ICO?

Anyone can launch an ICO. With very little regulation of ICOs in the U.S. currently, anyone who can access the proper tech is free to launch a new cryptocurrency.
But this lack of regulation also means that someone might do whatever it takes to make you believe they have a legitimate ICO—and then abscond with the money. Of all the possible avenues of funding, an ICO is probably one of the easiest to set up as a scam.

What Are Cryptocurrency Smart Assets?

Smart assets are unique virtual currency tokens that may represent a tangible real-world asset or non-tangible ownership that can be purchased, sold, or exchanged as defined by the rules of smart contracts on the blockchain network.
  • Smart assets are the underlying assets of smart contracts.
  • NEM, which stands for New Economy Movement, is a peer-to-peer cryptocurrency and blockchain that uses smart assets.
  • Physical assets are intended to be the basis for smart assets.

What’s Next for Blockchain?

As we prepare to head into the third decade of blockchain, it’s no longer a question of if legacy companies will catch on to the technology—it’s a question of when. Today, we see a proliferation of NFTs and the tokenization of assets. The next decades will prove to be an important period of growth for blockchain.

Summary

If you are considering Blockchain development, let Trajectus experts help you decide which blockchain solution will better serve your business purpose. We have Engineering experts, Architects and Business Analyst who have extensive experience in building solutions for the Wall Street-related financial applications as well as Crypto Wallets and NFTs. Give our experts a call today to discuss your use case(s).

Appendix A: History of Blockchain

Although blockchain is a new technology, it already boasts a rich and interesting history. The following is a brief timeline of some of the most important and notable events in the development of blockchain.
2008
  • Satoshi Nakamoto, a pseudonym for a person or group, publishes “Bitcoin: A Peer-to-Peer Electronic Cash System."
2009
  • The first successful Bitcoin (BTC) transaction occurs between computer scientist Hal Finney and the mysterious Satoshi Nakamoto.
2010
  • Florida-based programmer Laszlo Hanycez completes the first ever purchase using Bitcoin — two Papa John’s pizzas. Hanycez transferred 10,000 BTC’s, worth about $60 at the time. Today it's worth $80 million.
  • The market cap of Bitcoin officially exceeds $1 million.
2011
  • 1 BTC = $1USD, giving the cryptocurrency parity with the US dollar.
  • Electronic Frontier Foundation, Wikileaks and other organizations start accepting Bitcoin as donations.
2012
  • Blockchain and cryptocurrency are mentioned in popular television shows like The Good Wife, injecting blockchain into pop culture.
  • Bitcoin Magazine launched by early Bitcoin developer Vitalik Buterin.
2013
  • BTC market cap surpassed $1 billion.
  • Bitcoin reached $100/BTC for the first time.
  • Buterin publishes “Ethereum Project" paper suggesting that blockchain has other possibilities besides Bitcoin (e.g., smart contracts).
2014
  • Gaming company Zynga, The D Las Vegas Hotel and Overstock.com all start accepting Bitcoin as payment.
  • Buterin’s Ethereum Project is crowdfunded via an Initial Coin Offering (ICO) raising over $18 million in BTC and opening up new avenues for blockchain.
  • R3, a group of over 200 blockchain firms, is formed to discover new ways blockchain can be implemented in technology.
  • PayPal announces Bitcoin integration.
2015
  • Number of merchants accepting BTC exceeds 100,000.
  • NASDAQ and San-Francisco blockchain company Chain team up to test the technology for trading shares in private companies.
2016
  • Tech giant IBM announces a blockchain strategy for cloud-based business solutions.
  • The government of Japan recognizes the legitimacy of blockchain and cryptocurrencies.
2017
  • Bitcoin reaches $1,000/BTC for the first time.
  • Cryptocurrency market cap reaches $150 billion.
  • JP Morgan CEO Jamie Dimon says he believes in blockchain as a future technology, giving the ledger system a vote-of-confidence from Wall Street.
  • Bitcoin reaches its all-time high at $19,783.21/BTC.
  • Dubai announces its government will be blockchain-powered by 2020.
2018
  • Facebook commits to starting a blockchain group and also hints at the possibility of creating its own cryptocurrency.
  • IBM develops a blockchain-based banking platform with large banks like Citi and Barclays signing on.
2019
  • China’s President Xi Jinping publicly embraces blockchain as China’s central bank announces it is working on its own cryptocurrency
  • Twitter & Square CEO Jack Dorsey announces that Square will be hiring blockchain engineers to work on the company’s future crypto plans
  • The New York Stock Exchange (NYSE) announces the creation of Bakkt - a digital wallet company that includes crypto trading
2020
  • Bitcoin almost reaches $30,000 by the end of 2020
  • PayPal announces it will allow users to buy, sell and hold cryptocurrencies
  • The Bahamas becomes the world’s first country to launch its central bank digital currency, fittingly known as the “Sand Dollar”
  • Blockchain becomes a key player in the fight against COVID-19, mainly for securely storing medical research data and patient information.
THE AUTHOR
Avinash Panchal
Head of Information Technology

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