What is Blockchain?

Introduction to Blockchain:

The concept of Blockchain first came to fame in October 2008, as part of a proposal for Bitcoin, with the aim to create P2P money without banks. 

Bitcoin introduced a novel solution to the age-old human problem of trust. 

The underlying blockchain technology allows us to trust the outputs of the system without trusting any actor within it. 

People and institutions who do not know or trust each other, reside in different countries, are subject to different jurisdictions, and who have no legally binding agreements with each other, can now interact over the Internet without the need for trusted third parties like banks, Internet platforms, or other types of clearing institutions.

History and Evolution of Blockchain:

Pictorial representation of history and evolution of blockchain is given below:

History and Evolution of Blockchain

What is Blockchain?

A blockchain is a database that is shared across a network of computers. 

Thus blockchain is a massively replicated database of all transactions in the Bitcoin network.

It is a growing list of records, called blocks, which are linked using cryptographic hash. 

It uses a consensus mechanism called proof of work which prevents double spending in the network a problem that had plagued cryptographic researchers for decades. 

Double spending meant a bad actor could spend the same funds twice, denying the first transaction happened. 

Proof of work solves this problem by having miners in the network solve cryptographic proofs using their hardware. 

Miners are Bitcoin nodes that verify a transaction and check it via its blockchain history, a timestamped record of all transactions ever made in the network. 

Someone could theoretically alter their blockchain history, but with proof of work, they would also need to have the majority of computational power in the network to verify it. 

Because the Bitcoin network has much more computation power at this point than all of the world’s supercomputers combined, an attacker would have an extremely difficult time trying to break the network.

Each block contains a cryptographic hash of the previous block, a timestamp, and transaction data (generally represented as a Merkle tree root hash). 

Blockchain was invented by Satoshi Nakamoto in 2008 to serve as the public transaction ledger of the cryptocurrency bitcoin.

Working Principle of Blockchain Transaction:

Working Principle of Blockchain Transaction

Types of Blockchain:

There are four types of blockchain which are listed below:

• Public Blockchain

• Private Blockchain

• Consortium Blockchain

• Hybrid Blockchain

Types of Consensus Algorithm Implemented in Blockchain:

• Proof-of-Work (PoW) used by Bitcoin

• Proof-of-Stake (PoS) used by Ethereum

• Delegated Proof-of-Stake (PoS)

• Byzantine Fault Tolerance (BFT)

• Practical Byzantine Fault Tolerance (PBFT)

• SIEVE

• Proof-of-Burn (PoB) and more.

Technologies Used in Creating Blockchain:

The technologies used in creating blockchain are listed below:

1. Decentralization

2. Cryptography

• 2.A) Asymmetric Encryption and decryption

• 2.B) Digital Signature

3. Hashing.

Let us look in detail one by one below:

1. Decentralization:

A decentralized system is a system in which the data is stored at multiple locations this type of system is highly fault tolerant. 

If a node crashes on the system network let’s say, it doesn’t bring the entire system down. 

There are other nodes on the network that run the blockchain. 

Decentralization also adds more security since the information stored on one computer must be copied to all nodes in the network. 

This means if a node were compromised, a hacker would need to be able to change the information on all nodes to manipulate the data. 

This has proven to be a good safeguard in deterring attacks against the system.

2. Cryptography:

2.A) Asymmetric Encryption and Decryption:

Asymmetric cryptography refers to process of using two keys for encryption and decryption. 

These keys are termed as public key and private key. 

Any key pair can be used for encryption and decryption. 

Messages encryption with public key can be decrypted using private key and messages encryption by private key can be decrypted using public key. 

Let’s understand this with the help of an example. Adam using Eve’s public key to encrypts messages and sends it to Eve. 

Eve can use her private key to decrypt the message and extract contents out of it. 

Messages encrypted with Eve’s public key can only be decrypted by Eve, as she only holds her private key and no one else. 

This is the general use case of Asymmetric keys.

2.B) Digital Signature:

Digital signatures are very similar to signature done by an individual on a piece of paper. 

Similar to a paper signature, digital signature helps in identifying an individual. 

It also helps in ensuring that messages are not tampered with in transit. 

Lets understand Digital signature with the help of an example. 

Samson wants to send a message to Sara. 

How can Sara identify and ensure that the message has come from Samson only and that the message has not been changed or tampered with in transit? 

Samson takes the message he wants to send to Sara and generates a hash of it and then using his private key (yes, private key) encrypts the hash and appends the resultant cipher data to the original message.

Once the resultant message reaches to Sara, She segregates the messages into the original message and cipher data. 

She decrypts the cipher data using Samson’s public key and extracts the hash out of it. 

She further hashes just the original message and compares both the hashes. 

If the hashes are same, it means that the message is not tampered with. 

It also establishes the fact that the message is originated by Samson as only he can encrypt the hash with his private key.

3. Hashing:

Hashing is the process of transforming string data into another fixed length string data and it is not possible to re-generate or identify the original data from resultant string data. 

Hashing ensures that even a slight change in input data will completely change the output data and no one can ascertain the change in the original data. 

There is another important property of hashing is that no matter the size of input string data the length of its output is always fixed. 

For example, using SHA256 hashing algorithm and function with any length of input will always generate 256-bit output data. 

This can especially become useful when large amount of data can be stored as 256-bit output data.

Example of Hashing given below:

The input “hello”generates a hash “b9fda68f334232a4c832ff355aef9949bf3229cd2f9be8dccf95c8ee1d2c2dbb”.

Distributed Ledger Technology (DLT):

The terms Distributed Ledger Technology (DLT) and Blockchain are often used interchangeably. 

DLT means that instead of everybody having their own ledger, which is separately maintained, reconciled, etc. a single ledger is created and everybody has an automatically synchronised copy.

Characteristics of Distributed Ledger Technology

Smart Contract:

A smart contract is a computer protocol intended to digitally facilitate, verify, or enforce the negotiation or performance of a contract.

Smart contracts allow the performance of credible transactions without third parties.

These transactions are traceable and irreversible.

Smart contracts were first proposed by Nick Szabo, who coined the term, in 1994.

Different Levels of Smart Contracts:

Different Levels of Smart Contracts

Integration of Blockchain and IoT:

Both blockchain and Internet of Things are considered to be world changing technologies.

The security issue is one of the most compelling reasons for integrating blockchain with IoT.

Oversight is another vital component that blockchain adds to the IoT equation.

Smart contracts are a real game changer for IoT applications.

Blockchain, DLT and Smart Contract Comparison:

Blockchain Distributed Ledger Technology (DLT) and Smart Contract Comparison

Applications of Blockchain in Different Industry:

Pictorial Representation of Applications of Blockchain in Different Industry

Advantages of Blockchain:

Let us look at the advantages of blockchain below one by one:

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. 

Cost Reductions:

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 third-party verification and, with it, their associated costs. 

Business owners incur a small fee whenever they accept payments using credit cards, for example, because banks have to process those transactions. 

Bitcoin, on the other hand, does not have a central authority and has virtually no transaction fees.

Decentralization:

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. 

Efficient Transactions:

Transactions placed through a central authority can take up to a few days to settle. 

If you attempt to deposit a check on Friday evening, for example, you may not actually see funds in your account until Monday morning. 

Whereas financial institutions operate during business hours, five days a week, blockchain is working 24 hours a day, seven days a week. 

Transactions can be completed in about ten minutes 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. 

Private Transactions:

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 misconception that blockchain networks like bitcoin are anonymous, when in fact they are only confidential. 

That is, when a user makes public transactions, their unique code called a public key, is recorded on the blockchain, rather than their personal information. 

Although a person’s identity is still linked to their blockchain address, this prevents hackers from obtaining a user’s personal information, as can occur when a bank is hacked. 

Secure Transactions:

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. 

Transparency: 

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, for example, it is unlikely that anyone could make a change without being noticed.

Disadvantages of Blockchain:

Let us look at the disadvantages of blockchain below:

Technology Cost:

Although blockchain can save users money on transaction fees, the technology is far from free. 

The “proof of work” system that bitcoin uses to validate transactions, for example, consumes vast amounts of computational power. 

In the real world, the power from the millions of computers on the bitcoin network is close to what Denmark consumes annually. 

All of that energy costs money and according to a recent study from research company Elite Fixtures, the cost of mining a single bitcoin varies drastically 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’s 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. 

Speed Inefficiency:

Bitcoin is a perfect case study for the possible inefficiencies of blockchain. Bitcoin’s “proof of work” system takes about ten minutes to add a new block to the blockchain. 

At that rate, it’s estimated that the blockchain network can only manage seven transactions per second (TPS). 

Although other cryptocurrencies like Ethereum (20 TPS) and Bitcoin Cash (60 TPS) perform better than bitcoin, they are still limited by blockchain. 

Legacy brand Visa, for context, can process 24,000 TPS. 

Illegal Activity: 

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. 

The most cited example of blockchain being used for illicit transactions is probably Silk Road, an online “dark web” marketplace operating from February 2011 until October 2013 when it was shut down by the FBI. 

The website allowed users to browse the website without being tracked and make illegal purchases in bitcoins. Current U.S. 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 Federal Reserve, the Bank of Canada and the Bank of England, have launched investigations into digital currencies. 

According to a February 2015 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.” 

Hack Susceptibility:

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. 

Bonneau released a report last year estimating that 51% attacks were likely to increase, as hackers can now simply rent computational power, rather than buying all of the equipment.