A blockchain is a distributed ledger that is shared among network nodes. A blockchain database stores information electronically in digital format. Blockchains are best known for their crucial role in cryptocurrency systems, such as Bitcoin for recording transactions securely on a decentralized network. The innovation with blockchain technology is that it protects against illicit transactions and generates trust without the need of a third party.
While cryptocurrency networks, most notably bitcoin, maybe the most common use of blockchain technology it’s not limited to just digital coins. With the ability to initiate transparent transactions and save businesses time and money, public blockchain networks are being utilized by a number of institutions.
History of Blockchain Technology
Can you remember the first cell phone or dial-up Internet? Technology definitely has revolutionized itself over the years and blockchain technology is no different, creating a wave of new and improved emphasis on secure transactions.
Blockchain protocol initially came around to implement a system wherein document timestamps could not be tampered with. The first decentralized blockchain was conceptualized about 10 years ago by the person or group of people behind the cryptocurrency bitcoin known as Satoshi Nakamoto. The improved design validated transactions to timestamp blocks without requiring them to be signed by a trusted party.
The first major blockchain innovation was bitcoin. The second was called blockchain itself; the realization that the underlying technology that operated bitcoin could be separated from the currency and used for all kinds of network members. The third innovation was called the “smart contract,” embodied in a second-generation blockchain system called ethereum, which built little computer programs directly into the blockchain that allowed brokerage services and the finance sector, like loans or bonds, to be represented, rather than only the cash-like tokens of the bitcoin. The fourth major innovation is called “proof of stake.” This new system will do away with data centers, replacing them with complex financial instruments, for a similar or even higher degree of security. The fifth major innovation for storing data is called blockchain scaling. Right now, in the blockchain world, every computer code in the network processes every transaction. This is slow. A scaled blockchain accelerates the process, without sacrificing security, by figuring out how many computer systems are necessary to validate each transaction and dividing up the work efficiently. To manage this without compromising the legendary security and strength of blockchain is a difficult problem, but not an impossible one. A scaled blockchain is expected to be fast enough to power the internal audit of things and go head-to-head with the major payment middlemen of financial institutions.
A blockchain structure can be seen as consisting of several layers:
The framework to power the blockchain and power to operate the systems.
Carries out key functions such as validating transactions, storing records of the blockchain, or submitting votes on network governance. The software that dictates how these key functions are performed is known as a client.
Consensus – Proof of stake
Used to secure the network and validate transactions.
Blocks (where transaction data is permanently recorded and stored), transactions (processed information).
Smart contracts (a self-executing program on a blockchain that controls and/or documents legal events or actions according to preset terms), decentralized applications (a piece of software that communicates with a blockchain that uses a smart contract as its business logic).
The primary use of blockchain is as a distributed ledger for cryptocurrencies such as bitcoin. But, over time, blockchain technology has been integrated into multiple areas; a few are:
The main function of smart contracts is to automate agreements.
Banks have expressed interest in implementing a distributed ledger to create private blockchains for use in a commercial bank account. The blockchain has also given rise to initial coin offerings as well as a new category of digital assets called security token offerings.
Cryptocurrencies and non-fungible tokens (NFTs) have been used in video games for monetization.
There have been several different efforts to employ blockchains in supply chain management. Precious commodities mining, food supply chains, furniture by way of profit-sharing, and software development.
In response to COVID, Ernst & Young, a professional service network, was working on a blockchain to help employers, governments, airlines, and others keep track of people who have had antibody tests and could be immune to the virus. Hospitals and vendors also utilized a blockchain for medical records and needed medical equipment. Additionally, blockchain technology is being used in China to speed up the time it takes for health insurance payments to be paid to healthcare providers and patients.
Domain names can be controlled by the use of a private key, which encrypts and decrypts data and is shared between the sender and receiver as opposed to a public key that only encrypts data. This would also bypass a registrar’s ability to suppress domains used for fraud, abuse, or illicit transactions.
Types of Blockchain Networks
Currently, there are at least 4 types of blockchain networks.
Has no access restrictions. Anyone with an internet connection can send transactions to it as well as become a validator (reach consensus, or agree on data value). Some of the largest, most known public blockchains are the Bitcoin blockchain and the Ethereum blockchain.
The private blockchain is permission-based, one cannot join unless invited by the network administrators. Participant and validator access is restricted. To distinguish between open blockchains and other peer-to-peer decentralized database applications, a distributed ledger is normally used for private blockchains.
A hybrid blockchain has a combination of centralized and decentralized features. The exact workings added to the chain can vary based on which portions of centralization or decentralization are used.
A sidechain is a designation for a blockchain ledger that runs in parallel to a primary blockchain. Entries from the primary blockchain (that typically represent digital assets) can be linked to and from the sidechain; this allows the sidechain to otherwise operate independently of the primary blockchain.
Concerns With Blockchain Technology
Although the use of blockchain systems is becoming more popular, there are still a few points of opportunity that may make widespread adoption a bit slower.
A blockchain ledger may seem safe but any chink in the system could compromise that security. For instance, if someone wanted to access data they would only need access to one node. This means the weakest device in a blockchain poses a threat to the entire network.
When a transaction occurs, it may be impossible to forge in a blockchain however, it is very possible to get a fraudulent transaction approved; this is instrumental for financial institutions.
Proof of Identity
Nodes are the point of communication redistribution for users or applications to interact with the blockchain. Each node has an identity that votes on which transactions are recorded. Consequently, the majority wins so if a scammer enters a blockchain with multiple devices, they can get a transaction approved and therefore authenticated.
Proof of Stake
In terms of stakeholders in a blockchain network, the weight of your vote is aligned with the stake you hold in a blockchain. What this means is if you own a majority of the assets in a blockchain, you hold the power. If a group of people invests in more than 50% of the assets in a blockchain they control the network.
The integration of blockchain technology in a supply chain seems like a great idea, however public blockchain in a commercial environment can cause data structure concerns.
Public blockchain technology is completely transparent and this isn’t ideal for use in a commercial environment because it allows participants real-time access.
The larger the blockchain, the more vulnerable it is. Refer back to the access of nodes and majority rule. Also, every device in the network must have a copy of when every transaction occurs meaning multiple copies of sensitive data.
There’s no authority to enforce law and order in a decentralized network. Also, smart contracts are not yet legally recognized as substantial agreements in most countries. Since every user can be from a different country, it would be difficult to determine which laws applied to what user, agreement, or transaction.
5. Energy Consumption
The use of multiple computing power on a decentralized network consumes a lot of energy. The storage requirement, electricity, and data stored and processed by each node are as much as a central authority in any other system.
Proof of Work
Proof of Identity has equal weight, proof of stake is regulated by the largest stake holder but proof of work incites effort on the users and their devices.
During mining, when proof of work is used to validate transactions, it’s done by computing the stakeholder power of a complex mathematical equation. This problem verifies the transaction through its hash – a function that meets the encrypted demands needed to solve for a computation -which makes this difficult because a hash is merged with another hash upon transaction.
For proof of authentication, the hash must be tracked all the way to its origin. It’s estimated that Bitcoin consumes as much energy as entire countries.
The bitcoin blockchain is a public ledger that records bitcoin transactions. It is structured as a chain of blocks, each new block containing a hash of the previous block up to the genesis block in the chain. A group of communicating nodes running bitcoin software maintains the blockchain. Transactions are broadcast to this network using readily available blockchain technologies.
Network nodes can validate transactions, add them to their copy of the ledger, and then broadcast these ledger additions to other nodes. To achieve independent verification of the chain of ownership each network node stores its own copy of the blockchain. At varying intervals of time averaging to every 10 minutes, a new block is created, added to the blockchain, and quickly published to all nodes, without requiring central oversight. This allows bitcoin software to determine when a particular bitcoin was spent, this way blockchain eliminates double-spending time-averaging.
Bitcoin and Ether are similar in many ways: Each is a digital currency traded via online exchanges and stored in various types of cryptocurrency wallets. Both are decentralized, meaning that they are not issued or regulated by a financial institution or other authority. And of course, both make use of blockchain technology. However, there are also many crucial distinctions between the two with the most notable being bitcoin as a fungible token and ethereum as a non-fungible token.
Bitcoin mining is the process by which new bitcoin are entered into circulation; it is also the way that new transactions are confirmed through distributed ledger technology and a critical component of the maintenance and development of the digital ledger. “Mining” is performed using sophisticated hardware that solves an extremely complex computational math problem. The first computer to find the solution to the problem is awarded the next block of bitcoins and the process begins again.
Blockchain-based Ethereum is a decentralized, open-source blockchain with smart contract functionality. Ether is the native cryptocurrency of the blockchain platform and is second only to Bitcoin in market capitalization. Ethereum was conceived in 2013 by programmer Vitalik Buterin. Experts believe the Ethereum blockchain’s potential will revolutionize online transactions. The platform allows anyone to deploy permanent and immutable decentralized applications onto it, with which users can interact; the most popular has been the creation and exchange of NFTs.
There are two types of accounts on Ethereum: user accounts and contracts. Both types have an ETH balance, may send ETH to any account, may call any public function of a contract or create a new contract, and are identified on the blockchain and in the state by their address.
User accounts are the only type that may create transactions. For a transaction to be valid, it must be signed using the sending account’s private key, the 64-character hexadecimal string from which the account’s address is derived. The algorithm used to produce the signature allows one to derive the signer’s address from the signature without knowing the private key.
Contracts are the only type of account that has associated code and contract storage. A contract function may take arguments and may have return values. Within the body of a function, in addition, to control flow, statements, a contract’s code may include instructions to send ETH, read from and write to its storage, create temporary storage (memory) that dies at the end of the function, perform arithmetic and hashing operations, call its own functions, call public functions of other contracts, create new contracts, and query information about the current transaction or the blockchain.
Gas refers to the transaction fees, or pricing value, required to successfully conduct a transaction or execute a contract on the Ethereum blockchain platform. The Ethereum blockchain requires “gas” to keep itself running in the same way that a car needs gasoline to move. All transactions on the Ethereum network cost a certain amount of gas, depending on the current demand and the size and speed of the contract one is trying to execute.
Contract source code
Ethereum’s smart contracts are comparable to legal contracts outside of blockchain technology. One issue related to using smart contracts on a public blockchain network is that bugs are visible to all but cannot be fixed quickly. A centralized system such as your computer can provide certain guarantees that a public blockchain cannot. For example, there could be an assumption that the state of the contract does not change after a withdrawal however, If the owner wanted to, he could monitor the network for submissions. When he detects an unprocessed transaction containing a valid submission, he could then submit one himself that lowers the bounty. There are solutions currently being worked out; a soon-to-be-released tool for automated detection of these exploits.
The ERC-20 (Ethereum Request for Comments 20) Token Standard allows for fungible tokens on the Ethereum blockchain. The standard provides functions including the transfer of tokens from one account to another, getting the current token balance of an account, and getting the total supply of the token available on the network. Smart contracts that correctly implement ERC-20 processes are called ERC-20 Token Contracts and help keep track of the created tokens on Ethereum.
Non-fungible Tokens (NFTs)
Ethereum also allows for the creation of unique and indivisible tokens, NFTs. NFTs have been used to represent such things as collectibles, digital art, sports memorabilia, virtual real estate, gaming items. The first NFT project, Etheria, a 3D map of tradable and customizable hexagonal tiles, was deployed to
Decentralized Finance (DeFi)
Decentralized Finance offers traditional financial instruments in a decentralized framework outside of companies’ and governments’ control, such as money market funds which let users earn interest. Decentralized finance applications are typically accessed through a Web3-enabled browser extension or application which allows users to directly interact with the Ethereum blockchain through a website.
Ethereum 2.0 is an open-source development currently underway as a major upgrade to Ethereum. The main purpose of the upgrade is to increase transaction throughput for the network from about 15 transactions per second to up to tens of thousands of transactions per second.
The goal is to increase the rate of production by splitting up the workload into many blockchains running parallel and then having them all share a common consensus.
Public Blockchain Network
A public blockchain network is a network anyone can join as there are no restrictions when it comes to participation. The ledger is also visible to anyone as well as access to the consensus process. Ethereum is one of the platform examples.
Best Public Blockchain Technology Features:
High Security – Online transactions are susceptible to hacking every day which causes billions of dollars of losses every year. With security protocols of public blockchain technology, hacking issues can be easily offset.
Open Environment – The public blockchain network is open for all, so, no matter where you reside, you can log into these platforms. You would only need a good internet connection and a computer. It can be used to transact in a safe environment. Also, you can make money from mining as well. However, not all public platforms offer mining features.
Anonymous Nature – This is one of the features of public blockchains that most users love. Here, everyone is anonymous. You don’t use your real name or identity; everything would stay hidden, and no one can track you based on that. Because it is a public domain, this feature is primarily for the safety of one’s possessions.
No Regulations – In reality, this network doesn’t have any regulations that the nodes have to follow so, there is no limit to how one can use this platform. However, the main issue is that enterprises can’t work in a non-regulated environment.
True Decentralization – You get true decentralization which is something not necessarily present in private blockchain networks. As everyone has a copy of the records, it creates a distributed ledger. In this type of blockchain, there isn’t a centralized entity so, the responsibility of maintaining the network is solely on the nodes. The ledger is being updated to promote fairness. Furthermore, both of these features make sure that there is always a decentralized environment in the system.
Immutability – The public blockchain network is fully immutable. This means that once a new block gets on the chain, there is no way to change it or delete it. The best part is that the hash functions work as a security protocol. Therefore, when a person tries to change the blocks, he/she will create a different chain separating from the original chain. Thus, canceling out their changes.
Full User Empowerment – Typically, in any network, the user has to follow a lot of rules and regulations. In many cases, the rules might not even be fair ones. But not in public blockchain networks. Here, all of the users are empowered as there is no central authority to look over their every move. These platforms are also open to the public, so no corporation can stop you from downloading the nodes and joining the consensus. This is something that you won’t see in private blockchain platforms. More so, if you check the private blockchain, you’ll see that the users can’t enjoy full freedom.
A private blockchain is a special type of blockchain technology where only a single organization has authority over the network. This means that it’s not open for the public to join. It isn’t fully decentralized because only those within an enterprise can get access to it; it’s more of a partially decentralized situation. There are regulations that other platforms don’t have, so all the nodes have to abide by certain rules to ensure a company’s proper flow.
Best Private Blockchain Technology Features:
High Efficiency – Only a handful of people are allowed in the network and in many cases, they even have certain tasks to complete. So, there is no way they can take up extra resources and slow down the platform.
Full Privacy – Enterprises always deal with security and privacy issues as well as sensitive information daily. Anything getting leaked can result in a massive loss for the company. Using a network that can secure this information would be highly beneficial.
Stability – Due to the stability of this platform, you will get the peace of mind necessary to conduct business securely. Basically, in every blockchain platform, you have to pay a certain fee in order to complete a transaction. But, in public platforms, the fee can increase to a great extent due to the pressure of nodes requesting transactions. When there are too many transaction requests, it takes time to complete them. More so, as time increases, the fee increases drastically. But not on private platforms. As only a handful of people can request for transactions, there isn’t any form of delays so there are no changes in the fees.
Low Fees – In private blockchain platforms, the transaction fees are extremely low. Unlike public blockchain platforms, the transaction fee does not increase based on the number of requests. So, no matter how many people request for a transaction, the fees will always stay low and accurate.
No Illegal Activity – These platforms have authentication processes before one can log into the network so, since only verified individuals get entry into the system, no illegal activity can take place.
Web 3.0 is the decentralized web built using distributed ledger technology on the blockchain. It is open, permission-less, and trustless while still remaining secure. Its goal is to put more control over web content in the users’ hands. With Web 3.0, there is no need for an account for each social platform. with just one account, you could easily move between platforms, browse or even shop.
With the increasing number of blockchain systems appearing, blockchain interoperability is becoming a topic of major importance. It’s basically the communication mechanism between two or more blockchains. The objective is to support transferring assets from one blockchain system to another.
Why Is This Needed?
Due to the lack of direct interoperability between Bitcoin and Ethereum, users of the world’s largest cryptocurrency cannot use their funds within the world’s largest DeFi ecosystem. This creates a barrier to the adoption of DeFi and cryptocurrencies. It is also impossible to directly send tokens like USDT from the Ethereum blockchain to another blockchain such as Binance Smart Chain even if both blockchains individually support USDT or another token. There are already several blockchain interoperability solutions available. They can be classified into three categories: cryptocurrency interoperability approaches, blockchain engines, and blockchain connectors.
What’s Next For Blockchain?
With many practical applications for the technology already being implemented and explored, blockchain is making a name for itself with substantial nods to ethereum and bitcoin. Blockchain stands to make business and government operations more accurate, efficient, secure, and cheap, with fewer middlemen.
As we enter into the third decade of blockchain, there’s no longer a question of if this technology will catch on but when. As we see an abundance of NFTs and the tokenization of digital assets, the next decades will prove to be an important period of growth for blockchain work.