What is Blockchain?
Here’s A Comprehensive Guide for Beginners

Blockchain technology has gained a lot of traction across the world due to its features like transparency, immutability, decentralization and traceability. From enterprises to startups, banks, and governments, everyone has allocated resources and invested money to understand how could blockchain bring a shift in the current computing paradigm.

The blockchain is more robust and secure than the centralized models by its nature as it relies on a decentralized and distributed ledger model. But do you understand what is blockchain, how does it work, what problems it can solve, how and where it can be used?

To help innovators and entrepreneurs understand what is blockchain, we have covered the following topics in our article:
 

What is Blockchain?

As the name indicates, a blockchain is a chain of blocks, containing time-stamped digital records. Initially described by a group of researchers in 1991, this technique was intended to timestamp digital records so that no one could backdate or tamper them.

But the concept went unused until Satoshi Nakamoto revived it again in 2009 to create a digital cryptocurrency, Bitcoin.

Understanding the blockchain in more depth, it is a distributed ledger where the saved digital records are distributed across all participating nodes in the network. Each node maintains an updated copy of the ledger.

Once the data has been recorded or added in a blockchain, it becomes difficult to change it. Let’s understand how by taking a closer look at a block.

Author’s Bio

Akash Takyar
Akash Takyar
CEO LeewayHertz
Akash Takyar is the author of Blockchain Technology and Business book. He is the co-founder of LeewayHertz and is a consultant to fortune 500 companies including Siemens, 3M, Hershey’s and others. He has a Masters Degree in Computer Science. Akash’s experience of building over 100+ apps allows him to rapidly architect and design solutions. His ability to explain complex technologies in simple and practical ways has resulted in him becoming a popular speaker at colleges, universities, and conferences.

Every block comprises of-

  • Data
  • Hash of the block
  • Hash of the previous block

The data recorded in a block depends on the blockchain type.

For example, Bitcoin Blockchain saves the details about a transaction such as a receiver, sender and number of coins.

A hash of the block is similar to a fingerprint(always unique) that provides identification to the block and its contents.

Once a block is created, a hash gets generated. Hash value gets changed with every change in the block.

Therefore, hash values help in detecting the changes made to blocks.

Containing a hash of the previous block means every block is linked to each other and creates a chain of blocks, known as “Blockchain.”

Let’s consider an example.

We have a chain of 3 blocks.

Each block in this chain has its hash and previous hash.

  1. Block1:
    Hash: 3W8F
    Previous Hash: 0000
  2. Block2:
    Hash: 2BR1
    Previous Hash: 3W8F
  3. Block3:
    Hash: 9G4S
    Previous Hash: 2BR1

Here, we can see that block3 points to block2 while block2 points to block1.

what is blockchain

Since the block1 is unique and its previous hash value is 0000, it can never point back as it is the first block in the chain.

This block is called as the genesis block.

Suppose you tamper the second block and change in this block would cause hash of the block to alter as well. As a result, it would make block3 and all other blocks in the chains invalid because they do not store the valid hash value of the last block.

So, it is clear that changing all blocks will make all other blocks invalid.

But using hash mechanism is not enough to prevent data from tampering. Nowadays, computers are quite faster and can evaluate hundreds of thousands of hashes in a second. So, it can be possible for hackers to recalculate hashes of all blocks and make the blockchain valid.

In order to make sure no centralized authority is not owning the data, the blocks need to be distributed to various machines on a network. Let’s call them nodes. Each node will maintain a copy of the ledger. So when a data is captured in the blockchain, all the nodes need to agree that it is good to store the data to the blockchain.

But how can nodes come to an agreement to add any new block to the chain of records?

Blockchain uses different types of consensus mechanisms to come to a decision if a block needs to be added to the chain or not.

Proof-of-Work

Introduced by Bitcoin, Proof-of-work is a consensus protocol which is also known as mining and the nodes on the network are called “miners.”

The proof of work mechanism comes in the form of a solution to the mathematical problem, which requires a considerable amount of power. Miners have to compete to find the answer to the problem.

The one who finds the solution to the mathematical power can validate transactions and add a new block while receiving rewards in return.

So, the proof-of-work mechanism makes it difficult to tamper the blocks because for tampering one block, you would have to re-evaluate the proof-of-work for all blocks.

The use of hashing and proof-of-work makes the blockchain more secure than that of centralized computing models.

Leader-based Consensus

The leader based distributed ledger platform has a leader computer where every member in the network sends transactions to the leader.

The leader sends out the transactions order or may send blocks which has an order of transactions to be added to the chain.

Economy-based Consensus

In an Economy-based Distributed Ledger Technology, the system is set up like a simulation of the economy where economic rationality manages consensus.

Here, a consensus algorithm tries to simulate the way an economy works but does not deal with the chaos of a real-world economy.

To add blocks onto a chain as the community, a vote can be done to add next to the chain.

If someone votes for a block that no one else has voted for, they might have to pay a certain amount of fine. On the other hand, if the vote is given to the block that everyone voted for, they might earn a significant profit. That is how economy-based consensus works.

Voting-based Consensus

Unlike proof-based consensus algorithms where nodes are free to join and withdraw from the network, nodes should be known and adjustable in a voting-based consensus. Besides managing the ledger, all nodes in the network have to verify blocks or transactions together.

In this consensus, nodes first communicate with each other before they decide to append the proposed blocks to the chain.

Voting-based consensus algorithms can be further classified as-

  • Byzantine Fault Tolerance Consensus: To prevent the cases of subverting and crashing nodes
  • Crash Fault Tolerance Consensus: To avoid the cases of crashing nodes

Virtual Voting Consensus

Virtual Voting Algorithm does not allow voting messages to be sent across the network. Following the Byzantine Fault Tolerance Mechanism, it ensures no more than 1/3 of nodes in the network are malicious at any specific attack instance.

Since every node has a copy of the ledger, every member node can reach a consensus without a vote ever being sent.

Each member has information what another member would have voted even without going through a voting process.

By looking at the working of different consensus protocols, it can become easier for you to choose the most efficient algorithm to build a blockchain app.

The introduction of blockchain technology gained people’s interest. Everyone realized that technology could be used for various purposes like storing health records, conducting tax audits and creating a digital notary system.

Now, we understand what is blockchain, how it works and what problems it can solve, let’s talk about the different types of blockchains.

The existing way of exchanging documents is to send a Word Document to another person and ask them to make edits in it. The problem with this scenario is that you have to wait until the other person sends you a copy for further changes.

It happens because you cannot edit it until the other person is done with it. Databases also work in a similar way. Two individuals cannot edit the same record at once.

But with Google Docs, both parties can have access to the same record at the same time and the single version of that record can be visible to both members. Also, it allows you to access and restore the timestamped version of documents anytime.

The distributed model comes into play when many people get involved in sharing of the same ledger.

Imagine you have to share legal documents with the multiple entities. Instead of passing them from one individual to another and not being in sync with each other, what if all documents become shared rather than transferred back and forth.

So, blockchain can make the sharing of information by bringing transparency and traceability.

  • Public Blockchain
    In a public blockchain, any user can become a member of the blockchain network. Since the data stored on blockchain is accessible to everyone in the world, anyone can have the right to read and write data.
    A public blockchain is completely decentralized as the permissions to write and read data are shared by all involved users equally who reach consensus before data gets stored on the blockchain.
  • Private Blockchain
    In a private blockchain, only one organization can control the permissions to send, write and receive data.
    Private blockchains can only have a few users who are allowed to access and perform transactions on the blockchain network.
    Only, the organization that has all controls can change the rules of the private blockchain and cancel transactions based on the deployed regulations.
  • Consortium Blockchain
    A consortium blockchain, also known as the permissioned blockchain network, which can be a hybrid model between highly-trusted entity model of private blockchains and the low trust offered by public blockchain.
    Rather than enabling any user to participate in the validation of the transaction process but in a consortium blockchain, a few selected participants are predetermined.
  • Immutability
    Forming immutable ledger is one of the main concepts of the blockchain. Any centralized database is prone to get hacked and require trust in the third party to make it more secure.
    A block which is once written to the blockchain cannot change. Being immutable means that something remains unchangeable over time. It offers a great benefit for auditing purposes. As a data provider and data recipient, it is possible to prove that the data has not modified or tampered.
  • Trust
    Currently, we have to rely on middlemen or intermediaries which cut down the efficiency of transactions by charging a small fraction of fees to provide trust. Building trust between parties leads to high costs of goods and services.
    By distributing information across a network of computers, blockchain overrides the need for a central administrator. Therefore, the trust in the blockchain can be built by forming a consensus when all nodes in the network validate the transactions.
  • Auditability
    As blockchain is resistant to alteration of any stored data, it can be used as a source of verification for reported transactions. Instead of asking users to send bank statements or transaction reports, auditors can directly verify the transactions on publically available blockchain ledger.
  • Transparency
    Blockchain offers a high level of privacy by making sure that transaction details are shared amongst the parties involved in those transactions.
    Every participant who has access to the blockchain network can transparently view the details stored on it.

The blockchain offers internet users the ability to authenticate digital information and create value.

  1. Smart Contracts
    Stored on the blockchain, these contracts are simple programs which can execute based on certain conditions. The smart contracts bring trust in the system by allowing controlled data disclosure.

    Ethereum, an open-source project, was built only to realize the possibility of smart contracts specifically.

    It can leverage the functionality of blockchains on a world-changing scale.

  2. Sharing Economy
    As companies like Airbnb and Uber are emerging, the sharing economy is also gaining a lot of traction. Nowadays, users who want to avail ride-sharing services have to depend on intermediaries like Uber.

    Enabling peer-to-peer transactions, the blockchain allows the direct interaction between all involved parties.

  3. Supply Chain Auditing
    Socially-active customers nowadays want to know if the ethical claims made by companies about their products are real or not. Distributed ledgers offer an easy and quick way to ensure if the product in the supply chain has followed all quality standards or not.

    Blockchain based timestamping offers transparency on ethical products, like jewelry, eatables, automotive components and more.

  4. Identity Management
    Distributed ledgers come up with improved methods for verifying who you are, with the possibility to digitize identity documents.

    Implementation of the blockchain in identity management can enhance the level of privacy and security.

    No personal identity documents would be stored in a centralized database. Since the blockchain identity system will be decentralized, there will be no chances of a single point of failure.

  5. Land Title Registration
    Property titles tend to be susceptible to fraud due to the involvement of the multiple intermediaries and lack of transparency. Therefore, many countries are considering blockchain based land registry projects.
    With the help of land registration on the blockchain, a buyer can directly interact with a seller without paying additional fees to the intermediaries.

To understand how blockchain technology can be applied to multiple industries across the globe, contact our team of blockchain experts and discuss your requirements.

Author’s Bio

Akash Takyar
Akash Takyar
CEO LeewayHertz
Akash Takyar is the author of Blockchain Technology and Business book. He is the co-founder of LeewayHertz and is a consultant to fortune 500 companies including Siemens, 3M, Hershey’s and others. He has a Masters Degree in Computer Science. Akash’s experience of building over 100+ apps allows him to rapidly architect and design solutions. His ability to explain complex technologies in simple and practical ways has resulted in him becoming a popular speaker at colleges, universities, and conferences.

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