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 blockchain can bring a shift in the current computing paradigm.
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 blockchain is, how does it work, what problems it can solve, how and where are its uses?
To help innovators and entrepreneurs understand what blockchain is, we have covered the following topics in our article:
- What is Blockchain?
- What is “Block” in Blockchain?
- How does Blockchain Work?
- What are the various Blockchain Consensus Protocols?
- Blockchain as Document Sharing Platform
- What are the types of Blockchain?
- What are the features of Blockchain?
- What are the business applications of Blockchain?
- What are the various platforms for blockchain app development?
What is Blockchain?
As the name suggests, a blockchain is a chain of blocks containing timestamped digital records. Initially presented by a group of researchers in 1991, this technique’s intent was 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.
More profoundly described, it is a distributed ledger where the saved digital records are spread 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.
Every block comprises of the following components:
- 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 identifies the block and its contents.
Once a block gets 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.
Every new block contains the current hash and the hash of the previous block, which implies that every block is linked to each other and creates a chain of blocks, known as “Blockchain.”
Here, we are going to explain the working of blockchain with an example.
We have a chain of three blocks.
Each block in this chain has its hash and previous hash.
- Hash: 3W8F
- Previous Hash: 0000
- Hash: 2BR1
- Previous Hash: 3W8F
- Hash: 9G4S
- Previous Hash: 2BR1
Here, we can see that block3 points to block2 while block2 points to block1.
Since the block 1 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 known as the genesis block.
Suppose you tamper with the second block. The change in this block would cause the hash of the block to alter as well. As a result, it would make block three and all other blocks in the chain invalid because they do not store the valid hash value of the last block.
So, it is clear that changing any block will make all other blocks invalid.
But using the hash mechanism is not enough to prevent data from tampering. Nowadays, computers are faster and can evaluate hundreds of thousands of hashes in a second. It can be possible for hackers to recalculate hashes of all blocks and make the Blockchain valid.
The blocks get distributed to various machines on a network known as nodes to ensure no centralized authority owns the data. Each node will maintain a copy of the ledger.
When data is captured in the Blockchain, all the nodes need to agree that it is good to store it to the Blockchain. But how can nodes agree to add any new block to the chain of records?
Blockchain uses different consensus mechanisms to decide if a block needs to be added to the chain.
There are numerous blockchain consensus protocols. Some blockchain platforms use their own customized consensus protocols to validate transactions. Here we have listed eight commonly used consensus protocols:
- Proof of Work (PoW)
- Proof of Stake (PoS)
- Delegated Proof of Stake (DPoS)
- Proof of Authority
- Leader Based Consensus
- Economy Based Consensus
- Voting Based Consensus
- Virtual Voting Consensus
Let’s discuss these consensus mechanisms in detail.
Proof of Work (PoW)
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.
Proof of Stake (PoS)
The Proof of Stake consensus algorithm is an alternative approach to Proof of Work, but with a different process. It does not require as many CPU computations to mine.
Here, the validators are the creators of a new block. They get chosen arbitrarily based on how much they have contributed to the network. The higher chances to be selected as the validator are dependent on the number of contributions they make, i.e. depending on their wealth/stake. Contrary to the Proof of Work consensus mechanism, there is no reward for mining or validating transactions. Hence, the miners take a transaction fees.
EOS and Cardano Ouroboros use this form of consensus mechanism.
Delegated Proof of Stake (DPoS)
Even though Delegated Proof of Stake consensus mechanism sounds the same as Proof of Stake, they are quite different.
With Delegated Proof of Stake, the token holders don’t validate the blocks themselves, instead they select delegates to validate for them. There are usually 21-100 selected delegates, who are changed from time to time and allotted an order to deliver blocks. Fewer delegates allows efficient organization and designed time slots to publish blocks. The token holders can vote delegates out and replace them with other delegates if they publish invalid transactions or miss their time slots.
In the Delegated Proof of Stake system, miners can collaborate to develop blocks. Some blockchain platforms which use the Delegated Proof of Stake consensus mechanism are Steemit, EOS, etc.
Proof of Authority (PoA)
Proof of Authority is a modified version of Proof of Stake consensus mechanism. Here, the validators are picked based on their stature in the network. IBM Hyperledger and Ethereum Kovan Testnet use this consensus mechanism.
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 order of the transactions or may send blocks with an order of transactions to add to the chain.
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 how an economy works but does not deal with the chaos of a real-world economy.
A vote can be done to add blocks onto a chain as the community.
If someone votes for a block that no one else has voted for, they might have to pay a certain 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.
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 of 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 further classify as following-
- Byzantine Fault Tolerance Consensus: To prevent the cases of subverting and crashing nodes.
- Crash Fault Tolerance Consensus: To avoid the instances of crashing nodes.
Virtual Voting Consensus
Virtual Voting Algorithm does not allow to send voting messages 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 about 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 more comfortable 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 this technology could be used for various purposes like storing health records, conducting tax audits and creating a digital notary system.
Now, we understand what Blockchain is, 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. 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 similarly. Two individuals cannot modify 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 the sharing of the same ledger.
Imagine you have to share legal documents with multiple entities. Instead of passing them among people 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 the Blockchain is accessible to everyone in the world, anyone can have the right to read and write data.
A public blockchain is wholly 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 can 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, can be a hybrid model between a highly-trusted entity model of private blockchains and the low trust offered by a public blockchain.
Rather than enabling any user to participate in the validation of the transaction process, a few selected participants are predetermined in a consortium blockchain.
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.
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.
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 a publicly available blockchain ledger.
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.
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- 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.
- 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.
- 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.
- 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.
- 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.
Blockchain platforms enable the development of Blockchain-based applications. Here is a list of some of the popular platforms for blockchain app development:-
- Hyperledger Fabric
- Hyperledger Sawtooth
- Hedera Hashgraph
Let’s learn more about these platforms.
Stellar is a blockchain based distributed ledger which is used to facilitate cross-asset value transfers. Using the Stellar network, one can build banking tools, mobile wallets and smart devices. Stellar facilitates cross-border payments and exchanges of cryptocurrencies and fiat currencies.
Stellar’s cryptocurrency is Stellar Lumens, denoted by XLM. It follows the Stellar Consensus Protocol, which allows nodes to reach consensus without depending on a closed system to record financial transactions.
Companies like Transfer To, NaoBTC, RippleFox, and ICICI Bank are integrating with the Stellar network to enable cross-border money transfers.
The official website of Tezos defines it as “an open-source blockchain protocol for assets and applications backed by a global community of validators, researchers, and builders.” It is associated with a computerized token known as a tez or a tezzie. It is a decentralized ledger which makes use of blockchain technology designed to support smart contracts and dApps using Michelson as its language. Token holders gain a reward for engaging in proof-of-stake consensus mechanism in lieu of mining it.
Tezos works similarly to its counterparts like NEO, Ethereum, ICON and many other blockchain platforms. But some of its vital features help it to stand out of the crowd. One such feature is its self-rectifying cryptographic ledger, which can grow as per the requirements without getting forked every so often. It is also economical.
Hyperledger Fabric is a project of Hyperledger, the intent of which is to use a modular architecture to build Blockchain-based solutions or applications. The scalability of the architecture singles it out from other blockchain solutions as it enables the network designers to plug in their preferred components like membership services and consensus. The framework of Hyperledger Fabric is configured for permissioned networks, allowing familiar identities to be involved within a system. The participants within this network should be approved and should have credibility in the capital to participate in the Blockchain.
Hyperledger Sawtooth was launched by the Linux Foundation and assisted by IBM and Digital Asset. It is an enterprise-grade and modular platform intended for developing, deploying and running distributed ledgers, hence enabling digital records to be maintained without a central authority. Its consensus mechanism is Proof of Elapsed Time (PoET), which enables it to integrate with hardware security solutions, known as “trusted execution environments” and Intel’s newly launched Xeon processor is one of its applications.
Hyperledger Sawtooth is Hyperledger’s second open-source blockchain platform to integrate with an enterprise-ready 1.0 version.
Hedera Hashgraph platform is a secure, fast and fair platform that does not require computing a heavy proof of work algorithm. It provides a new form of distributed consensus as it authorizes and allows developers to build an entirely new class of scalable decentralized applications.
The governing body of the Hedera Hashgraph platform is The Hedera Hashgraph Council. The provisions made in Hedera’s governance ensure that no member or small group can have extreme influence or control over the entire body.
It offers an optional mechanism that allows “binding arbitration,” so the smart contracts are deployed with a list of the public key of arbitrators that can be edited to fix bugs or add new features. If an appointed arbitrator agrees on the revision/alteration of a smart contract, the transaction having a new bytecode is sanctioned by the arbitrator’s keys and the change is implemented.
Ripple was discovered in 2012. Its aim is to link payment providers, digital asset exchanges, banks and corporate via the blockchain network “RippleNet” without any charge-backs. It enables global payments through a digital asset called “XRP or Ripple.” It is now one of the various popular cryptocurrencies like Ether and Bitcoin.
It is built on the advanced blockchain technology, is more scalable and faster than other blockchains. It uses voting based on probability to achieve consensus between nodes.
Presently, it has more than 100 customers and around 75 clients in different stages of commercial deployment primarily across three use cases, i.e., minimizing liquidity costs (xRapid), sending payments across multiple networks (xVia), and cross-border payments (xCurrent).
Ethereum was established in late 2013. It is an open-source, Blockchain-based distributed computing platform. Ethereum is widely recognized for running smart contracts on a custom-built blockchain. Every node within the network has to run an EVM (Ethereum Virtual Machine) implementation.
Ethereum is a public blockchain platform (hence permissionless) and is built for limited access against mass consumption. Currently, Ethereum works on a Proof of Work-based consensus platform, which is relatively slower with regard to speed. However, it may shift its consensus protocol to Proof of Stake in the near future.
The native cryptocurrency of Ethereum is called Ether, used for stoking the Ethereum ecosystem. A developer who builds applications using Ethereum has to pay charges in Ethers, for executing transactions and running apps on the Ethereum network.
Blockchain is a very innovative technology with newly found applications in multiple industries. Its benefits have helped businesses adopt efficient security measures along with better organization to enhance their workflows and customer satisfaction. As more and more people are learning about blockchain technology, they are willing to invest in it to shift their businesses to high quality functioning with the help of blockchain applications.
To understand how blockchain technology can be applied to multiple industries across the globe, contact our team of blockchain experts and discuss your requirements.
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