The list of blockchain and blockchain applications is growing in number. But how many in real comprehend the idea of blockchain: What exactly is it, and what makes it special?
It is observed that there is still confusion persisting in the public discussions between blockchain and cryptocurrency. The two concepts are used interchangeably among the mass while they trace their origins to a 2008 paper credited to Satoshi Nakamoto. However, it is important to clarify that blockchain specifically defines as a form of distributed ledger or database technology, while cryptocurrency, is one of the applications of blockchain. In the blockchain, every member or node within a network holds a copy of the ledger and actively participates in its maintenance. This feature provides blockchain with a definition of distributed ledger technology.
Node? “Any Individual Computer/ Server participating in blockchain”. Ledger?? “A database holding a certain set of information carried over blockchain network”.
Isn’t it easy so far? Here is the rest of the story.
The thought of a distribution ledger technology like the blockchain originated from envisioning a future where direct peer-to-peer digital payments could be made possible, eliminating the intermediaries to facilitate transactions. Though, in the physical realm, this process is easy and straightforward, implementing a similar in the digital world is far more complex. As digital files can be easily duplicated and altered it raises the risk that an unscrupulous actor could create duplicate copies and spend the same currency multiple times, shaping a double spending problem. Blockchain began its journey as a solution to the double spending problem.
Earlier, the only viable solution was to introduce a third party, such as a bank, to oversee a payment ledger that ensures currency is spent only once. However, this initiative could not fully eliminate the necessity for an intermediary, as there was a need to verify transactions against a central ledger. Followed came Bitcoin– the first application of blockchain technology, making the cryptocurrency so famous and confusing with the term blockchain 😃😃😃.
Bitcoin blockchain networks revolutionized how we ensure the integrity of the information in a database without any central authority. Here, instead of a central ledger, the participant nodes, took the responsibility of maintaining the integrity of the information, forming a secure and reliable framework for recording data.
Behind The Curtain,
The working of blockchain technology is a little convoluted. But let’s simplify.
In a blockchain network, blocks of encrypted information are added once they have been validated by the nodes using an algorithmic consensus mechanism.
Blocks? “A batch of stored information”.
Encrypted Information? “Blockchain utilizes cryptography and consensus mechanisms to authenticate and secure new information added to the ledger”. This ensures that the ledger remains immutable or tamper-proof. In a blockchain network, encrypted blocks of information are added only after the validation by the network’s nodes through an algorithmic consensus mechanism. Each block is interconnected to its previous block, making it extremely difficult for a node to manipulate the data in any manner.
Consensus Mechanism? The collective decision-making process by nodes to authenticate the information to be added is true and valid. The Bitcoin blockchain network employs a consensus approach called proof of work, where, the network nodes compete to solve a computational problem. Here the first node to find the solution earns the right to validate the next block, which contains records of recent transactions. This validation process is called mining, as it rewards the validating nodes with newly generated bitcoins.
The Bitcoin network is designed to validate a new block approximately every ten minutes, and the difficulty of the computational problems increases as nodes allocate more computational power to solve the proof of work puzzles.
Another consensus mechanism that is well-popular within blockchain networks is proof of stake. Ethereum blockchain recently shifted its consensus model from proof of work to proof of stake. Contrary to the proof of work, under the proof of stake mechanism, nodes are required to hold and commit a certain amount of cryptocurrency, rather than solely relying on computational power. By staking their cryptocurrency, here, the nodes gain the opportunity to validate a new block and add it to the chain. Similar to proof of work, nodes participating in the validation process are rewarded with cryptocurrency. In addition, the proof of stake introduces penalties on nodes for engaging in malicious behaviour so as to discourage any detrimental actions within the network.
Next comes the types of blockchain.
Predominently, blockchain networks are classified under different umbrellas called public, private, hybrid, consortium etc. While the broad classification that anyone should know is the public/ permissionless blockchains and the private/ permissioned blockchains. The public blockchain networks allow any anyone to join and then propose changes to the database and participate in validation. The examples of include Bitcoin and Ethereum networks. Private/permissioned networks require that users be authorized before becoming a node, and the ability to propose or validate changes to the database may be further restricted to certain nodes in the network; examples include, Hyperledger, R3 Corda etc.
Now that we understood blockchain, let’s figure out how to enter the network as we conclude.
To enter, any blockchain network, a software application- wallet is necessary. With the software installed, any computer user can join the blockchain network, engage in network transactions, and participate in the validation of the ledger. The software provides users with a matching set of cryptographic keys, one public, which is used to identify the user on the ledger and track their transactions, and one private, which allows users to sign transactions to ensure only they initiate the transaction attributed to them.
Applications Beyond Cryptocurrency
Blockchain technology is widely used beyond the cryptocurrency implementation layer. For instance, the supply chain industry makes use of blockchain technology to protect their data, streamline the supply chain processes, decreasing resource waste and abuses. For instance, in the food industry, blockchain is used to cut food recall times down from days to seconds in addition to tracking what product was contaminated and where it was delivered. Blockchain is helping the industry to remove articles from stores quickly, saving companies millions in food recalls. Blockchain is also an active participant in the “carbon credit market, improving the transparency and traceability and authenticity issues regarding the energy credits sold. Blockchain is also seriously looked at in banking, healthcare, automobile, governance sector etc. Today, blockchain also enables new digital-native industries, like businesses built around the sale and trade of non-fungible tokens (NFTs).
With virtually any business that relies on middlemen marching towards blockchain to add efficiency to their systems, there springs a blockchain story.
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