Blockchain represents a new paradigm for the way information is shared and companies are rushing to figure out how they can use the distributed ledger technology to save time and reduce costs. Numerous companies began rolling out real-world projects across a variety of industries - everything from financial services to healthcare to mobile payments.
What is Blockchain?
Blockchain stands for “chain of blocks”, where each individual block represents a transaction. Oftentimes, people also call it a digital ledger, because it essentially is a registry of transactions.
What are blocks?
Blocks are files where data is permanently recorded. A single block consists of the following fields:
Hash is generated with an algorithm (SHA256), that takes all fields inside a block and outputs a single cryptographic hash.
Why are blocks “chained”?
Blocks are chained - linked with each other. Actually, they are cryptographically linked. What that means is every block is linked to the previous one with its cryptographic hash. I depict this in a picture below:
Just because, all blocks make up this chain of blocks, it’s really hard to maliciously change data inside a single block (for example change the owner of funds).
Remember when I talked about how hashes are generated? Whenever someone changes data inside a block, its new hash is different from the original one. The next block’s prev. hash field will not match the new hash - cryptographic link will be broken, and as a result the Blockchain will not be updated.
The only walk around is to change all blocks that follow the corrupted block. Specifically, change the prev. hash field inside them, to make Blockchain seem valid again. This problem is solved with a concept of distributed network.
Why distributed network?
Blockchain is a distributed network, because it’s distributed across all its users (nodes), that is every user has an exact copy of it. The idea of having many copies distributed across the network solves very important problem, which is corrupted blockchains. Even if someone manages to maliciously change the entire blockchain, his copy will be different from all other copies of blockchain existing on the network. Eventually, it will be replaced with a valid copy.
Also, this is why Blockchain is trustless. Since we no longer need to trust a single entity/organization/third-party (like a bank). Instead, consensus maintains the network. There is no risk of a central registry being attacked, anymore.
Blockchain is a chain of blocks, where transactions are recorded. It is publicly accessible, because anyone can view transactions that have ever been executed and have their own copy of the chain. It is distributed across its users, who form a consensus that validates new blocks before adding them to Blockchain. This consensus is one of the mechanisms that make Blockchain so secure.
There are also other mechanisms like proof-of-work mechanism, that make the network extremely secure, but I will put this topic off to later posts.
By now, you have a solid grasp of what a Blockchain is. Now, let’s talk about the actual benefits and limitations of this technology.
This is a core concept and benefit of Blockchain. There is no need for a trusted third party or intermediary to validate transactions; instead a consensus mechanism is used to agree on the validity of transactions.
Immutability & Security
Once a transaction was registered on Blockchain, it is extremely difficult to change it. On top of that, Blockchain is highly secure, since all transactions are cryptographically secured. With no central point to be exploited the system is protected against hacking attacks and fraud.
Blockchain transactions reduce transaction time and are processed 24/7. One transaction usually takes just a few minutes, unlike interbank transactions that might take days to make.
As no third party is required in the blockchain model, this can massively eliminate overhead costs in the form of fees paid to trusted third parties.
Everyone all over the world with the Internet access, can use Blockchain. For example, to transfer Bitcoin to a friend using mobile phone.
The most popular Blockchains have consensus mechanisms which require all consensus members (often called miners) to verify a transaction. Since there are around 5000 miners, this limits the total number of transactions a blockchain network can process. Currently Bitcoin can process 7 transactions per second at maximum, whereas VISA network routinely handles 2000 transactions per second.
There are some potential security issues with Blockchain using distributed consensus to validate transactions. The most worrisome is the possibility of a 51-percent attack, in which one mining entity could grab control of the blokchain. The issue is the centralization tendency in mining, where only few large mining pools control the majority of the transaction recording.
Mining draws an enormous amount of energy, most of it wasted. The earlier estimate cited was $15 million per day, and other estimates are higher. On one hand, it is the very wastefulness of mining that makes it trustable. However, in principle, there is only one miner, that gets a reward, and that is the one who adds a new block (registers a new transaction in blockchain) first.
Blockchain in Practice
The most popular application of Blockchain technology is Bitcoin, obviously. So let’s consider a simple transaction between two people on Bitcoin network.
Practice makes it perfect! That’s why you may want to check out this amazing online tool, developed by Anders Brownworth, to better understand the concepts discussed in this post.
Generate hash: https://tools.superdatascience.com/blockchain/hash
Mine a block: https://tools.superdatascience.com/blockchain/block
Try to tamper one of the blocks: https://tools.superdatascience.com/blockchain/blockchain
Play with a distributed network: https://tools.superdatascience.com/blockchain/distributed
Congratulations, you have made it this far! I can’t wait to see you in the next posts on this series. Keep up the great work on discovering this revolutionary technology.
All the important topics, like how mining works, and how consensus protocol works will be discussed in later posts.
➤ Next post: Blockchain Categories & Applications