What is technology blockchain?

Learn about the fundamentals of blockchain technology and how it can improve the trustworthiness of records and financial transactions.

What is blockchain?

Blockchain is a method of storing data in such a way that it is difficult or impossible to alter, hack, or cheat it.

A blockchain is a digital log of transactions that is duplicated and distributed across the blockchain's complete network of computer systems. Each block in the chain contains a number of transactions, and each time a new transaction takes place on the blockchain, a record of that transaction is added to the ledger of each participant. Distributed Ledger Technology is a decentralized database that is administered by various people (DLT).

Blockchain is a sort of distributed ledger technology in which transactions are recorded using a hash, which is an immutable cryptographic signature.

This means that if a single block in a chain is modified, it will be immediately clear that the chain has been tampered with. Hackers would have to change every block in the chain, across all distributed versions of the chain, if they intended to destroy a blockchain system.

Blockchains like Bitcoin and Ethereum are constantly growing as new blocks are added to the chain, increasing the security of the ledger dramatically.

Why is blockchain technology generating so much buzz?

Many attempts to generate digital money have been made in the past, but they have all failed.

The most pressing issue is one of trust. How can we believe that if someone invents a new money called the X dollar, they won't give themselves a million dollars or steal your X dollars?

Bitcoin was created to address this issue by utilizing a blockchain, which is a type of database. A person in control of most regular databases, such as a SQL database, can make changes to the entries (e.g. giving themselves a million X dollars). Blockchain is unique in that no one is in charge; instead, the individuals who utilize it run it. Bitcoins can't be forged, hacked, or double-spent, thus those who own them are safe.

What is the process for a transaction to be added to the blockchain?

A transaction must be validated and authorized before it can be added to the blockchain.

Before a transaction can be put to the blockchain, it must go through many important phases. Today, we'll look at cryptographic key authentication, proof of work authorization, mining's role, and the more recent usage of proof of stake protocols in subsequent blockchain networks.

Authentication

Although the original blockchain was supposed to function without a central authority (i.e., no bank or regulator deciding who can transact), transactions must still be validated.

Cryptographic keys, a string of data (similar to a password) that identifies a person and grants access to their "account" or "wallet" of value on the system, are used to do this.

Each user has a private key and a public key that is visible to everyone. Using them together generates a secure digital identity that can be used to authenticate users via digital signatures and 'unlock' transactio

Authorisation

After the users have agreed on the transaction, it must be authorized, or authorised, before it can be added to a block in the chain.

The decision to add a transaction to the chain on a public blockchain is decided by consensus. This means that the transaction must be accepted by the majority of "nodes" (or computers in the network). The people who own the machines in the network are rewarded for confirming transactions. 'Proof of work' is the term for this procedure.

Proof of Work

To add a block to the chain, Proof of Work asks the people who own the machines in the network to solve a challenging mathematical problem. Mining is the process of resolving an issue, and'miners' are usually compensated in bitcoin.

However, mining is a difficult task. The mathematical challenge can only be solved through trial and error, with a 1 in 5.9 trillion chance of succeeding. It necessitates a significant amount of computational power, which consumes a significant quantity of energy. This means that the benefits of mining must surpass the cost of the computers and the electricity used to power them, because a single computer would take years to solve the mathematical problem.

The Power of Mining

According to the Cambridge Bitcoin Electricity Consumption Index, bitcoin mining consumes almost 70 terawatt-hours (TWh) of electricity per year, making it the 40th largest electricity consumer by 'country.' According to 2016 data compiled by the CIA, Ireland (ranked 68th) uses just over a third of Bitcoin's use, or 25 TWh, and Austria (ranked 42) utilizes 64.6 TWh of electricity every year.

The Problem with Proof of Work

Miners frequently pool their resources through firms that aggregate a big group of miners to achieve economies of scale. The profits and fees offered by the blockchain network are then shared among these miners.

As more computers join the blockchain to try to solve the challenge, the difficulty becomes more difficult to solve and the network grows larger, presumably dispersing the chain further and making it more difficult to destroy or hack. However, mining power has become concentrated in the hands of a few mining pools in practice. These massive corporations now have the computing and electrical resources required to operate and build a blockchain network based on Proof of Work certification.

Proof of Stake

Later blockchain networks used "Proof of Stake" validation consensus procedures, in which members must have a stake in the blockchain - typically by owning some cryptocurrency - to be eligible to choose, verify, and validate transactions. Because no mining is required, this saves a significant amount of computational power.

Furthermore, blockchain technology has grown to include "Smart Contracts," which execute transactions automatically when specific criteria are satisfied.

What's the difference between a blockchain and a cryptocurrency like Bitcoin?

Many people make the mistake of conflating the two. Are you aware of the distinction?

Blockchain is the technology that powers the cryptocurrency Bitcoin, however it is not the only distributed ledger system based on the blockchain technology. Other cryptocurrencies have their own blockchain and distributed ledger designs.

Meanwhile, the technology's decentralisation has resulted in multiple schisms or forks inside the Bitcoin network, resulting in offshoots of the ledger in which some miners use a blockchain with one set of rules and others use a blockchain with a different set of rules.

Bitcoin Cash, Bitcoin Gold, and Bitcoin SV are all separate cryptocurrencies from the original Bitcoin. Because these cryptocurrency blockchains have smaller networks, they are more vulnerable to hacking assaults, such as the one that hit Bitcoin Gold in 2018.

The History of Bitcoin

A groundbreaking article titled Bitcoin: A peer-to-peer electronic cash system appeared on a little-known internet forum in late 2008, at the time of the financial crisis. It was written by a mystery figure known only as Satoshi Nakamoto, a pseudonym for the author's true identity.

Satoshi believed that banks and governments wielded much too much power, which they exploited for their own gain. Satoshi envisioned a new sort of money called Bitcoin as a way to change that: a cryptocurrency that was not regulated or administered by central banks or governments, and that you could transmit anywhere in the world for free, with no one in charge.

Nobody paid attention to Satoshi's crazy ideas at first, but as time went on, more and more people began to buy and use Bitcoin.

Bitcoin has expanded to a network of roughly 10,000 "nodes," or participants, who use the Proof of Work mechanism to validate transactions and mine bitcoin since its inception in 2009.

This democracy lasted until the invention of ASICs, which outperformed other, less powerful devices, and companies began to benefit from amassing miners and mining technologies. Individuals can still participate in the Bitcoin process, but it is costly to set up and the return on investment varies depending on the highly volatile value of bitcoin.

Huge mining pools are now owned or controlled by large organizations, and power is once again being centralized. This evolution has tainted Satoshi's initial vision for blockchain, which called for Bitcoin.

What are the potential dangers of public blockchains?

Three concerns with public blockchains are discussed in this blog post: 51 percent assaults, Proof of Stake weaknesses, and double spending.

Attacks on 51% of the population

When blockchains use simple majority consensus rules, there is a risk that malicious actors will band together to affect the system's outcomes. In the case of a cryptocurrency, this means that a group of miners with more than 50% of the computer power can decide which transactions are validated and added (or removed) to the chain. A 51 percent assault on a blockchain using the Proof of Work (PoW) consensus protocol method can potentially take the form of malevolent parties creating a "rival" chain containing false transactions.

These fraudsters can utilize their better mining capacity to create an alternate chain that is longer than the "real" chain and so – because it is part of the Bitcoin network – is more valuable.

In a large blockchain like Bitcoin this is increasingly difficult, but where a blockchain has ‘split’ and the pool of miners is smaller, as in the case of Bitcoin Gold, a 51% attack is possible.

In 2018, a 51 percent double spend attack was successfully carried out on the Bitcoin Gold and Ethereum Classic blockchains, resulting in the theft of millions of dollars.

Proof of Work vs Proof of Stake

In January 2019, a 51 percent attack on a new blockchain dubbed Ethereum Classic pushed the Ethereum blockchain to switch from Proof-of-Work (PoW) mining to Proof-of-Stake (PoS) voting.

Proof of Stake, on the other hand, is more subject to schisms or splits known as "forks," in which major stakeholders disagree about which transactions should make up blocks, resulting in the creation of a new currency. Ethereum tested this validation mechanism for a short time but had to revert to Proof of Work owing to forking issues. In 2020, a new Proof of Stake validation system is scheduled to be introduced.

Double Spending

There is a possibility that a participant with one bitcoin, for example, may spend it twice and fraudulently get items worth two bitcoins before one of the goods or service suppliers notices that the money has already been spent. However, this is a problem with any electronic money system, and it is one of the main reasons for clearing and settlement procedures in traditional currency systems.