When we say Blockchain, in words it literally means a chain of blocks but not in technical terms. When we say the words “block” and “chain” in this context, we are actually talking about digital information (the “block”) stored in a public database (the “chain”). Let us understand what is Blockchain in more detail.
Blocks in a Blockchain are filled with information in digital form. They have three main parts-
- Blocks store information about the transaction such as, Date, Time and the amount of your recent transaction.
- Blocks store information about who is participating in the transactions. Instead of using your actual name, your purchase is recorded without any identifying information using a unique “digital signature,” sort of like a username.
- Blocks store information that distinguishes them from other blocks. Much like you and I have names to distinguish us from one another, each block stores a unique code called a “hash” that allows us to tell it apart from every other block.
How Blockchain works ?
A Blockchain transaction has 4 main steps-
This is where the actual transaction takes place.
Each transaction on a Blockchain is verified before getting its own block. This is done by a series of computers that are part of the network.
After getting a green signal from the computers the transaction is then stored inside a Block. The Block contains data such as, Date, Time, Your digital signature, 2nd Party’s digital signature and the amount of transaction. After this the Block joins other similar Blocks to form a “Blockchain”.
The main part of this process is Hashing without which the Blockchain won’t be as it is. The Block is given a unique identifier named ‘Hash’. The block is also given the hash of the previous Block to form a systematic chain. Once the Block is hashed it can then be added to the Blockchain.
Is Blockchain private ?
Anyone can view the contents of the blockchain, but users can also opt to connect their computers to the blockchain network. In doing so, their computer receives a copy of the blockchain that is updated automatically whenever a new block is added, sort of like a Facebook News Feed that gives a live update whenever a new status is posted.
Each computer in the blockchain network has its own copy of the blockchain, which means that there are thousands, or in the case of Bitcoin, millions of copies of the same blockchain. Although each copy of the blockchain is identical, spreading that information across a network of computers makes the information more difficult to manipulate. With blockchain, there isn’t a single, definitive account of events that can be manipulated. Instead, a hacker would need to manipulate every copy of the blockchain on the network.
Looking over the Bitcoin blockchain, however, you will notice that you do not have access to identifying information about the users making transactions. Although transactions on the blockchain are not completely anonymous, personal information about users is limited to their digital signature or username.
Is Blockchain secure ?
Blockchain technology accounts for the issues of security and trust in several ways. First, new blocks are always stored linearly and chronologically. That is, they are always added to the “end” of the blockchain. If you take a look at Bitcoin’s blockchain, you’ll see that each block has a position on the chain, called a “height.” As of December 2019, the block’s height had topped 6,09,990.
After a block has been added to the end of the blockchain, it is very difficult to go back and alter the contents of the block. That’s because each block contains its own hash, along with the hash of the block before it. Hash codes are created by a math function that turns digital information into a string of numbers and letters. If that information is edited in any way, the hash code changes as well.
Here’s why that’s important to security. Let’s say a hacker attempts to edit your transaction so that you actually have to pay for your purchase twice. As soon as they edit the amount of your transaction, the block’s hash will change. The next block in the chain will still contain the old hash, and the hacker would need to update that block in order to cover their tracks. However, doing so would change that block’s hash. And the next, and so on.
In order to change a single block, then, a hacker would need to change every single block after it on the blockchain. Recalculating all those hashes would take an enormous and improbable amount of computing power. In other words, once a block is added to the blockchain it becomes very difficult to edit and impossible to delete.
To address the issue of trust, blockchain networks have implemented tests for computers that want to join and add blocks to the chain. The tests, called “consensus models,” require users to “prove” themselves before they can participate in a blockchain network. One of the most common examples employed by Bitcoin is called “proof-of-work.”
In the proof of work system, computers must prove that they have done work by solving a complex computational math problem. If a computer solves one of these problems, they become eligible to add a block to the blockchain. But the process of adding blocks to the blockchain, what the cryptocurrency world calls “mining,” is not easy. In fact, according to the blockchain news site BlockExplorer, the odds of solving one of these problems on the Bitcoin network were about one in 12.9 trillion in December, 2019. To solve complex math problems at those odds, computers must run programs that cost them significant amounts of power and energy.
Proof-of-work does not make attacks by hackers impossible, but it does make them somewhat useless. If a hacker wanted to coordinate an attack on the blockchain, they would need to solve complex computational math problems at 1 in 12.9 trillion odds just like everyone else. The cost of organizing such an attack would almost certainly outweigh the benefits.
Blockchain’s Practical Application
Blocks on the blockchain store data about monetary transactions—we’ve got that out of the way. But it turns out that blockchain is actually a pretty reliable way of storing data about other types of transactions, as well. In fact, blockchain technology can be used to store data about property exchanges, stops in a supply chain, and even votes for a candidate.
Professional services network Deloitte recently surveyed 1,000 companies across seven countries about integrating blockchain into their business operations. Their survey found that 34% already had a blockchain system in production today, while another 41% expected to deploy a blockchain application within the next 12 months. In addition, nearly 40% of the surveyed companies reported they would invest $5 million or more in blockchain in the coming year. Here are some of the most popular applications of blockchain being explored today.
Perhaps no industry stands to benefit from integrating blockchain into its business operations more than banking. Financial institutions only operate during business hours, five days a week. That means if you try to deposit a check on Friday at 6 p.m., you likely will have to wait until Monday morning to see that money hit your account. Even if you do make your deposit during business hours, the transaction can still take one to three days to verify due to the sheer volume of transactions that banks need to settle. Blockchain, on the other hand, never sleeps.
By integrating blockchain into banks, consumers can see their transactions processed in as little as 10 minutes, basically the time it takes to add a block to the blockchain, regardless of the time or day of the week. With blockchain, banks also have the opportunity to exchange funds between institutions more quickly and securely. In the stock trading business, for example, the settlement and clearing process can take up to three days (or longer, if banks are trading internationally), meaning that the money and shares are frozen for that time.
Given the size of the sums involved, even the few days that the money is in transit can carry significant costs and risks for banks. Santander, a European bank, put the potential savings at $20 billion a year. Capgemini, a French consultancy, estimates that consumers could save up to $16 billion in banking and insurance fees each year through blockchain-based applications.
Use in Cryptocurrency
Blockchain forms the bedrock for cryptocurrencies like Bitcoin. As we explored earlier, currencies like the U.S. dollar are regulated and verified by a central authority, usually a bank or government. Under the central authority system, a user’s data and currency are technically at the whim of their bank or government. If a user’s bank collapses or they live in a country with an unstable government, the value of their currency may be at risk. These are the worries out of which Bitcoin was borne.
By spreading its operations across a network of computers, blockchain allows Bitcoin and other cryptocurrencies to operate without the need for a central authority. This not only reduces risk but also eliminates many of the processing and transaction fees. It also gives those in countries with unstable currencies a more stable currency with more applications and a wider network of individuals and institutions they can do business with, both domestically and internationally (at least, this is the goal.)
Health care providers can leverage blockchain to securely store their patients’ medical records. When a medical record is generated and signed, it can be written into the blockchain, which provides patients with the proof and confidence that the record cannot be changed. These personal health records could be encoded and stored on the blockchain with a private key, so that they are only accessible by certain individuals, thereby ensuring privacy.
Property & Land Records
If you have ever spent time in your local Recorder’s Office, you will know that the process of recording property rights is both burdensome and inefficient. Today, a physical deed must be delivered to a government employee at the local recording office, where is it manually entered into the county’s central database and public index. In the case of a property dispute, claims to the property must be reconciled with the public index.
This process is not just costly and time-consuming—it is also riddled with human error, where each inaccuracy makes tracking property ownership less efficient. Blockchain has the potential to eliminate the need for scanning documents and tracking down physical files in a local recording office. If property ownership is stored and verified on the blockchain, owners can trust that their deed is accurate and permanent.
A smart contract is a computer code that can be built into the blockchain to facilitate, verify, or negotiate a contract agreement. Smart contracts operate under a set of conditions that users agree to. When those conditions are met, the terms of the agreement are automatically carried out.
Say, for example, I’m renting you my apartment using a smart contract. I agree to give you the door code to the apartment as soon as you pay me your security deposit. Both of us would send our portion of the deal to the smart contract, which would hold onto and automatically exchange my door code for your security deposit on the date of the rental. If I don’t supply the door code by the rental date, the smart contract refunds your security deposit. This eliminates the fees that typically accompany using a notary or third-party mediator.
Suppliers can use blockchain to record the origins of materials that they have purchased. This would allow companies to verify the authenticity of their products, along with health and ethics labels like “Organic,” “Local,” and “Fair Trade.”
As reported by Forbes the food industry is moving into the use of blockchain to increasingly track the path and safety of food throughout the farm-to-user journey.
Voting with blockchain carries the potential to eliminate election fraud and boost voter turnout, as was tested in the Nov. 2018 midterm elections in West Virginia. Each vote would be stored as a block on the blockchain, making them nearly impossible to tamper with. The blockchain protocol would also maintain transparency in the electoral process, reducing the personnel needed to conduct an election and provide officials with instant results.
Advantages of Blockchain
Accuracy of the Chain
Transactions on the blockchain network are approved by a network of thousands or millions of computers. This removes almost all human involvement in the verification process, resulting in less human error and a more accurate record of information. Even if a computer on the network were to make a computational mistake, the error would only be made to one copy of the blockchain. In order for that error to spread to the rest of the blockchain, it would need to be made by at least 51% of the network’s computers—a near impossibility.
Typically, consumers pay a bank to verify a transaction, a notary to sign a document, or a minister to perform a marriage. Blockchain eliminates the need for third-party verification and, with it, their associated costs. Business owners incur a small fee whenever they accept payments using credit cards, for example, because banks have to process those transactions. Bitcoin, on the other hand, does not have a central authority and has virtually no transaction fees.
Blockchain does not store any of its information in a central location. Instead, the blockchain is copied and spread across a network of computers. Whenever a new block is added to the blockchain, every computer on the network updates its blockchain to reflect the change. By spreading that information across a network, rather than storing it in one central database, blockchain becomes more difficult to tamper with. If a copy of the blockchain fell into the hands of a hacker, only a single copy of the information, rather than the entire network, would be compromised.
Transactions placed through a central authority can take up to a few days to settle. If you attempt to deposit a check on Friday evening, for example, you may not actually see funds in your account until Monday morning. Whereas financial institutions operate during business hours, five days a week, blockchain is working 24 hours a day, seven days a week. Transactions can be completed in about ten minutes and can be considered secure after just a few hours. This is particularly useful for cross-border trades, which usually take much longer because of time-zone issues and the fact that all parties must confirm payment processing.
Many blockchain networks operate as public databases, meaning that anyone with an internet connection can view a list of the network’s transaction history. Although users can access details about transactions, they cannot access identifying information about the users making those transactions. It is a common misperception that blockchain networks like bitcoin are anonymous, when in fact they are only confidential.
That is, when a user makes public transactions, their unique code called a public key, is recorded on the blockchain, rather than their personal information. Although a person’s identity is still linked to their blockchain address, this prevents hackers from obtaining a user’s personal information, as can occur when a bank is hacked.
Once a transaction is recorded, its authenticity must be verified by the blockchain network. Thousands or even millions of computers on the blockchain rush to confirm that the details of the purchase are correct. After a computer has validated the transaction, it is added to the blockchain in the form of a block. Each block on the blockchain contains its own unique hash, along with the unique hash of the block before it. When the information on a block is edited in any way, that block’s hash code changes—however, the hash code on the block after it would not. This discrepancy makes it extremely difficult for information on the blockchain to be changed without notice.
Even though personal information on the blockchain is kept private, the technology itself is almost always open source. That means that users on the blockchain network can modify the code as they see fit, so long as they have a majority of the network’s computational power backing them. Keeping data on the blockchain open source also makes tampering with data that much more difficult. With millions of computers on the blockchain network at any given time, for example, it is unlikely that anyone could make a change without being noticed.
Bitcoin- Bitcoin is a decentralized digital cryptocurrency which does not need a central bank or single administrator and can be sent from user to user on the peer-to-peer bitcoin network without the need for intermediaries.
White Paper- White paper is an authoritative and explanatory report that states a specific complex a problem and also provides its solution.
Distributed Ledger Technology- Distributed ledger technology (DLT) is a digital system for recording the transaction of assets in which the transactions and their details are recorded in multiple places at the same time. Blockchain is one of the many types of DLT.
P2P Network- Peer-to-Peer computing or networking is a distributed application architecture that partitions tasks or workloads between peers. All the peers have equal rights and advantages and the ‘peers’ are said to form a peer-to-peer network of nodes.
Decentralized Network- A decentralized network is the type of network where resources are allocated to all the nodes present in a network and there is no single point of failure.
Mining- Bitcoin mining is the processing of transactions in the digital currency system, in which the records of current Bitcoin transactions, known as blocks, are added to the record of past transactions, known as the blockchain.
ASIC Miner- An ASIC (application-specific integrated circuit) is a microchip designed for a specific application like mining Bitcoins.
Consensus- A consensus generally means an agreement of a majority. In Blockchain, Consensus Mechanism is used to ensure that the proposed agreement is carried out between two or more parties.