Understanding The Blockchain – Everything You Need to Know
Here’s a group of internet strangers showing us how it’s done.
… don’t worry anon, he’s ok.
By now, you are most likely familiar with cryptocurrency—the different types, how to use them, and how to mine them. Heck, you might be comfortable enough to start teaching crypto to other people.
But hold your horses, there is still something you must learn before going all professor on your peers, and that’s blockchain.
What is the blockchain?
The blockchain is a decentralized database that stores its information in a sequence of linked blocks. Every new piece of data entered is put into a new block, and that block is then connected with its predecessor.
These blocks are chronologically added to the chain (a long list of other blocks), making it easy to track transaction history and hindering it from being tampered with… that is, unless you can successfully perform a 51% attack. More on that later.
These blocks can store a wide array of information, but for the most part, they’re used as a distributed ledger (a record) to keep track of transactions in the world of crypto.
Blockchain’s shining feature is that blocks can never be reversed or edited by anyone—not even by the mysterious creators of the technology. Thus, the records will always be safe, transparent, and permanent.
And just like you would use a trusted third party like a bank, PayPal, E-transfer, or Western Union to send money or pay for goods or services, you can use the Bitcoin and other blockchain networks in the same manner.
But the most significant benefit is that a blockchain network, like Bitcoin, is globally available and accessible to everyone, and there’s no centralized place for malicious attackers to target!
TL;DR: A blockchain is a trustless medium for storing all kinds of data. It’s a highly secure and scalable solution because a copy of the entire blockchain is held on every participating member’s computer or node in the network.
How does the blockchain work?
Think of the blockchain as an accountant in the form of digital timestamps. This means the entered data and information cannot be tinkered with nor backdated.
We’re looking at you, creative accountants!
When most people think of blockchain, they usually think of Bitcoin (and vice versa). Bitcoin uses the blockchain. But there are so many more great use cases for blockchain other than payment networks.
Blockchain is creating a new kind of commerce that removes the hurdle of trusted third parties who cannot offer their services for a specific industry or region.
The first notable use of the technology was in 2009, with the creation of Bitcoin by Satoshi Nakamoto. So technically speaking, the blockchain is a digital ledger that's uber transparent.
Thanks to cryptographic hashes, every block recorded is permanent and impossible to change. These cryptographic hashes give each block a unique digital fingerprint, aka a hash. This makes each transaction secure, unique, and personally identifiable on the blockchain so it can never be lost.
A hash is generated only when a block is created, so when something inside the block changes, the hashes changes along with it. Also, to ensure the blockchain is never manipulated, the previous block’s hash is contained as information on the new block.
Therefore, a block can only connect to its predecessor if it has its hash. As you can imagine, this can make breaches of security and hacking quite challenging; You’d have to edit the previous hashes of the current block to proceed. If a block is edited and the hashes moving forward don’t match, the entire blockchain is invalid.
Of course, modern computers are more than capable of editing hashes and updating blocks fast enough to tamper with data. So another failsafe technology is added to help secure blockchains: the Proof-of-Work consensus mechanism.
Proof-of-Work (PoW) is a mechanism that slows down the creation of new blocks, allowing for any malicious activity to be detected easily. For example, tampering with a single block to disrupt an entire blockchain would have to prove you worked on that block and every other block that comes after it.
There’s also another type of mechanism called Proof-of-Stake (PoS), an energy-efficient alternative we seek to implement across networks in the future. But that’s for another day.
As you can begin to see, it’s incredibly costly to hack a blockchain. To succeed, a malicious attacker would need approximately 51% of the network’s total mining power.
At the time of writing this article, it takes approximately $700k to successfully 51% attack Bitcoin every hour.
(source)
The best way to defend against a majority attack is to have more participants use the network—a phenomenon known as the network effect.
Together, hashing and PoW/PoS are what make blockchains secure. It doesn’t end there, though—they’re further solidified by using a peer-to-peer (P2P) network, facilitating free participation rather than relying on a central party to control the entire blockchain.
Everyone joining the network gets a copy of the blockchain and serve as nodes (computer terminals) that verify blocks in consensus (a kind of P2P voting) every time a new block gets added. So aside from hashing and PoW/PoS, editing a single block would require you to edit transactions on all nodes. As you can tell, the entire system is reliable and safe.
Another remarkable feature deriving from blockchains is smart contracts, which we will discuss in another feature. Don’t forget, Oracles, DeFi, and NFTs!
Pros & cons of the blockchain
As it is with anything, there are positives and negatives to a given solution. But first, let’s start with the pros of the blockchain.
Pros of the blockchain
- Trustless, Faster, Low Transaction Fees – The blockchain reduces intermediaries while making transactions more efficient and faster.
- High-Quality Data – They use consensus (P2P voting) between all nodes, reducing errors caused by centralized systems like typos or human error.
- Immutable And Transparent – All blocks are linked together to form a verifiable information chain. It’s available for anyone to audit forever.
- Network Effect – Blockchain networks benefit from the network effect phenomenon: every new user or node that participates in the ecosystem helps strengthen the network and make it more valuable. Combining consensus, cryptography, and global scalability is far more efficient, safe, and durable than a centralized third party.
- 100% Control – In a digital world where anything can be duplicated, copied, and censored, you now have complete control over your digital assets as long as you protect your private keys.
Cons of the blockchain
- Majority Attack – Some smaller blockchains run the risk of a 51% attack where a single entity or group of miners collude to control most of the network. With this power, they can reverse transactions, change rules, and create havoc in the community.
- Private Key Control – Much like passwords but more secure, this 256-bit string of letters and numbers is what keeps all your assets in the blockchain safe. The downside of losing your private key is there is no centralized system to help you recover your lost access.
Here's what a bitcoin wallet's private key looks like:
5KRZ595RGW6EC86ww4i42ZG7GJnTYBSQs2LiUg98MQSHLQ94yGx- High Fees And Network Congestion – Fees can become expensive during network congestion, occurring when many people attempt to transact simultaneously. This problem is a limitation of Proof-of-Work chains.
- Lack of privacy – Some chains are entirely transparent and run through consensus, thus creating too much transparency for some organizations. It’s one of the reasons why big corporations and enterprises have yet to adopt blockchain technology—it would reveal their intellectual properties and assets to the public.
Adopting blockchain in today’s world
The non-tampering and backdating features of blockchain can solve some of the issues industries run into today.
An excellent example of this is demonstrated in used-car sales. The car’s odometer provides transparency when disclosing the vehicle’s exact mileage history for buyers and sellers. Blockchain pretty much accomplishes the same thing.
One of the most applicable use cases for blockchain is voting. Not only is every vote on the blockchain transparent as it is secure, but it also saves up on paper and lessens fraud. Since the blockchain cannot be changed and every vote cast is seen across all nodes in the network, every vote is secured, and fraudulent activity can be spotted from a mile away.
This is exactly what Agora from Switzerland is currently working on now. Take a look at the other side of the bridge—DAOs wouldn’t exist without blockchain, as it’s the only way investors can cast their votes with utmost security and transparency.
Within the food industry, the convenience of blockchain’s data history can be put to good use. Employees can find, sort, track, recall and replace bad batches in no time. On top of all this, details of its transportation from the farm to the table are duly noted.
Other use cases include:
- Real Estate
- Insurance Providers
- Commerce Platforms
- Digital Media Rights
- And more…
What does the future look like for blockchain technology?
The most widely applicable use for blockchains is currency. Even centralized institutions that seek the benefits of improving our current monetary systems, such as the G20, IMF, and the World Bank, have started looking at blockchain technology.
Stablecoins are of pique interest—they avoid the volatility and risk of cryptocurrencies while providing a liquid reserve currency for traders and investors.
We’ve also seen some institutions looking at private blockchains to build a centralized system on top of a decentralized network. Simply put, these private blockchains harness the power of decentralization without compromising the traditional systems organizations are built upon. Amazon and BMW are just a few of the hundreds of companies looking into this solution.
As we have seen repeatedly, creativity opens up doors for innovation more than it closes, but it does take time. We do know for sure that this technology is still in its infancy, and it’s up to us to determine how we will use it for the greater good.
We believe blockchain will revolutionize the way our society works. It’s just a matter of time.
