This is a complete guide to blockchain technology
In this in-depth guide, you’ll learn:
- What is blockchain technology
- History of Blockchain
- Key elements of a blockchain
- Lots more…. Let’s dive right in.
Blockchain is a system of recording information in a way that makes it difficult or impossible to alter, hack, or cheat the system. Blockchains are essentially digital ledgers of transactions that are duplicated and distributed across a global network of computers.
Information is the lifeblood of business. It’s better if it’s received as fast as possible and as accurately as possible. Information can be delivered in an immediate, transparent, and shared manner through blockchain because the information is stored on a permanent ledger that can only be accessed by network members with permission. Orders, payments, accounts, production, and so on, can all be tracked with blockchain technology. Due to a single view of the truth, you can see all aspects of a transaction from beginning to end, providing greater confidence, as well as new efficiencies and opportunities.
In simple words, Blockchains are constantly growing lists of records – called blocks – that are encrypted and linked together. The ‘Genesis block’ is the first block in any blockchain-based protocol. Except for the Genesis block, each block contains data, a previous hash, and its own hash.
History of Blockchain
- 1991—Scientists Stuart Haber and W. Scott Stornetta created a cryptographic chain of blocks where no one could damage the time-stamps of the document. This was the beginning of Blockchain technology.
- 1998—Nick Szabo, a computer scientist and cryptographer, worked on a decentralized currency. He realized that decentralized ledgers could be used for self-executing code, also known as smart contracts.
- 2008—The first decentralized blockchain was conceptualized by a person (or group of people) known as Satoshi Nakamoto. It is believed that Satoshi Nakamoto is the pseudonymous person or persons who invented bitcoin, wrote the white paper describing bitcoin, and developed and deployed the Bitcoin original reference implementation.
- Bitcoin, a digital currency experiment, was the first major blockchain development. There are millions of people using bitcoins for payments, including the growing remittance market, which now hovers between $700-$900 billion dollars.
Key elements of a blockchain
Distributed ledger technology
Distributed Ledger Technology (DLT) describes the technological infrastructure and protocols that allow simultaneous access, validation, and record updating in an immutable manner across a network that spans multiple entities or locations.
DLT (Distributed Ledger Technology) is a protocol enabling decentralized databases to function securely. The lack of a centralized authority to check manipulation is eliminated with distributed networks.
After a transaction is recorded to the shared ledger, it cannot be changed or tampered with. For a transaction record that contains an error, a new transaction must be added to reverse the error, and then both transactions are visible.
Smart contracts are rules that can be stored on the blockchain and executed automatically. Smart contracts can include terms for travel insurance payments, conditions for corporate bond transfers, and much more.
Use Cases of Blockchain
- Payment Systems -Cross border, Large interbank, & Retail
- Central Bank Digital Currency & Private Sector Stable Value Tokens
- Secondary Market Trading – Crypto-exchanges & custody
- Venture Capital -Crowdfunding through Initial Coin Offerings
- Clearing, Settlement and Processing – Securities & Derivatives
- Trade Finance & Supply Chain -Digitizing paper-based processes
- Digital IDs and Data Reporting
- Secure sharing of medical data
- NFT marketplaces
- Music royalties tracking
- Cross-border payments
- Real-time IoT operating systems
- Personal identity security
- Anti-money laundering tracking system
- Supply chain and logistics monitoring
- Voting mechanism
- Advertising insights
- Original content creation
- Cryptocurrency exchange
- Real estate processing platform
Crypto Assets overview
A decade ago, there was only one example of a crypto asset: bitcoin. Since then, the definition has changed. To understand crypto assets, you must distinguish them from cryptocurrencies and digital assets.
The meaning of cryptocurrency and crypto assets is the same from an accounting perspective. Cryptographic currency and cryptographic asset both fall under this category. No matter which side you choose, you need to realize that these are digital assets, not physical ones. The assets on a crypto asset balance sheet are digital assets.
Characteristics of Crypto assets:
- Crypto assets are encrypted.
- The technology behind crypto assets is distributed ledger technology.
- A third party, such as a bank, is not needed to issue crypto assets, as is the case with bitcoins.
- Crypto assets can be used for three purposes: as investments, as a means of exchange, and as a means of obtaining goods and services.
Blockchain: perception Vs Reality
Types of blockchain networks
There are several ways to build a blockchain network. They can be public, private, permissioned or built by a consortium.
Public blockchain networks
Public blockchains, such as Bitcoin, are open to anyone to join. There are a number of drawbacks to this approach, including high computational power requirements, a lack of privacy for transactions, and weak security. These are important considerations for enterprise use cases of blockchain.
Private blockchain networks
Similar to a public blockchain network, a private blockchain network is a decentralized peer-to-peer network. The network is governed by one organization, which controls who can participate, operates a consensus protocol, and maintains the shared ledger. This can significantly increase trust and confidence between participants, depending on the use case. Integrated with a corporate firewall, a private blockchain can even be hosted on-premises.
Permissioned blockchain networks
The majority of businesses who setup a private blockchain do so on a permissioned network. Permissioned blockchain networks can also exist in public blockchain networks. As a result, the network and transactions are restricted to those who are authorized to participate. Participants must receive an invitation or permission in order to participate.
A blockchain can be maintained by multiple organizations at the same time. Organisations that have been pre-selected determine who may submit transactions and access data. In business, a consortium blockchain is ideal when all participants must be permissioned and share responsibility for the blockchain.
Pros and Cons of Blockchain
The blockchain is almost limitless in its potential as a decentralized form of record-keeping, despite its complexity. Blockchain technology may very well see applications beyond those described above, ranging from greater user privacy to lower processing fees to fewer errors. There are, however, some downsides to this technology.
|Technology that is transparent||Bitcoin mining involves significant technology costs|
|Provides secure, private, and efficient transactions||Low transactions per second|
|Less chance of tampering||History of use in illicit activities, such as on the dark web|
|Reduces costs by eliminating third-party verification||Regulation varies by jurisdiction and remains uncertain|
|Improves accuracy by removing human involvement||Data storage limitations|
Blockchain systems may seem complex, however, the individual technologies that comprise them can be easily understood. Blockchains are based on well-known computer science mechanisms (linked lists, distributed networking) and cryptographic primitives (hashing, digital signatures, public/private keys) mixed with financial concepts (such as ledgers).
The technology behind the blockchain involves the use of cryptographic hash functions as a key component of many operations, including hashing the content of blocks. Hashing is a method of calculating a relatively unique fixed-size output (called a message digest, or just digest) for an input of nearly any size (e.g., a file, some text, or an image).
The process of hashing allows for security to be enabled during the process of a message transmission when the message is intended solely for a specific recipient. The hash is created through a formula, which helps prevent tampering with the transmission.
Cryptographic hash functions are a special class of hash functions whose properties make them ideal for cryptography. It is necessary for a cryptographic hash function to possess certain properties in order to be considered safe.
A transaction is a recording of a transfer of assets (digital currency, units of inventory, etc.) between parties. An analogy to this would be a record in a checking account for each time money was deposited or withdrawn. Blockchains contain multiple transactions in each block. Most transactions require at least the following fields of information, but they can contain more:
- Amount – The total value of the digital asset to be transferred.
- Inputs – A list of the digital assets to be transferred (their total value equals the amount). Note that each digital asset is uniquely identified and may have different values from other assets. However, assets cannot be added or removed from existing digital assets. Instead, digital assets can be split into multiple new digital assets (each with lesser value)or combined to form fewer new digital assets (each with a correspondingly greater value).
- Outputs – The accounts that will be the recipients of the digital assets. Each output specifies the value to be transferred to the new owner(s), the identity of the new owner(s),and a set of conditions the new owners must meet to receive that value. If the digital assets provided are more than required, the extra funds are returned to the sender (this is a mechanism to “make change”).
- Transaction ID/Hash – A unique identifier for each transaction. Some blockchains use an ID, and others take a hash of the specific transaction as a unique identifier.
Asymmetric-key cryptography, or public key/private key cryptography, is a fundamental component of blockchain technologies. Asymmetric-key cryptography uses a pair of keys: a public key and a private key that are mathematically related to each other. The public key may be made public without compromising the security of the process, but the private key must remain secret if the data is to remain encrypted. Despite the relationship between the two keys, it is not possible to determine the private key from the public key.
In asymmetric key cryptography, the different keys of the key pair are used for specific functions, depending on the service provided. For example, when digitally signing data, the cryptographic algorithm utilizes the private key to sign. The signature can then be verified using the corresponding public key.
Asymmetric-Key Cryptography Utilization in Blockchain Systems:
- Private keys are used to digitally sign transactions.
- Public keys are used to derive addresses, allowing for a one-to-many approach for pseudonymity (one public key pair can yield multiple addresses; in some cases, multiple public key pairs are utilized to create multiple addresses).
- Public keys are used to verify signatures generated with private keys.
- Asymmetric-key cryptography provides the ability to verify that the user transferring value to another user is in possession of the private key capable of signing the value.
Addresses and Address Derivation
A user’s address is a short, alphanumeric string derived from the user’s public key using a hash function, along with some additional data (used to detect errors). Addresses are used to send and receive digital assets. Most blockchain systems make use of addresses as the “to” and “from” endpoints in a transaction. Addresses are shorter than the public keys and are not secret. To generate an address, it typically means taking a public key, hashing it, and converting the hash to text:
public keyà hash function à address
Users can generate as many private/public key pairs, and therefore addresses as desired, allowing for a varying degree of pseudo-anonymity. Addresses act as the public-facing “identity” on a blockchain for a user, and oftentimes an address will be converted into a QR code for easier use.
When a blockchain distributes digital assets, it does so by assigning them to an address. To spend that digital asset, a user must prove possession of the address’s corresponding private key. By digitally signing a transaction with the private key, the transaction can be verified with the public key.
A ledger is a collection of transactions. Recently, ledgers have been stored digitally, often in large databases owned and operated by centralized “trusted” third parties for a community of users (i.e., the third party owns the ledger).
In centralized ledgers, records can be lost, destroyed, invalid, incomplete, or altered. In any centralized ledger, it is in the best interest to back up data, verify transactions, include all valid transactions, and not alter history. Through the use of a distributed consensus mechanism, a blockchain-based ledger can resolve these issues. As a result, the blockchain ledger will be copied and distributed amongst every node within the system.