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What is blockchain technology?

What is blockchain technology?

Blockchain technology is an advanced database mechanism that enables transparent information sharing within a company’s network. A blockchain database stores data in blocks that are linked together in a chain. The data is chronologically consistent because it is not possible to delete or modify the chain without the consensus of the network. As a result, blockchain technology can be used to create an immutable or immutable ledger to keep track of orders, payments, accounts, and other transactions. The system includes built-in mechanisms that prevent unauthorized transaction entries and create consistency in the shared view of these transactions.

Why is blockchain technology important?

Traditional database technologies present several challenges when it comes to recording financial transactions. For example, let’s look at the sale of a property. Once the money is exchanged, ownership of the property is transferred to the buyer. Individually, both the buyer and the seller can record monetary transactions, but neither party is reliable. The seller can easily claim that he did not receive the money even though he did, and likewise the buyer can claim that he paid the money even though he did not.

To avoid potential legal issues, a trusted third party must monitor and validate transactions. The presence of this central authority not only complicates the transaction, but also creates a single point of vulnerability. If the core database were to be compromised, both parties could be harmed.

Blockchain technology mitigates these issues by creating a decentralized and secure system for recording transactions. In the case of real estate transactions, blockchain technology creates a ledger for the buyer and seller. All transactions must be approved by both parties and are automatically updated in both ledgers in real time. Any alteration to historical transactions will damage the entire ledger. These properties of blockchain technology have contributed to its use in various sectors, including the creation of digital currencies such as Bitcoin.

How is blockchain technology used in different sectors?

Blockchain technology is an emerging technology that is being innovatively adopted by various sectors. In the following subsections, some use cases from different sectors are described:

Energy

Energy companies use blockchain technology to create peer-to-peer energy trading platforms and optimize access to renewable energy. For example, let’s look at these uses:

  • Energy companies using blockchain technology created a trading platform for the sale of electricity between individuals. Solar panel homeowners use this platform to sell their excess solar power to neighbors. The process is largely automated: smart meters generate the transactions and the blockchain records them.
  • With crowdfunding initiatives based on blockchain technology, users can finance and purchase solar panels in communities that lack access to energy. Sponsors could also receive rent from these communities once the solar panels are built.

Finance

Traditional financial systems such as banks and stock exchanges use blockchain services to manage online payments, accounts, and market operations. For example, Singapore Exchange Limited , an investment holding company that provides financial trading services throughout Asia, uses blockchain technology to create a more efficient interbank payment account. By adopting blockchain technology, they have solved several challenges, such as batch processing and manual reconciliation of thousands of financial transactions.

Multimedia content and entertainment

Media and entertainment companies use blockchain systems to manage copyright data. Copyright verification is essential for artists to receive fair remuneration. Multiple transactions are required to record the sale or transfer of copyrighted content. Sony Music Entertainment Japan uses blockchain services to make digital rights management more efficient. They have successfully used the blockchain strategy to improve productivity and reduce costs in copyright processing.

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Retail sale

Retail companies use blockchain technology to track the movement of goods between suppliers and buyers. For example, Amazon’s retail service has filed a patent for a distributed ledger technology system that will use blockchain technology to verify that all products sold on the platform are authentic. Amazon sellers can map their global supply chains and allow participants, such as manufacturers, couriers, distributors, end users, and secondary users, to add events to the ledger after registering with a certificate authority. 

What are the characteristics of blockchain technology?

Blockchain technology has the following main characteristics:

Decentralization

Decentralization in the blockchain refers to the transfer of control and decision-making from a centralized entity (individual, organization, or group) to a distributed network. Decentralized blockchain networks use transparency to reduce the need for trust between participants. These networks also prevent participants from exercising authority or control over others in a way that reduces the functionality of the network.

Immutability

Immutability means that something cannot be changed or altered. No participant can manipulate a transaction once someone has posted it to the shared ledger. If a transaction log includes an error, you must add a new transaction to roll back the error, and both transactions will be visible to the network.

Consent

A blockchain system sets rules about the consent of the participants to record transactions. New transactions can only be recorded when the majority of network participants give their consent.

What are the main components of blockchain technology?

The blockchain architecture has the following main components:

A distributed ledger

A distributed ledger is the shared database on the blockchain network that stores transactions, like a shared file that all team members can edit. In most shared text editors, anyone with editing rights can delete the entire file. However, distributed ledger technologies have strict rules about who can edit and how. Entries cannot be deleted once they have been registered.

smart contracts

Companies use smart contracts to self-manage business contracts without the need for a third party to help them. They are programs stored in the blockchain system that are executed automatically when predetermined conditions are met. They run if-then checks so that transactions can be completed safely. For example, a logistics company may have a smart contract that makes payment automatically once the goods arrive at the port.

public key cryptography

Public key cryptography is a security feature to uniquely identify participants in the blockchain network. This mechanism generates two sets of keys for network members. One is a public key that is common to all members of the network. The other is a private key that is unique to each member. The private key and the public key are joined together to unlock the ledger data. 

For example, John and Jill are two members of the network. John records a transaction encrypted with his private key. Jill can decrypt it with her public key. In this way, Jill is certain that John made the transaction. Jill’s public key would not have worked if John’s private key had been tampered with.

How does blockchain technology work?

While the underlying mechanisms of the blockchain are complex, we provide a brief overview in the following steps. Blockchain software can automate most of these steps:

Step 1: Record the transaction

A blockchain transaction shows the movement of physical or digital assets from one party to another on the blockchain network. It is recorded as a data block and can include details such as the following:

  • Who participated in the transaction?
  • What happened during the transaction?
  • When was the transaction made?
  • Where was the transaction made?
  • Why was the transaction made?
  • How much of the asset was exchanged?
  • How many preconditions were met during the transaction?

Step 2: Get Consensus

A majority of the participants in the distributed blockchain network must agree that the recorded transaction is valid. Depending on the type of network, the rules of the agreement may vary, but are usually established at the start of the network.

Once the participants reach a consensus, the transactions on the blockchain are written in blocks equivalent to the pages of a ledger. Along with the transactions, a cryptographic hash function is also added to the new block. The hash function acts like a chain that links the blocks. If the content of the block is changed intentionally or unintentionally, the value of the hash function changes, providing a way to detect data tampering. 

Therefore, blocks and chains are securely linked and cannot be edited. Each additional block reinforces the verification of the previous block and thus of the entire blockchain. This is like stacking blocks of wood to build a tower. Blocks can only be stacked on top and if a block is removed from the middle of the tower, the entire tower collapses.

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Step 4: Share the ledger

The system distributes the latest copy of the central ledger to all participants.

What are the types of blockchain networks?

There are four main types of decentralized or distributed networks on the blockchain:

Public Blockchain Networks

Public blockchains are permissionless and allow everyone to join them. All members of the blockchain have the same rights to read, edit and validate the blockchain. Mainly, people use public blockchains to trade and mine cryptocurrencies like Bitcoin, Ethereum, and Litecoin. 

Private Blockchain Networks

A single organization controls private blockchains, also called managed blockchains. The authority determines who can be a member and what rights they have in the network. Private blockchains are only partially decentralized as they have access restrictions. Ripple, a digital currency exchange network for businesses, is an example of a private blockchain.

Hybrid Blockchain Networks

Hybrid blockchains combine elements of private and public networks. Companies can set up private permission-based systems alongside a public system. In this way, they control access to specific data stored on the blockchain while keeping the rest of the data public. They use smart contracts to allow public members to check whether private transactions have been completed. For example, hybrid blockchains can grant public access to digital currency while keeping bank currency private.

Consortium Blockchain Networks

A group of organizations control the consortium blockchain networks. The shortlisted organizations share responsibility for maintaining the blockchain and determining data access rights. In industries where many organizations have common goals and benefit from shared responsibility, consortium blockchain networks are often preferred. For example, the Global Shipping Business Network Consortium is a non-profit blockchain consortium that aims to digitize the shipping industry and increase collaboration between shipping operators.

What are blockchain protocols?

The term blockchain protocol refers to the different types of blockchain platforms that are available for application development. Each blockchain protocol adapts the basic principles of blockchain to fit specific industries or applications. Some examples of blockchain protocols are provided in the following subsections:

Hyperledger Fabric

Hyperledger Fabric is an open source project with a set of tools and libraries. Companies can use it to build private blockchain applications quickly and efficiently. It is a general-purpose, modular framework that offers unique identity management and access control features. These features make it suitable for various applications such as supply chain tracking, trade finance, loyalty and rewards, and financial asset clearing and settlement.

Ethereum

Ethereum is an open source and decentralized blockchain platform that can be used to build public blockchain applications. Ethereum Enterprise was designed for business use cases.

Corda

Corda is an open source blockchain project designed for businesses. With Corda, interoperable blockchain networks can be created that conduct transactions with strict privacy. Businesses can use Corda’s smart contract technology to conduct direct transactions with value. Most of its users are financial institutions.

Quorum

Quorum is an open source blockchain protocol derived from Ethereum. It is specially designed for use in a private blockchain network, where a single member owns all the nodes, or in a consortium blockchain network, where multiple members own a part of the network.

How did blockchain technology evolve?

Blockchain technology has its roots in the late 1970s, when an information scientist named Ralph Merkle patented hash trees, or Merkle trees. These trees are a computing structure for storing data by linking blocks using cryptography. In the late 1990s, Stuart Haber and W. Scott Stornetta used Merkle trees to implement a system where document timestamps could not be tampered with. This was the first case in the history of blockchains.

The technology has continued to evolve over these three generations:

First generation: Bitcoin and other virtual currencies

In 2008, an anonymous individual or group of individuals known only by the name of Satoshi Nakamoto described blockchain technology in its modern form. Satoshi’s idea of ​​the Bitcoin blockchain used 1 MB blocks of information for Bitcoin transactions. Many of the features of Bitcoin’s blockchain systems are fundamental to blockchain technology even today.

Second generation: smart contracts

A few years after first-generation currencies emerged, developers began to consider blockchain applications beyond cryptocurrencies. For example, the inventors of Ethereum decided to use blockchain technology in asset transfer transactions. His significant contribution was the feature of smart contracts.

Third generation: the future

What are the benefits of blockchain technology?

Blockchain technology offers many benefits for asset transaction management. We list some of them in the following subsections:

advanced security

Blockchain systems provide the high level of security and trust that modern digital transactions require. There is always the fear that someone is manipulating the underlying software to generate fake money for themselves. But blockchain technology uses the three principles of cryptography, decentralization, and consensus to create an underlying software system with a high level of security that is almost impossible to tamper with. There is no single point of failure, and transaction records cannot be changed by a single user.

Greater efficiency

Business-to-business transactions can be time-consuming and create operational bottlenecks, especially when third-party and compliance regulators are involved. Transparency and smart contracts on blockchains make these business transactions faster and more efficient.

Faster audit

Companies must be able to generate, exchange, archive and reconstruct electronic transactions in a secure and auditable way. Blockchain records are chronologically immutable, which means that all records are always ordered by time. This data transparency makes the audit process much faster.

What is the difference between Bitcoin and the blockchain?

Bitcoin and the blockchain can be used interchangeably, but they are two different things. Since Bitcoin was one of the earliest applications of blockchain technology, people inadvertently started using the term Bitcoin to refer to the blockchain, thus creating this misnomer. But blockchain technology has many applications beyond Bitcoin.

Bitcoin is a digital currency that works without any centralized control. Bitcoins were originally created for online financial transactions, but are now considered digital assets that can be converted to any other world currency, such as the dollar or euro. A public Bitcoin blockchain network creates and manages the central ledger. 

Red de Bitcoin

All Bitcoin transactions are recorded in a public ledger, and servers around the world have copies of this ledger. Servers are like banks. Although each bank only knows the money that its clients exchange, Bitcoin servers are aware of all Bitcoin transactions in the world.

Anyone with an extra computer can set up one of these servers, known as a node. It’s like opening your own Bitcoin bank instead of a bank account.

bitcoin mining

On the public Bitcoin network, members mine the cryptocurrency by solving cryptographic equations to create new blocks. The system broadcasts each new transaction to the network publicly and shares it from node to node. Approximately every ten minutes, miners collect these transactions into a new block and permanently add them to the blockchain, which acts as the ultimate Bitcoin ledger.

Mining requires a significant amount of computing resources and takes a lot of time due to the complexity of the software process . In exchange, the miners earn a small amount of cryptocurrency. The miners act as modern workers who record transactions and collect transaction fees.

All network participants reach a consensus on who owns which coins, using blockchain cryptography technology.

What is the difference between a database and a blockchain?

A blockchain is a special type of database management system that has more features than a regular database. In the following list, we describe some significant differences between a traditional database and a blockchain:

  • Blockchains decentralize control without damaging trust in existing data. This is not possible in other database systems.
  • The companies involved in a transaction cannot share their entire database. But in blockchain networks, each company has its copy of the ledger, and the system automatically maintains consistency between the two ledgers.
  • Although in most database systems you can edit or delete data, in blockchains you can only insert data.

How is the blockchain different from the cloud?

The term cloud refers to computing services that can be accessed online. Software as a Service (SaaS), Product as a Service (PaaS), and Infrastructure as a Service (IaaS) can be accessed from the cloud. Cloud providers manage your hardware and infrastructure and give you access to these computing resources over the Internet. They offer many more resources than just database administration. If you want to join a public blockchain network, you need to provide your hardware resources to store your copy of the ledger. You can also use a cloud server for this purpose. Some cloud providers also offer full blockchain as a service (BaaS) from the cloud.

What is blockchain as a service?

Blockchain as a Service (BaaS) is a managed blockchain service provided by a third party in the cloud. You can develop digital services and blockchain applications while the cloud provider provides the infrastructure and tools for building the blockchains. All you have to do is customize existing blockchain technology to make blockchain adoption faster and more efficient.   

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