Since 2008 there have been talks about blockchain technology and its decentralized, distributed public ledger transaction technique. But this concept skyrocketed only after the implementation of the same in cryptocurrency. Although the idea of cryptocurrency is now being challenged, the uses and implementation of blockchain have since then only increased.
Blockchain have been actively worked upon and researched. We have found many ways to have blockchain implemented to increase security and efficiency in many sectors. But what exactly do we know about blockchain?
What is Blockchain?
Well, you must have seen many old school movies when an exchange of money or otherwise between two parties were recorded in a big fat book. This big fat book who is called a ledger.
The transaction between two parties recorded in a very systematic manner. This is to ensure if there was any claim of discrepancy all you had to do was to check the ledger and you would know the complete sequence of the transactions.
Say, a piece of land, Plot 92 was owned by Bob Prichet which was then inherited by his son, Sam. But Sam, in order to get a hold on hard cash, he sells the land to Ryan. Ryan is just an investor who then sells the land to Jack. Now the entire transaction between all the parties involved is mentioned in the ledger as follows –
December 1882 — Sam Prichet Inherits the plot 92 from father Bob Prichet
January 1891 — Sam Prichet sells plot 92 to Ryan Crasta — $400
April 1891 — Ryan Crasta sells plot 92 to Jack Shepherd — $800
Sam realizes he made a mistake and conspires to get his sold land back. He goes to the land office. He informs the custodian that the land is owned by him and not Jack Shepherd who claim to be the owner. The custodian in order to verify this claim checks the ledger which holds the transaction for plot 92. The ledger informs him little lamb was sold by Sam to Ryan on January 1891 which was then sold to Jack Shepherd on April 1891 thus disregarding Sam’s claim to the land.
Blockchain also works with the same technique but with the security and efficiency of the digital world. But Blockchain technology provides you with a lot more advantages than an ordinary ledger.
Blockchain was first introduced by Satoshi Nakamoto. But the technique was not implemented right away. Soon after this technology was implemented in cryptocurrency.
How does Blockchain Technology work?
A blockchain consists of a sequential connection of blocks which contains data, hash Function, nonce, nodes, the hash of the previous block.
Data — The data in the block depends upon the reason for which the blockchain technology is being used. So in case, the blockchain technology is being used to record the history of a land, the data in the block would be the plot number, names of the seller and the buyer and the paid amount. In case it’s being used for cryptocurrency the block data will include the names of the sender and the receiver and the amount.
Hash Function —The hash function acts like the fingerprint of the block. Every block is represented by a unique Hash Function. The size of hash function for every block remains the same. It will take any length data and create a fixed length cryptic output. Hashing works only in one direction so it helps increase the security of the block. If you try to change the content of the block the Hash Function which represents this particular block will change accordingly.
Hash of the previous block — As mentioned, a blockchain consists of a sequential connection of blocks. Let’s consider the previous example –
In the above example, every block contains two hash functions. One represents that very block and the other represents the previous block. The first block is called as Genesis Block and is represented as ‘0’ hash value. In this manner, every block is linked to the previous block. This keeps the record of the transactions in series as they have originally occurred.
The purpose of having the hash of the previous block is to ensure security against hacking. When someone hacks into any of the blocks to modify its content, the hash of the block subsequently changes. This causes the mismatch of the hash function with the next block and it breaks the link.
In the example, if someone modifies the second block, Hash 2 will change to the new hash 4. Once this change is made, the following block which contains the previous hash value as 2 will be disconnected and the chain is broken.
Nonce — It is a number added to each of hash function which can only be used once. This is used in an authentication protocol to ensure the old data is not reused and reworked upon.
Proof of Work — In order to avoid the application of any wrongful changes in a block and the consequent blocks, blockchain technology implements a mechanism called as proof of work. This states that for any changes that are applied it takes a specific amount of time to create the new block. For example — Bitcoin takes 10 minutes to update or add new block to the chain. So if one block is tampered with, the following block will have to be updated as well which would take a long time.
Distributed Network — To secure the data in a blockchain, it uses a P2P network instead of a centralized controlled network. Everyone is allowed to participate. The members of this P2P network is known as Nodes. Every node of the network has a full copy of the blockchain data. The verification of this data is done by every node in the network. At least 50% of the nodes of the P2P network should positively verify the data to add the block to the chain or for the changes to be successfully implemented on any specific block. This is called Mining.
Nodes — It has minimum data required for any transaction to be processed. It sends queries to the full node in case it needs more information to move forward. Need low storage memory.
Full Nodes — Entire copy of the copy of the blockchain. Requires high storage capacity.
Miners — They are full nodes which listen to transactions and add transactions into blocks after carrying out the proof of work. They are rewarded whenever a block is added to the chain.
Where are we currently using Blockchain?
We started with Cryptocurrency but now Blockchains are being used widely across many sectors.
- Tracking eGaming Fraud
- E-Wallet and Payment Gateway Management
- Certification and Authentication of Art
- Diamond Trading
- Royalty Collections for Music
- Oil and Gas Transactions
- Cross Border Payments
- Photo Intellectual Property
- Voter IDs and Identity Verification
- Car Insurance Data
- Food Supply Chain Transparency and sustainability
Why aren’t we using Blockchain Technology more often?
Effective as it may be, we cannot overlook the limitations of using Blockchain Technology.
- Hard to design
- Difficult to manage
- Scaling is hard and needs high storage capacity
- Maintenance is very costly
- The development process is very slow
- Heavy energy and resource consumption
- Security flaws
With all these limitations, blockchain cannot be implemented without costing a good amount of money and resource for standardization, security and better performance.
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Blockchain Technology: Understanding Made Easy For You was originally published in Data Driven Investor on Medium, where people are continuing the conversation by highlighting and responding to this story.