The Blockchain revolution has already begun, and many industries have started to decode their business opportunities. Now, it’s safe to say that blockchain technology is not entirely new; and has become one of the most captivating recent technologies. Not just this, it could be a game-changer for the global economy. As per the report from Market Research Future (MRFR), the global Web 3.0 Blockchain market is expected to reach $6,187.3 million by 2023. Needless to say, there are tremendous market opportunities for the technology.
What is Blockchain Technology? | Blockchain Definition
Blockchain is a shared, immutable, and digital ledger that eases the process of recording transactions and tracking assets in a business network. The asset can be tangible or intangible. Tangible assets include a house, car, cash, etc. On the other hand, intangible assets include intellectual property, branding, copyrights, etc.
Blockchain can be considered as a structure, also known as a block, which stores transactional records of the public in several databases, also known as a chain in a decentralized peer-to-peer network. The blocks in the chain are linked with the use of cryptography. They contain information such as a cryptographic hash of the previous block, a timestamp, and a Merkle tree root (binary tree) which is a data structure that summarizes the transactions that the block holds. Every transaction is considered authorized by the digital signature of owners under this ledger. This way, it authenticates the transaction and makes it secure from interference. Hence, the information contained in digital ledgers is highly secured.
In simple words, the digital ledger is something like a Google spreadsheet shared among several computers in a network, in which the transactional records are stored based on actual purchases. The best part of this is that anybody can see the data, but no one can corrupt it.
When was Blockchain Technology Firstly Introduced?
In 1991, Stuart Haber and W. Scott Stornetta released a paper about how to timestamp documents, a case that is popular in the blockchain industry presently. Stuart Haber and W. Scott Stornetta managed to verify the integrity of data by storing hash values in timestamped blocks that could prove the existence and the version of a document at a certain time.
In 2008, Satoshi Nakamoto (his identity remains unknown until today) authored the Bitcoin paper where he first conceptualized the first blockchain network. From that time, a whole industry was formed that sparked a lot of ground-breaking innovations.
How does Blockchain Work? – Clarifying the Difference Between Blockchain and Bitcoin
Remember both Blockchain and Bitcoin are different.
Bitcoin ≠ Blockchain
Blockchain is the technology behind bitcoin—the offerings of current Blockchain technology track digital assets other than a digital currency. The main objective of this technology is to enable digital information to be recorded and distributed. According to Investopedia, “A Blockchain is a foundation for numerous ledgers or records of transactions that can’t be altered, deleted, or destroyed.”
It is also known as DLT (Distributed Ledger Technology). Since its emergence, the use of Blockchain has exploded via the creation of various cryptocurrencies, smart contracts, decentralized finance (DeFi) apps, and non-fungible tokens (NFTs). It is a tamper-proof data structure that tracks something of value or interest. For example, it passes from owner to owner. This is like any digital asset such as a digital coin, a Word doc, or the serial number of the Microsoft Surface tablet.
In reality, every item associated with a unique digital fingerprint can be tracked on a Blockchain.
What’s more? The exciting thing about Blockchain technology is that it establishes a protocol that enforces transaction rules. Moreover, it works on the principle of no central server or trust authority, speedily and globally. As a result, it eliminates mediators’ roles, reduces transaction fees, and makes commerce more efficient for businesses and consumers alike.
What is the Blockchain Architecture?
As you already know, Blockchain is an open ledger or record in which every transaction is authenticated or authorized. It is designed as a decentralized network for millions of computers, commonly known as “nodes”. It is a distributed database architecture in which each node plays the role of a network administrator.
The best part of Blockchain is that it is impossible to hack since the Blockchain architecture has no centralized information. Instead, it supports a growing list of records known as “blocks”. Each block maintains a timestamp and links to the previous block.
What are the Components of Blockchain Architecture?
User or computer in the blockchain architecture. It means each node has an independent copy of the entire blockchain ledger.
The data record verified by blockchain participants serves as an almost fixed confirmation of the authenticity of a financial transaction or contract.
It is a sealed data compartment that contains a native hash code that identifies the block and the hash code from the previous block in the sequence of blocks and a set of timestamped transactions.
It’s recognized as an ordered sequence of blocks.
Nodes validate blocks before adding them to the blockchain structure.
It is considered a set of rules and agreements for performing blockchain operations.
What are the Advantages of a Blockchain Network?
The main advantages of utilizing a blockchain network are:
Blockchain is not owned by a single entity. It is a peer-to-peer network where there is no anyone in the authority of the network. This feature makes it more secure than other traditional record-keeping systems.
The history of all transactions is recorded in the public distributed ledger. This makes them traceable and transparent as any user could trace them in the network.
All data that is stored in a blockchain cannot be modified, thus blockchain ensures their immutability. The importance of this benefit is that the cryptographic hash function guarantees that changes in blocks are impossible to proceed with.
In which Applications Blockchain Technology is Utilized?
- Tokenizing physical assets
- Voting procedures
- Financial services
- Ownership tracking
- Food production
Blockchain uses consensus algorithms and protocols to elect a leader who will decide the contents of the next block. It serves as a ledger that allows transactions to be placed in a decentralized manner. Technologies based on Blockchain technology include Artificial intelligence and IoT (Internet of Things), while Blockchain, BPM, and Workflow Automation go hand in hand.
What is a consensus algorithm in a Blockchain?
Consensus mechanisms are fault-tolerant mechanisms that allow nodes to accomplish agreements on the state of the network and the validation of data that are stored within this network. It is useful to utilize consensus protocols in decentralized systems, especially for record-keeping processes.
Let’s discuss various consensus algorithms and how they work.
Which types of consensus algorithms are mostly used?
There are various mechanisms that ensure the validity of the transactions that occurred in a network, but the most known are Proof-of-Work and Proof-of-Stake.
1. Proof-of-Work (PoW)
The most popular algorithm is used by currencies such as Bitcoin & Ethereum. PoW requires huge amounts of computing resources as it is conducted through miners, who use this computing power to solve cryptographic problems and verify transactions. Sending spam emails is the most common example.
The concept was first adapted to secure digital money by Hal Finney in 2004. This idea is based on the “reusable proof of work”, which uses the SHA-256 hashing algorithm. So, here is a quick explanation of PoW:
- According to Investopedia, “PoW is considered as a decentralized consensus mechanism. It simply requires members of a network in order to expend efforts to solve an arbitrary mathematical puzzle for preventing anyone from gaming the system.”
PoW sets the difficulty and rules for miners’ work. Mining is an act of adding valid blocks to the chain. This is essential since the chain’s length helps the network follow the correct Ethereum chain and understand the current state of Ethereum. Therefore, the more work is done, the longer the chain will be, and the higher will be the block numbers. This way, a more specific network can be in the current state of things.
Opponents of this consensus algorithm claim that there is a hypothetical scenario where a group of miners can unleash a 51% attack on the network. This means that if they control more than 50% of the network, will allow the transactions to be processed multiple times. Additionally, as the mining difficulty increases over time, there is a continuous demand for higher energy consumption in order to keep the network running, which leads to negative environmental impacts.
2. Proof-of-Stake (
The Proof-of-Stake (PoS) relies on the concept that forgers (instead of a miner in the case of the PoW mechanism) stake an amount of cryptocurrency, as the bigger amounts they own, the bigger the probabilities of mining a block. When a block is forged, forgers get as a reward the transaction fees of this block. The idea of this mechanism is to prevent malicious attacks on the network and incentivize actors to validate legitimately.
3. pBFT (Practical Byzantine Fault Tolerance)
pBFT is a consensus algorithm, first introduced in the late 90s by Barbara Liskov and Miguel Castro, with the aim to work in asynchronous systems, mainly in computing and Blockchain.
Byzantine Fault Tolerance refers to the feature of a blockchain to reach consensus even when some of the nodes in the network fail to respond or respond with fault information. The mechanism of BFT is to safeguard against system failures by supporting collective decision-making. It also focuses on reducing the influence of the fault nodes.
Blockchain technology is undeniably the most innovative and valuable technology, which has been successful in adopting cryptocurrency. Since this highly secured technology plays a significant role in software development, it is widely used in custom software development services for data traversal in peer-to-peer networks and storing data in transparent ledgers. As more and more enterprises embrace blockchain technology, it’s sure to see blockchain growth and innovation for years to come.
With this article, you have understood the basics of Blockchain technology and its fundamentals. Now, you can decide whether Blockchain technology is suitable for your next project or not.
Hardik Shah works as a Tech Consultant at Simform, a leading custom software development company. He leads large-scale mobility programs covering platforms, solutions, governance, standardization, and best practices.