What is blockchain?
The first implementation of blockchain as the underlying technology of Bitcoin
has led many to associate blockchain with Bitcoin. However, the potential use of blockchain goes far beyond the world of cryptocurrencies
. For some it is a technology that will change our lives, while it is a dream for others; no technology has released so much discussion since the advent of the internet. Despite the many headlines on the blockchain, however, technology remains difficult to grasp for many.
A blockchain is a decentralized, distributed record or 'ledger' of transactions in which the transactions are stored in a permanent and almost invariable manner using cryptographic techniques. Unlike traditional databases, which are managed by a central entity, blockchain relies on a peer- to - peer network that no party can control. Authentication of transactions is achieved by means of cryptographic means and a mathematical 'consensus protocol' which determines the rules by which the general ledger is updated so that participants can work together without any particular trust without being dependent on a single trusted third party. So, blockchain is, as The Economist calls it, a 'trust machine'. Participants in a blockchain can open and check the general ledger at any time.
What is decentralized?
Blockchain is decentralized
. This means that the data is not stored in one place but in several places. With a public blockchain, everyone can save and control this data by downloading software. You then become a so-called 'node', or components in the network with the task of checking and keeping track of the general ledger. In addition to full transparency, this also makes it more difficult for hackers to adjust data, for example. There is no so-called single point of failure. This is because each node has a copy of the ledger, for example, the hacker changed data on one node, the data no longer matches the data on the other nodes and shut your ‘‘computer‘‘. Moreover, it sometimes happens that central systems are offline, this can have several reasons. With a decentralized system, this is virtually impossible, if one node fails, the rest will continue to work. The applications of blockchain are extremely wide and new applications are being developed every day. The invention of blockchain is compared with the invention of the internet.
There are different ways to categorize blockchain. Blockchains are often classified as public (no specific entity manages the platform), private (the platform is controlled by one entity) or managed by a consortium of organizations. Another frequently used classification is permission-less (the blockchain is open to everyone - the most famous example is the Bitcoin network) or authorization (restrictions may be imposed on who can read and/or write on the blockchain). There are in practice many variants of blockchains, depending on the intended purposes.
Features Blockchain Technology
- A decentralized, distributed and transparent architecture of trust: information added to the blockchain is immediately visible to all participants in the network and distributed - that is, each peer maintains a full copy of the data, and updates, if present, are shared with the entire network without anyone having to trust a single central third party. Blockchain ensures immediate transparency - although in the case of consenting blockchains trust is more centralized and the readability of some information can be restricted to participants with permission to better align with the objectives of the blockchain.
- Security, immutability and traceability: the simultaneous use of different cryptographic techniques and the decentralized and distributed nature of blockchain platforms make such platforms highly resistant to attack compared to traditional databases.
- The unchanging nature of blockchain makes it possible to easily verify products and documents - however, it is important to note that while blockchain can help prevent fraud in the general ledger, the manipulation resistance of the technology can not prevent false information in the ledger is entered.
- Automation: to describe the use of smart contracts, as self-executing computer programs, for example, allows automating processes and payments, thereby increasing efficiency.
Pros & Cons of Blockchain
As with any new technology, you will find out that there are pros and cons for blockchain-tech. Blockchain gives numerous advantages, yet it has disadvantages also. Understanding both is crucial for making the right decision when evaluating a certain cryptocurrency investment. Blockchain is no different from other new technology, the advantages it offers come at a cost. There are some cons to the blockchain that must be well considered in order to conclude if blockchain is a wise choice.
Pros of the blockchain technology are:
- No involvement of a 3rd party (central authority). In a decentralized network, there is no central server to authenticate and authorize transactions between peers/users.
- Double Spend Problem. Blockchain is the first technology capable of solving the Double Spend Problem without having to trust on 3rd parties, such as governments.
- Transparent & Verifiable. Accountability to clients and (end)-users, even without permission
- Protected. Control who sees which data and when with a permissioned network
- Quality Control. Track the backgrounds of all supply chain components. Smart Contracts replacing the middlemen.
- Reducing Transaction Costs. Removing middle men reduces cost (example: payment-providers, banks & other financial institutions)
- Tokenization. Produce exchangeable tokens supported by real value
Partly Asset Ownership and Asset Digitization (example: own 1 house for 100%, or own 2 houses for 50%)
- Extremely Fault Tolerant. If a single node loses connectivity to the network it would remain working by other nodes in the network, which will take over his work. Compare it with a group message, if you want to delete a message in the group you will need to delete it on all phones as an everyone carries a copy. Fault tolerance is particularly useful when there are many people participating.
Cons of the blockchain technology are:
- Extremely slow compared with traditional databases (inefficient)
- New technology, continuously changing and evolving
- No centralized ownership or single authority
- Extremely difficult to get a ‘‘helicopter view‘‘ (overview) of all the solution and its possibilities
- Most platforms and projects are still in development mode, and may not be ready for big applications yet.
So, each blockchain is made of peers (computational nodes), initiated by participants, and each of the participants (parties) owns a copy of the transaction ledger. Blockchains are broadly categorized as permissioned or permissionless based on whether those computational nodes are on equal footing, primarily about the access they have, like reading, writing or validating the shared transaction ledger. Cryptocurrencies
such as Bitcoin
are categorized as permissionless blockchains as these grants all the nodes equal rights to perform the above tasks.