Blockchain is a radical technology that is upending several industries right now. The graph of its popularity keeps moving towards the right and up.
Across various industries, it promises to fix the gap in existing solutions and experiences. And every day, people from all walks of life discover it and are eager to learn about it.
However, a lot of people still struggle to understand what it is about and find it hard to grasp its technical details.
To utilize this technology effectively and build useful solutions with it, you need to; have a foundational knowledge of the core technical lingo it is based on, its pros and cons, current use cases, history and more.
This blog post aims to address all of this.
What is a Blockchain?
A blockchain is simply a database of records of which a copy is stored on each computer that makes up its network.
It is a type of distributed ledger and just like a ledger in accounting, it stores logs of information about different activities in a chronologically related order.
Identical copies of this ledger are stored on computers (often called nodes) that are part of a brotherhood of computers.
This brotherhood of computers, referred to as a peer-to-peer network, is in constant interaction with each other sending the latest updates of the ledger to one another.
By design, blockchain is decentralized, immutable, open and secure. This is why it has risen in popularity in recent years. And is actively being experimented with by a burgeoning worldwide community of developers and enthusiasts.
The web3 revolution that is underway is built on the foundation of blockchain technology and is poised to disrupt a lot of traditional industries and bring about a host of new industries.
How did it come to be?
In 2008, Satoshi Nakamoto, an unidentified group or individual released a white paper for a cryptocurrency named Bitcoin.
This happened in the wake of the 2008 financial recession that saw some prominent US banks disappear from existence.
The public distrust for these big banks and the financial system was quite palpable in this period because aside from the shady activities they had been involved with in the past, these banks also played a huge role in causing the recession.
This debacle made it clear that there was a need for a makeover in the financial system.
Satoshi’s white paper talked about some of the inherent problems of the incumbent financial system and proposed a solution to fix them.
The solution became the world’s first cryptocurrency called Bitcoin which is quite popular today.
While Bitcoin itself is a fascinating innovation, people were drawn to the technology underlying its implementation.
In the white paper, Satoshi described a time-stamped record of transactions that would be proof that a financial payment had occurred.
According to the paper, a copy of this record would be held by each network participant as opposed to being stored centrally and would be open and verifiable by its network participants amongst other features.
Though it was not explicitly called a ‘blockchain’ in the paper, it ended up being referred to by this name.
Its usage in Bitcoin piqued the interest of different individuals who believed that it could be applied in other domains besides digital currency.
Since the unveiling of Bitcoin, there has been a constant release of various projects built on top of blockchain technology exploring various use cases.
A number of these projects have recorded great success. Today, some popular projects utilizing the technology are Ethereum, Cardano, and Ripple to name a few.
Why is blockchain important?
Since its distinction from cryptocurrency and its increasing application in other domains, its prospective importance in everyday life keeps being evident. Although much of its application in various projects in progress is experimental, there is hope that its potential real-life use cases would be realized soon because tons of capital is currently being invested in various projects.
But why should anyone give a damn about this technology? Here are some reasons you should care
Privacy and control
Blockchain solves the problem of data privacy and control that we face today. The centralized web business model which is a result of the current implementation of the internet has been a dire source of concern for lots of people. The data people create when they surf the internet today is most times aggregated and stored in centralized locations owned and controlled by web companies without the consent of the people generating it. This data often contains personally identifying information and should it get into the hand of bad actors, could lead to devastating outcomes.
Bad actors have typically targeted these web companies with their centralized storage location for this highly-priced bounty and have in some cases been successful. The news media is filled with lots of stories of how the allegedly secure central storage locations of these web companies were compromised by malevolent actors. However, blockchain solves this problem through a combination of decentralization and cryptography.
Data stored on a blockchain cannot be traced back to a real human because it is obscured by some cryptographic action performed on it. And unlike centralized web companies, data on the chain is distributed across the network so that it is not held by a single, central controlling entity. Moreover, the network could be designed in such a way that only owners of data can access and modify it.
Decentralization
Decentralization is at the heart of blockchain. It means that no single entity controls how data stored on the network is accessed and used. Instead, the responsibility for control of data stored on the network is delegated to each participating node in the network. Each node runs a protocol written in computer code. This protocol is a set of rules guiding how data on the network is accessed or modified so no single node can modify or access data on the network on its own accord. Also, should one of the nodes decide to exit the network, it wouldn’t affect the network at all.
The problem with centralized control is seen all around us today. From financial institutions that control access to our money to web companies that control our data for their benefit; there seems to be no end to the faults in the centralized model. All these shortcomings make a decentralized system even more appealing. Asides from this, centralized institutions have a single point of failure, a thing that is nonexistent in a decentralized system.
Inclusion and accessibility
One popular application of blockchain technology is in the provision of financial services. Quite a large population of the world today are unbanked, meaning they have no access to traditional banking services. This is because many of these individuals don’t meet the basic requirements of these financial institutions. For instance, to create a bank account, certain KYC (know your customer) information is required which these classes of individuals cannot readily provide. Hence, they are left out of enjoying the benefits of traditional banking.
Decentralized finance which is a popular use case of the technology aims to resolve this. DeFi aims to lower the barrier to entry for this unbanked population and meet them at the point they are at. A significant portion of the world’s unbanked is living in impoverished conditions which implies that they cannot readily provide for their basic needs and talk less about meeting the requirements of some banks. DeFi would make it possible for these individuals to leap past the restraining requirements of traditional financial institutions and start enjoying the benefits of financial services we already take for granted. Lots of pilot projects are in progress, testing and refining the big promise of this application.
How does blockchain work?
To understand how blockchain works, we need to know the definition and role of certain terms that summarily define the technology. Blockchain at its core is a distributed ledger that is decentralized by design, coordinated by a consensus mechanism and secured with cryptography – the key phrases from this sentence you should know are, distributed ledger technology, decentralization, cryptography and consensus mechanism.
Distributed Ledger Technology
Blockchain is a type of distributed ledger. A distributed ledger is one in which a copy of its ledger is stored across its network of computers and is accessed, updated and validated according to certain defined rules (presumably written in code). This definition is synonymous with what a blockchain is, with a few modifications. It is on this foundation that many of the other characteristics of blockchain technology such as decentralization, security and so on are built.
Decentralization
Given that all the computers in its network hold an identical copy of its database and run the same protocol, no node is superior or subject to another node in the network. Also, no single node or group of nodes can act on their own accord to cause a change in the distributed ledger without the approval and acceptance of other nodes in the network. This characteristic is what makes the blockchain attractive as a replacement for the centralized model of trust prevalent in our society today.
Cryptography
The network’s security is largely dependent on cryptography. Data on a typical blockchain is open and accessible to anyone on the network, however, only so much can be done with it. This data is secured by encryption such that only individuals with the right keys can decrypt it and perform whatever actions they want. Asides from this, other cryptographic tools such as digital signatures and hash functions are part of what makes blockchains secure. Its cryptographic features are part of what makes it unattractive and difficult to hack and manipulate its data.
Consensus mechanisms
This is how the blockchain agrees on what new block of data (often called transactions) should be added to the legacy chain of blocks. There are several of such mechanisms, but the two most popular are proof-of-work and proof-of-stake.
Consensus mechanisms are decentralized systems of governance embedded in the protocol that runs on each node. They are designed in such a way that all bona fide nodes on the network have an equal opportunity to participate in contributing a block. This arrangement makes redundant the hierarchy that would typically be necessary to carry out a similar function in a centralized model.
What are the key components of a blockchain?
A blockchain is typically made up of the following
Nodes
Node is a fancy word for a computer in a blockchain network. These computers run the network’s protocol (which are its guiding rules written in code) and interact with other computers to share information and stay updated. There are different types of nodes with varying functions. In the Bitcoin network, for example, there are – full nodes, light nodes, and miners. And these nodes, all running the network’s protocol, have unique functions.
Blocks
Blocks are fundamentally made up of a collection of transactions and a header that contains metadata about the block. Blocks are created by certain nodes based on the network’s consensus algorithm. For instance, in Bitcoin, certain nodes called miners create blocks by fulfilling the proof-of-work consensus mechanism. In Ethereum, the proof-of-stake consensus algorithm must be fulfilled before a block can be added. Once a block is added to the blockchain, it cannot be altered and the further away a block is from the latest block on the chain, the more confirmed it is. A block header typically contains information such as the previous block’s hash, number of transactions, version of the protocol software client running and some other specific information depending on the kind of consensus algorithm. As part of a security measure, each block is linked to the previous block by including the previous block’s hash in the next block’s header. The only block that breaks this rule is the genesis block and that’s because it is the first block in the network.
Transactions
Transactions are singular entries in the blockchain conveying unique information about activities carried out by users. A transaction is to a blockchain what a record is to a ledger. Transactions are initiated by individuals with a private and public key pair that want to carry out some transfer of ownership or creation of a digital asset.
Hashes
Hashes otherwise known as digital signatures are obtained from hashing algorithms which are cryptographic functions that convert digital data of various forms and sizes into fixed-length alphanumeric strings. These strings are often unique to the digital data supplied to the algorithm. Hence, they serve as the data’s unique signature. Hashing algorithms are used in generating digital signatures for the blocks which are then used to link them to the next block in the chain. An example of a hashing algorithm is SHA-256 (where SHA stands for Secure Hashing Algorithm) used in the Bitcoin network.
Public and Private Keys
Public and private keys are cryptographically connected sets of random numbers that are used to verify and sign transactions respectively. A private key is a very large number from which the public key is generated and is meant to be kept a secret. It is akin to your password and should anyone have access to it, they could sign transactions in your stead. A public key is a key that you can share openly with anyone. It is most times used to generate a public address so users can transfer ownership of a digital asset. Also, they are used to verify that a transaction originated from a person with a certain private key. Public and private key pairs are often kept in wallets for safekeeping.
Wallets
Wallets are used to hold private keys safely for individuals. Private keys are very large numbers that are not often easy to remember. Hence, individuals need a means to easily recall and utilize them when they need to create payments or sign transactions which makes wallets necessary. There are two types of wallet; hot wallet, cold wallet or cold storage. Hot wallets are accessible through the internet. They help individuals to store their keys on private servers linked to the internet. You would typically need to create an account with an online wallet client to use this service. Cold wallets are any means of storing private keys that are not accessible through the internet. It includes writing the keys on paper, printing them out, storing them on USB flash and so on.
What are the types of blockchains?
The types of blockchains that currently exist are
Public blockchains
These blockchains are open (anyone can access their data) and free for anyone to join. All you need to be a part of this kind of blockchain are a computer connected to the internet and the blockchain’s software client (which is often open-source). Also, they are the most decentralized and popular of all types. Their decentralization and security get better as more computers join the network. Of all the types of blockchains, they have the largest number of nodes because of their open and permissionless nature. Bitcoin and Ethereum are examples of this type of blockchain.
Private blockchains
These blockchains, also known as permissioned blockchains, are owned and coordinated by an organization. And this organization controls who gets to join the network and what functions they can perform. The data in this network is not accessible to the public, only members of the network are privy to it. Since they are coordinated by an organization, they are very much centralized. Examples of private blockchains are Hyperledger and Ripple.
Consortium blockchains
These kinds of blockchains are coordinated and set up by a group of organizations in the same industry. The goal of this blockchain is to help these organizations solve challenges general to their industry or inter-organizational relations. Each member organization contributes its node to the network. The data shared is private to the network and this type of blockchain is more decentralized than a private blockchain but less than a public one. Examples of this type are R3 (formed by a consortium of banks worldwide), Cargosmart (a non-profit blockchain consortium for global shipping businesses)
Hybrid blockchains
These blockchains combine the best features of private and public blockchains. It is not open to public access and data is kept private to the network. It has a customizable design such as making data private or public, who can participate in the blockchain, and what part of the blockchain is accessible to the public. These kinds of blockchains can be owned by an organization or group of organizations.
Some use cases of blockchain
Some of the uses of blockchains today are in
Cryptocurrency
The first and most popular application of this technology is cryptocurrency. Here, it solves the double-spend problem that plagued previous digital currency implementations, removes third-party financial institutions and their exorbitant transaction fees, allows borderless financial transactions without an intermediating body to occur in minutes and many other benefits.
Decentralized Applications
Blockchain networks like Ethereum provide a means for developers to create applications on their platform using platform-specific programming languages. These applications are first written in this platform language and then deployed as smart contracts unto the network to be run decentrally. This development opens up a lot of opportunities.
Supply Chain Management
This technology could be used in conjunction with AI, automation and other technology advances to optimize and improve supply chain management. Asides from the increase in efficiency that AI and automation bring, blockchain could help in tracking information on raw materials and products such as provenance, logistics, history and so on in real-time for all stakeholders involved. Also, products and raw materials could be represented as digital assets which can be traded for digital currency on the network.
Digital Identity
Digital identity makes carrying out daily activities easier and should be controlled by individuals behind the identity. Blockchains could help divest control of our identities from central organizations and put them back in our hands. Identities held on the network would be easier to audit and verify and individuals can control who sees what and how long they can access their info.
Voting Systems
The immutable nature of blockchain makes it attractive to be used in voting. Voting conducted through this network helps reduce voter apathy because they no longer need to join long queues and wait for hours to exercise their suffrage. It also helps reduce electoral malpractices and invigorates the desired characteristics of a good election such as anonymity of voters, fairness, participation of the electorate and so on. Also, since blockchain is inherently secure, the cybersecurity and malware risks associated with digital and electronic voting systems are eliminated.
Limitations and Challenges of Blockchains
The challenges facing blockchains in their present incarnation are
Scalability
As more and more people use the network, they create more transactions which need to be processed on time. Currently, the rate at which popular blockchains process transactions is currently on average constant which doesn’t augur well for the exponentially increasing number of transactions to be processed. Bitcoin and Ethereum, the two most popular blockchains are currently contending with these challenges. However, there have been innovative workarounds to fix this issue. For instance, there are lightning networks and segregated witnesses in Bitcoin to help improve processing speed and Ethereum recently upgraded its protocol which amongst other things improved its transaction processing rate.
Interoperability
Solving this problem is key to the widespread adoption of blockchain technology. Given that one blockchain can’t solve all problems, different blockchains tackling different problems spring up constantly. Each blockchain is designed with standards and protocols that are incompatible with other blockchains. Blockchain interoperability would make it possible for two or more blockchains to process one another’s history and exchange data, and digital assets in a compatible way. Accomplishing this could allow users to utilize their tokens across blockchains which would increase adoption and reduce the barrier to entry for users who want to engage with multiple blockchains.
Regulation
The regulatory policies around blockchain technology and its application are mostly vague. This is due to the lack of a good understanding of this emerging technology and its impact on national economies. Its radical and dynamic nature makes it difficult for policymakers to put in place policies that would foster its growth and check its excesses. This uncertainty in regulation is a cause for concern because its widespread adoption hinges on how the government perceives this nascent tech through the kind of regulations it puts in place.
Security concerns
The possibility of a 51% attack on the network is a lingering fear for smaller networks. A 51% attack is when a node or group of nodes control more than 50% of the total hash computing power or staked coins and can manipulate or control the network to cause double-spending of coins, or reorganization of the blockchain as they wish. In addition, there is the risk of digital tokens being stolen by bad actors who exploit bugs in a smart contract or the network protocol. There are popular news stories of this incident occurring.
Conclusion
Blockchain is immutable, secure, decentralized and has a lot of great use cases. While there are a couple of live projects in production based on this tech, there is still a lot of work to be done for it to reach its full potential.
Just like in the early days of the internet when people didn’t know what to make of it, these are the early days of this great technology and a lot of tinkering is still being done to figure out how it could be used to make the world a better place.