Blockchain technology is the key to a new frontier of decentralized financial applications. Today, we cover the basics to explain blockchain technology to help newcomers in the space gain an introduction to the fascinating industry.
Blockchain technology enables developers to design more secure and more democratic systems for online applications. The technology has the potential to change the way the Internet works by applying its trustless cryptography and decentralized solutions. So, you can think of blockchain as the foundation of “Web3.”
There are at least 100 reasons why blockchain technology is such a big deal. Cryptocurrency and Bitcoin are the most popular of blockchains use cases and an underlying infrastructure for a new financial system is at our doorsteps.
This article will focus on several of the main reasons for its rising popularity, particularly, how the technology actually works. Once you understand the basic mechanics of blockchain technology, you will quickly see why blockchain applications are causing a sweeping change in the way we interact with the digital world.
Blockchain Technology Definition
- A blockchain is a ledger that can record transactions in an open and public way without storing the personal data of its users.
- The computing power for a blockchain is distributed (“decentralized”) across many computer servers who all run the software (and sometimes hardware) for the blockchain ledger. If one server (“node”) goes down, it does not matter, hundreds more are running it live and when the faulty node come back online, it is automatically updated to the current status of the ledger.
- Bitcoin was the first use case of blockchain technology to gain traction, with its origin transaction occurring in 2009. Public blockchains like Bitcoin are open and immutable (changing it is economically infeasible).
- Blockchain industry participants use advanced cryptography, hashing algorithms, incentive mechanisms, game theory, and many other forms of blockchain technology to create applications that use the blockchain as its transaction record.
What is blockchain technology changing?
- Automating error-proof contracts with smart-contracts
- Improving peer-to-peer shared economies
- Increasing crowdsourcing venture capital
- Expanding transparency in both public and private institutions
- Enabling greater supply chain accountability
- Improving functionality (through interoperability) for the Internet of Things (IoT)
- Improved access and accuracy of documents and record-keeping
- A new stock-market economy based on cryptographic tokens
How is blockchain technology affecting all of these things areas and industries? The basic answer is by applying its trademark features of:
- Immutability through hard cryptography: cryptographic blocks
- A decentralized network of participating nodes
- Increased transparency through the use of the “public ledger”
The New Internet
The reason that blockchain technology offers so much potential is that it relies on hard cryptography. Hard cryptography makes tampering with the information held within each data block is nearly impossible. But more then that, blockchain is appealing because it has great potential for a renewed democratization of the Internet.
The original idea behind the Internet was the proliferation of information. And in many ways, it has succeeded. However, some of the issues that the digital age faces are: piracy, hackers, and centralized authority.
In the world of the Internet, it is hard to say who owns what. This has in some ways been very beneficial, enhancing our access to information. But it has also eliminated certain valuable markets. For instance, a market of good quality information. In a world where anyone can say anything, it is not only hard to know what is true, but it is just as hard to get accurate sources.
As a result of this more and more we are seeing subscription services such as Netflix or Apple Music, or JStor for academic material. These gatekeepers have arrived to fill the need, curating and producing quality films, music and research.
A larger problem
While these services offer valuable content, they also highlight a larger problem. The problem is that rather than empower the individual, we still rely on large wealthy companies to sponsor the creation of our music, film and research content. What this often results in is large companies continuing to make more money off the talents of other people.
Moreover, by providing subscription services, Internet users are at the mercy of whatever content these companies want to charge. Companies also control what they deem profitable or willing to share, never mind what you think is interesting or important.
The core problem is that each of these relies on a central authority to distribute content. Blockchain, however, was designed to be a decentralized system. The decentralized network puts the power back in the hands of the many, rather than the privileged few.
Blockchain Technology Explained
Blockchain technology was first implemented by Bitcoin’s anonymous creator Satoshi Nakamoto in 2008. The idea behind Bitcoin was a digital currency that could not be easily forged, duplicated, or tampered with.
This article relies heavily on the work od Daniel Drescher’s book, Blockchain Basics: A Non-Technical Introduction in 25 Steps.
“Blockchain is a tool for achieving integrity in distributed software systems.” – Dresher
The Advantages of Distributed/Decentralized Systems
- Greater computing power: the network does not rely on a central server, instead it applies the resources of combined power from many connected computers.
- Reduced cost: the cost of maintaining a distributed system is lower, even though the initial cost is higher than individual computers because the cost is distributed amongst many.
- Greater reliability: the whole network continues to operate even when an individual in the network crashes, there is no single point of failure. Single supercomputers have lower reliability than distributed systems.
- Organic growth: computing power increases when the power of individual computers is aggregated. This increases the power of the whole system. Individual computers only every provides a maximum level of growth. Eventually, they need to be replaced due to the need for more computing power.
The Purpose of the Blockchain
The blockchain is a part of the implementation layer of a distributed software system. Blockchain can be both centralized and private or decentralized and public. There are possibilities for combinations of both. Exactly how the blockchain runs all depends on who is building the underlying architecture and what it is used for.
The key feature is the information is distributed amongst multiple nodes, with no central origin of control. And information is added cryptographically, which makes the history of the data contained by the blockchain immutable.
Middleman in Peril
When information is primarily digital and not physical, the need for the industry of middlemen is drastically eliminated. The essence of a peer-to-peer system allows individuals to interact directly with one another.
Blockchain’s architecture enables a trustless system of exchange. Trustless means that the design of the cryptography of blockchain’s architecture maintains the security of information in transactions. As a result, there will be a decreasing need for third party systems to ensure accountability and accuracy.
Here is a list of a few industries that will be changed as blockchain technology is applied:
- Music, film, books
- Banks and financial transactions,
- Contracts -with smart-contracts
- Patents and contracts
The Financial Industry
Financial industries are currently impacted most by blockchain technology. The act of transferring money from one country to another requires multiple middlemen along the way, this incurs transaction costs and time sunk. The same is true of bureaucratic processes for licenses and identity cards, even voting.
Peer-to-peer transactions are a threat to the way that financial institutions presently operate. Blockchain eliminates the need for trusted third parties and allows individuals to interact directly with one another.
Blockchain technology makes it possible to maintain the integrity of data and therefore personal property in a distributed, decentralized system.
How it Works
The goal of blockchain technology is a peer-to-peer system of the management of the ownership of digital goods in a trustless environment.
Transactions and Ownership:
The complete history of a transaction (or data) is a good way to determine the most current ownership. Blockchain technology uses cryptography and a distributed network to make this work. Cryptography protects digital ownership in a similar way that physical keys protect your personal property such as your house or car.
The Demands of Ownership Protection
In order for ownership to be protected in both the digital and physical world, it is necessary to identify and authenticate ownership. Thie also means restricting the access of others to your property.
Blockchain technology uses “hash values” to create a clear history of ownership. Blocks of data are linked in a chain that stores the entire history of a transaction. By following the trail and historical record it is easy to determine ownership.
Blockchain’s data structure is a digital ledger of past and present ownership. Distributed ledgers need to operate in a trustless environment. Therefore the history of the ledger is accessible, but also unchangeable (immutable).
Want to learn more about distributed ledgers check out this video.
The append-only ledger
Because you cannot change transactions that have been added to the blockchain, the blockchain needs to be maintained by regularly adding new transactions to prove transfers of ownership. The ledger is, therefore “append-only”, and everyone on the distributed ledger has copies of the transactions. But copies are not enough to prove ownership of a transaction.
The members of the network ensure that only valid transactions are added. Each member is, therefore, a supervisor of its fellow peers. This ensures that only accurate information is added to the blockchain.
Moreover, the network must agree on one version only of any individual transaction in order to avoid duplication. However, there is no central authority to make this decision. So, in a decentralized system, each participating node must decide which is the authentic transaction. Accordingly, in order for a block to be added to the network, there must be a consensus amongst the nodes.
“The goal is the documentation of ownership in a transparent and comprehensible way. Anyone who reads that documentation should be able to make an unambiguous statement concerning the association of the goods to its owners.” – Drescher
Transactions are Documents
Document ownership that uses blockchain depends on a record of the transfer of ownership, and the need to maintain the history of transfers. The current state of ownership of any given transaction is decided on by the maintenance of the public ledger. Every transaction also includes data that points to the original owner. The history of the transaction is stored in a ledger that is essentially an audit trail. Each state of ownership and transfer is part of the data collected in the chain of information in a block; hence blockchain.
Because decentralized blockchains do not have a central authority dictating the cost. Then, users of the blockchain must tell the system in advance how much they are willing to pay for their transactions. The sender, not the recipient, is the one that pays the transaction fee.
The entirety of a blockchain must read like a coherent history of events. So, when a transaction is added to the blockchain it will influence the state of the entire blockchain. That means that a transaction also contains the history of the transfer of ownership from one address to another.
Maintaining the Integrity of the Transaction History
The value of a blockchain is in maintaining its entire history. Therefore, the history of transactions must remain complete and unchanged. A blockchain must have the following qualities.
- Formal correctness: the format of the transaction must fit the script of the program (for example Bitcoin’s script).
- Semantic correctness: the meaning of the transaction must be accurate. So one cannot send cryptocurrency or a pass on ownership for something that they do not actually own. This also means that the network needs to find a consensus for all of the parameters.
- Authorization: the blockchain requires every transaction to carry information that proves that the owner of the account who passes ownership.
- Validating Transactions on the Blockchain: only valid transactions can be added to the history. Therefore, central to the validity of the blockchain is to protect the history from being manipulated or forged.
Therefore to be added to this history or chain of a blockchain, each transaction must conform to the formal and semantic structure of the platform. The block must then be authorized by the network based on the aforementioned criterion.
Hashing is the process of transforming a message of any kind into an alphanumerical collection of data of a fixed length. It is used for encryption, so the original message is hidden behind the hash. Moreover, they are very difficult, and in most cases impossible to recreate.
The recreation of Bitcoin’s SHA-256 works so that solving for a hash function is computationally expensive and difficult. The difficulty of this hash function is central to the security of the digital currency.
Cryptographic hash functions can be thought of as a kind of digital fingerprint, in that it is impossible to duplicate, and therefore useful for security and identification purposes.
Good cryptographic hash functions have the following properties:
- Deterministic: This means that using the same hash function, such as SHA-256, is always going to produce the same output from a set of input. If the input is a message of “Hello”, the output will be the same every time. The function would not be valuable if every time you entered “Hello” you received a different outcome.
Not the change in the example hash output below when the message is changed from hedgetrade rocks to Hedgtrade rocks.
- Pseudorandom: Because hash functions like SHA-256 use so many variables, they create alphanumeric strings of data. As such, they appear to be random outputs. However, each is a unique fingerprint which is what makes it secure.
- One-way usage: The cryptographic design employs one-way usage hash functions. This means that you cannot solve for the original input with the output. This is because of a mathematical function known as elliptical curve functions.
- Collision resistant: Collision resistance is a necessary part of the deterministic nature of a hash function. Because of the large variable set used within the hash function the probability of a different input message having the same hashed output is extremely low.
In order to verify that the data gets unchanged at a later time, a node must be able to recreate the cryptographic hash value. Then, you are able to compare the newly created hash value with the hash value that was created in the past. If both hash values are identical, then you can verify that the data has not been changed.
There is a further feature of SHA-256, which is that it is a “double hash.” This means that the data is hashed twice. So, if you create a hash value before it is sent, then the receiver creates the hash value of the data he or she receives, then both the sender and the receiver compare both hash values. If in the end, both sender and receiver have identical hash values the data was not altered in the course of the transfer.
The Blocks in the Chain
Whenever a new piece of data, or a block, is added to the blockchain, there is a “hash pointer or reference” which points to the previous block in the chain. The hash pointer is necessary for their linkage because “Block 3” will include the pointer to it’s linked “Block 2.”
The first block in a chain is called a Genesis Block and does not have any pointers backward, because there is nothing behind it.
The most current block in the chain is called the “head of the chain” and this is the block that the next block will be added to.
Merkle Trees are used to group together data “trees” so that distinct hashes are available at any time. The word “Merkle” comes from the name of the scientist who came up with the concept.
The tree stores data in a way that is change-sensitive. Each block of data is connected and combined data with hash references. When the data is broken then the references are broken. So, if the chain of reference is broken then it is proof that a part of the data was changed.
Storing blocks this way is also a time-saving way to ensure that the history of the blockchain has not been changed.
Hash Puzzles and Blockchain
The only way to solve a hash puzzle is through computational trial and error. For Bitcoin, this is part of the mining process known as proof of work. The computational challenge is essential to the security of a blockchain. A hash function is designed so that no human could solve for the problem efficiently. Therefore, part of the value of a good hash function is the difficulty of it, or more accurately, the total computational expense.
“Hash puzzles are computational puzzles that can be seen as the digital equivalent to the task of opening a combination lock by trial and error.” – Dresher
The target hash of any block is, therefore, a “nonce,” or a number only used once. As such, to solve for it requires the computational power to continually run tests. Once the hash value satisfies the restrictions, the puzzle is solved. In order to approve a block that wants to be added to the chain is to present a particular nonce.
The higher the difficulty level of a hash the more leading zeros are required. More leading zeros means increased complexity for the hash puzzle is. The more complicated the hash puzzle is the more computational power as well as the time needed to solve it.
The design of hash puzzles is that they can only be solved by computational trial and error. This is a necessary quality in order to maintain the security and quality of a blockchain. The difficulty also means that to solve the puzzle a significant amount of computational power is necessary. This means that it is not easy to approve and add new blocks to a chain.
A Trustless System
As I mentioned at the beginning, if blockchain applications pose any threat to middlemen operations, it is because they have devised a way to manage the problem of trust. We use middlemen and gatekeepers in the absence of the ability to trust the person or company we are dealing with.
Think about it like this; you are happy to take a cheque from your friend because you know they are good for it. You have lent them money before, and they have promptly paid you back.
But that is exactly what banks do not do. They do not just trust that you will pay your mortgage, you need to have collateral and build credit with them.
Blockchain sidesteps this issue by manufacturing a trustless system. That means that you do not need to know the person you are sending money to, or to have the assurance of a financial institution. This is possible because of the linkage of cryptographic blocks which make the blockchain immutable.
The essence of a secure blockchain is that the blocks of data are immutable because they cannot be changed once they have been added to the chain. The data in a blockchain is also ‘read-only,’ which is why it can function as a public immutable ledger.
The way that the immutable transaction history is imposed, is because of changes made to the data obvious to the blockchain. Also, the cost of changing them is prohibitive.
The way this works is that every block written or added to the chain incurs a significant computational cost. This is one of the added benefits of a difficult hash-target, as we discussed earlier. So, if you want to add a block there is significant computational cost. And if you want to change a block you would also have to change all the others that it is attached to.
To change the entire blockchain becomes increasingly challenging as the chain grows because each header will have to fit with the one before it. So in order to change one block, you must change all of the block headers; which is at this point computationally infeasible.
It is however theoretically possible and is referred to as a 51% attack. The basic idea behind it is that by controlling 51% of the hashing/computational power, a collection of nodes could rewrite the blockchain. However, the computational cost is no small feet.
So, the system is trustless because of the complex hash function and the computational cost of attacking the system. Thus playing by the rules is incentivized by design, and so the independently distributed nodes maintain the network accordingly.
Attacking the System
In order to maintain the immutability of the blockchain, each block header contains:
- The root of a Merkle tree containing transaction data
- A hash reference to the header of the preceding block
- The difficulty level of the hash puzzle
- The time when solving the hash puzzle started
- The nonce that solves the hash puzzle
When we talk about “difficulty” in reference to a blockchain, the difficulty refers to how much computational power, or how many guesses it takes to solve for the correct hash. The difficulty is, therefore, a part of the value of the blockchain because it is part of the proof-of-work. It shows the network that the node ran the computations, and did not somehow cheat the system.
It is then also true that a blockchain is secure because it is computationally expensive, and therefore energetically and financially expensive as well.
To effectively and successfully manipulate the transaction history, a malicious node would need to do the following:
- Rewrite the Merkle tree of the manipulated transaction belongs.
- Rewrite the block header to which the root of the rewritten Merkle tree belongs.
- AND, rewrite all succeeding block headers up to the head of the blockchain-data-structure.
- Not to mention hold enough hash power and enough capital to pull this all off.
Moreover, to attack the chain is a race against the legitimate chain. A blockchain is an ever-active being. Solving a hash puzzle takes about 10 minutes. So to race the system the attacker requires at least 210 minutes to embed a manipulation in a transaction that belongs to a block header located 20 blocks below the current head.
The difficulty rate is thus also a crucial operating function. If the difficulty is too low, then the computational costs of changing the blockchain declines and may no longer be prohibitively high enough.
However, if the difficulty is too high, then the computational costs of adding a new block may become too high. This cost can deter network participants, and this is a challenge that Bitcoin presently faces.
One challenge blockchain applications face is to determine the appropriate level of difficulty for the hash puzzles. Maintaining the appropriate level of difficulty is a challenge that needs to be continually managed as the computational power of computers changes with technological advances. At what point the difficulty becomes too high is a genuine issue that blockchains must continue to try to manage.
The Distributed, Decentralized Network
When you hear about blockchain applications you will also hear a lot about “decentralization.” Decentralized means that there is no single authority in charge of maintaining or controlling the information available on the network.
Centralized systems have a single point of origin. From that point, all information is disseminated and censored. So if the system is attacked all information that the server holds is jeopardized. Also, with information only being sent from one general location, there is also a limitation is the speed and power of bandwidth to send information on.
Decentralized systems have therefore established a peer-to-peer system that allows sharing of information about transactions. Peer-to-peer interactions are possible because there is no point of authority coordinating the passage of information. Instead, all nodes on the network facilitate the transfer of the information.
In order for this system to work on each computer that makes up, the peer-to-peer system must receive incoming information about transactions. In doing so, they are able to maintain their own history of transaction data.
Because there is no single point of authority that organizes the network transactions, the challenge is to have all nodes receive information of all transactions.
Do do this, each node is:
- connected to the system through the Internet.
- has a unique address as identification
- can disconnect and reconnect from the network at any time
- independently maintains a list of peers to communicate with
- uses messages to communicate between nodes
Nodes on the Network
So how does blockchain technology get all of these distributed computers or nodes to work together?
Each node is an autonomous computer. It is, therefore, the node’s job to maintain connection and communication with the network. These nodes are rewarded for their work with transaction fees. At present, there is no set standard for the cost of a transaction. Transaction fees are dictated by the supply and demand of the network. As a result, they can be very volatile.
Each computer then maintains a list of peers it communicates with. This list is only a subset of all nodes that make up the entire network. Each computer must regularly verify that those peers are still available. This is done by sending peers a small message, often called “ping.”
When their peers on the network approve the request other computers are added to the system. The new node’s address is then added to the connected network.
When a node joins the peer-to-peer system, it typically establishes connections to many different nodes for the sake of redundancy and security. Doing so ensures that the connection to the system as a whole is maintained, as individual nodes will inevitably disconnect or shut down.
Why distributed networks are so valuable
Distributed networks are valuable because the information is stored all across the network. That means that unlike traditional servers, the information is not in one place as with the traditional centralized network. So, once a node reconnects to the network they receive all transactions of the data and blocks they have missed while offline.
New nodes need to receive the whole history of transactions that have occurred on the blockchain up to the time they joined the system. Transferring a copy of the whole up-to-date version of the blockchain platform to a new node ensures that it becomes a full node after joining the system.
Why Blockchain’s Decentralized Network Works
The following list of rules is courtesy of Danial Drescher. If you are interested in a more detailed discussion of blockchain, I highly recommend this read.
- All nodes receive all the information needed to validate and add transaction data.
- Nodes process new transaction data they receive.
- The blocks created by other nodes are processed immediately on arrival at the node’s inbox.
- Only valid transaction data are added to the blockchain-data-structure.
- All nodes take part in a race for solving the hash puzzle. Due to the nature of the hash puzzle, it is unpredictable which node will solve it first.
- They are informed when a node solves the hash puzzle of a new block.
- All nodes receive the newly created block and recognize the winner of the race for solving the hash puzzle.
- The nodes of the system review and verify newly created blocks and ensure that only correct blocks are accepted.
- They add new blocks to their own copy of the blockchain-data-structure and hence grow the transaction history.
- The collectively maintained transaction history is kept free of invalid transactions and hence maintains integrity.
- No transaction data will be added twice.
- No valid transaction will get lost even if previously processed blocks are reprocessed.
- The system is able to perform ex-post validity checks on the transaction history and correct it retrospectively.
- Nodes have an incentive to process transactions and to create new blocks quickly.
- They also have an incentive to inform all other nodes about a new block because earning a reward depends on having transactions examined and accepted by all other nodes.
- Nodes have an incentive to work correctly, to avoid accepting any invalid transaction data or producing invalid blocks.
- Nodes have an incentive to review and revalidate blocks and transactions in a retrospective way.
Verifying Blocks and Adding Transactions to the Chain
To ensure that only valid transactions are added to the system, all nodes of the system can act as supervisors of their peers. This is tied to the reward system of the blockchain. Nodes are paid with transaction fees (for example, Bitcoin for Bitcoin’s blockchain).
It is in some ways a zero-sum game; if you win the reward by solving for the target hash first, the other nodes lose. However, the secondary aspect of the competition means that there is an incentive to ensure that only valid blocks are added. This is because if the block is deemed invalid, then the race is back on.
There is no central authority to organize the reward; this is done with smart-contracts that automatically payout to the node that fulfills the demands of the system.
And, the blockchain-algorithm is a sequence of programmed instructions that govern how nodes process new transaction data and blocks. This is often referred to as the “consensus mechanism.”
The basics of the blockchain-algorithm rules and procedures work as follows:
- Consensus/Validation Rules
- The reward for solving the target hash
- Punishment for approving invalid blocks
- Incentivization through competition
- Peer control
The validity of each block is evaluated based on two distinct groups of validation rules:
- Validation of the transaction data
- Validation of the block headers
The validation rules for block headers are based on the formal and semantic correctness of the block headers. That means that there is no ambiguity of the data in the block header. This is crucial, as it is part of the validation process; invalid data will stop the transaction.
A central element of validating block headers is the verification of the proof of work or the hash puzzle respectively. Only blocks whose headers contain a correct solution of its individual hash puzzle are processed further. Every block whose header fails the verification of its proof of work is discarded immediately.
Rewards for Valid Blocks
As has been mentioned, the entire cryptographic process of a blockchain and creating valid blocks is costly in terms of energy, time, and money. Solving the hash is intentionally computationally expensive. To solve the hash is to get one step closer to being rewarded.
Rewarding the nodes is how the network ensures that this remains a competitive industry. If your node is fast enough at solving the hash using the necessary data, then the other nodes will review the block.
The first kind of punishment is the lack of reward, even though the node participated in the race. But another more potent form of punishment is in the absence of reward. This can be because the block is a duplicate of an older one, or for lack of proof-of-work.
Due to the cost of solving for a hash as well as the potential reward, blockchains incentivize efficiency and peer-review. If you don’t win you need to make sure that the block that did is correct. If it is incorrect the reward is still up for grabs. And if it is correct then the node needs to move on to solving (or mining) the next block. As a result, the quality competition or the examination of the submitted block is done with a very high level of accuracy.
Healthy competition is driven by the following features of the network:
- Speed competition
- Quality competition
There is also no strong incentive to try and cheat the system because the hash function depends on the data within a transaction. So prematurely solving for a block is not a real possibility.
In the distributed network of a blockchain-algorithm, all participating nodes supervise all other nodes. The nodes both contribute and peer-review simultaneously. Each node verifies transactions and creates new blocks. They also receive, review, and validate the blocks created by other nodes. And so the system takes care of itself. And so long as no individual has exponentially more power than any other, it is fairly egalitarian, but driven by market demand.
Blockchain is being applied to multiple industries and replacing many outdated processes. Here are a few areas and examples of blockchain working its magic:
- Smart-contracts: smart contract automate the completion of a transaction. If all the requirements are met based on the script of the message, then the transaction is validated. If they are not met then the transaction does not go through.
- Share economies: blockchain is improving share economies with low transaction fee peer-to-peer systems, this includes apps like Uber and Airbnb.
- Crowdfunding: to date, Ethereum’s Decentralized Autonomous Organization has the most successful ICO (initial coin offering) success story
- Governance: Countries such as Georgia and Estonia are already applying to improve bureaucratic processes, and increase transparency.
- Supply Chain Auditing: blockchain can improve transparency and movement of product from the producer to the consumer. Microsoft, IBM, and Amazon are all working to be the new leaders of blockchain supply chain auditing. Walmart has already begun experimenting with its implementation.
- File storage: with the redundancy of a distributed network, there is a decreased potential for files to be lost in attacks or technology failures.
- Prediction markets: companies like HedgeTrade are harnessing the power of blockchain to use in prediction markets. Not only does this create a new market, but works to create liquidity in the power of one’s digital reputation.
- Protect Intellectual Property: by using smart-contracts copyright concerns can become a thing of the past, as blockchain makes it easy to automize the sale of intellectual property and patents to the benefit of the creator. This will affect the music and film industries, as well as reduce the need for lawyers.
- Neighbourhood Microgrids: sharing ownership of property will become far less complicated with the use of smart contracts and blockchain’s redundancy.
- Identity Management: this is already at work in Estonia, where the country has fully embraced e-Citizenship.
- Anti Money Laundering and Know Your Customer: Because it is so difficult to trace the movement of assets and track customer information, both the customer and anti-laundering will gain from improved record-keeping and information tracking.
- Personal Data Management: using blockchain patents, it will be easy to profit from the sale of your own personal data. Presently only monopolies like Instagram and Facebook benefit from this data. But that could change with blockchain.
- Stock-trading: a new market of peer-to-peer trading has been created. This included cryptocurrencies as well as other new digital assets.
Although blockchain is moving steadily, there are still several challenges that need to be dealt with before mass adoption is possible.
Disadvantages of Distributed Systems
- Coordination of overhead: there is no central entity to coordinate the members’ participation and output, this leads to challenges in efficiency and cost.
- Communication overhead: there is a cost to maintaining coordination of protocol and sending and receiving messages. This uses computing power that is not directed to actual computing.
- Dependancies on network connectivity: without a network, there is no distribution system or coordination amongst the nodes. Messages to communicate with other nodes depend on the network itself. And therefore the dependency on the network itself is high.
- High program complexity: because of the lack of coordination, this means that more time is spent coordinating the complexity of individual software and programs.
- Security issues: the fewer restrictions to information access the higher the demands are to maintain the security of information sharing.
- Distributed peer-to-peer systems: the nodes (computers) must connect directly to share information. They both supply and consume the resources of the network. Therefore the more customers that use the software the larger and more powerful the system becomes.
Key Ideas to Takeaway
- Hard/Strong Cryptography: Blockchain technology uses hard cryptography to store linked blocks of data. These are often referred to as transactions because they are information and ownership that are being sent from one person to another. Cryptography ensures that the information is hidden, and only the correct recipient can receive the transaction.
- Public ledger and Immutable History: Because blockchain is a collection of cryptographic blocks linked to one another, the history of the chain is where value and security are maintained. This also works as a public ledger that anyone can access with the right digital keys. If the chain is public, then anyone can access the history, as the case for Bitcoin and Ethereum.
- Decentralized v. Centralized Networks: blockchain technology uses distributed nodes that share and store information, as well as maintain the blockchain. This means that no one entity has control over the flow of information, as is the case with centralized networks.
- Digital ownership: Blockchain technology has made digital ownership a reality, and therefore anyone can hold valuable assets on a blockchain. Currently, the most popular digital assets are cryptocurrencies. However, more governments along with the private sector are implementing blockchains to improve daily processes every day.