Everything About Blockchain Technology

Alex Tarasenko
Alex Tarasenko

Blockchain is among the hot topics of discussion on the digital landscapes in recent years. And while the hype around it is somewhat decreasing, the technology is actually conquering not only the financial industry, but also the markets of education, trade, social interaction, and business operation. 

What exactly is Blockchain? What is its future? And why is so important in the age of ever-growing infosphere? 

Let’s have a closer look at the technology to find it all out. 

What is Blockchain? 

At the core of it, Blockchain is a shared database that is managed independently. Wikipedia defines Blockchain as a “distributed ledger that can record transactions between two parties in a verifiable and permanent way”. In simple terms, the system represents a “chain” of data “blocks”, each containing encrypted information about other blocks to ensure coherency. 

Okay, maybe the “in simple terms” part doesn’t quite apply in this case. Anyways, that’s as simple a definition as it gets. 

To better understand the notion, it is helpful to look at its application using a real-word example. Something like the “Chinese whispers” game…

Chinese Whispers

Perhaps some will recognize the game they used to play in kindergartens back in the day. It looked like this: 

First, you have a number of kids sitting one by one in a line or circle. Then, you give one of them the code word, which the kid then repeats to the next one, and so on. Participants whisper the words so that the message travels through the “chain of kids” and does not get intercepted.

Now, you know how kids are… They get distracted, muffle the words, foul play – all kinds of stuff. So, usually, after a round or two into the game, you have a savagely distorted message. This is Chinese whispers (or spoiled telephone). 

chinese whispers principle

Now, replace those kids with real people on the Internet and a message they transfer slightly more important. Something like a bank account information, or a business contract, or money exchange. Something that HAS to remain authentic and unchanged. Just like with the kids, some of the participating or third parties may want to accidentally (less likely) or deliberately alter the message, which may have disastrous consequences in the “grown-up” world.

This is exactly where the Blockchain technology enters the stage, acting like a cheat sheet for each of the participating kids to check with each time on whether the message they receive matches the initial (true) one. Like that, they can never fool or get fooled by others during the game.   

Of course, the process is much more complex than a paper prompt when it comes to real operations. That said, the principle in place remains mostly the same. 

Blockchain’s history 

While the idea of a distributed database itself appeared back in 1991, the technology only took shape as late as 2008. At that time, somebody under the alias of Satoshi Nakamoto developed it as a transaction ledger for the Bitcoin cryptocurrency. 

Bitcoin soon blew up and became a global thing, giving way to other cryptocurrencies as well. But the Blockchain technology proceeded to expand beyond the notion of e-currencies – becoming the people’s choice wherever multiple parties share sensitive information. 

blockchain structure

How does BlockChain work?

In a blockchain system, data is stored in blocks attributed to nodes (participants of the chain). The effectiveness of such a database model relies on three pillars of security. 

Those are: 

Hashing 

Each of the blocks in a blockchain consists of three essential parts: the block’s data, the block’s hash, and the hash of the previous block. 

  1. The block’s data is simply the information it carries. 
  2. The block’s hash is essentially a recorded version of the block’s data encrypted into a unique code number. 
  3. The previous block’s hash is a hash number of the previous block in the chain.

Whenever someone modifies the content of block A, it receives a new hash number. This makes block B invalid since it contains the initial (unchanged) hash number of block A, which then makes all the following blocks invalid, too. 

block components

So, in order to successfully modify a block in a blockchain, all nodes have to confirm the new hash number of that block, effectively creating a “new” chain. More so, in order to temper with a single block, one would have to alter over 50% of them all.     

Proof of work

Surprisingly enough, modern computing capabilities create the possibility for that kind of operation. To counter this, Blockchain technology utilizes so-called proof of work. 

Proof of work is a mechanism that slows down the creation of new blocks. It is a calculation that needs to be executed before a new block is established or edited. For cryptocurrencies, it usually takes up to 10 minutes to fulfill. Paired with hashing, this makes tampering with block within a blockchain virtually impossible. 

However, there is one more way the technology achieves its Troyan-like wall of security.   

Distribution 

In a blockchain-based database, each node represents a link of the chain without which the entirety of it falls apart – just like an actual chain. Each of the nodes stores a copy of the blockchain, protected by a combination of public and private cryptography keys. 

Blockchain data distribution

Like that, instead of being held centrally, Blockchain data is stored across the network. So, it has neither centralized vulnerabilities nor central points of failure. Since there are no “main” copies of the blockchain with all users granted equal “trust” within the network (no moderators and admin rights) – there is nothing hackers can actually target to compromise the system. It’s like a myriad of shadows casting each other. 

All of this makes (a public) blockchain virtually incorruptible. 

Types of Blockchain

As with any technology out there, there are several types of blockchain each with its own benefits and drawbacks. Those are: 

Public

A public block-chain is completely free to access. This means that anyone with an Internet connection can join in and become a validator to execute the so-called consensus protocol – a collective verification of the chain’s elements. 

This does not mean that participants have access to each other’s block data, which is well protected by private crypto keys. This just means that multiple people ensure a proper hash sequence to grant the chain’s coherence. 

Private 

A private blockchain is held on a secluded basis and requires permission to be accessed. Therefore, one needs an invitation from the admin to join in and participate in the consensus protocol. They also call private blockchains peer-to-peer databases. 

While widely applied, private blockchains are generally less secure and are not as “invincible” as public ones. This is because there are admins with advanced rights over the chain, which means a potential centralized point of vulnerability. Nevertheless, private blockchains are a quite popular solution these days. 

Hybrid

Hybrid blockchains represent a particular combination of public and private chains, depending on which of the methods applies to which parts of the system architecture. 

A hybrid approach provides the owners of a chain with some sort of control over the network while maintaining the security level close to that provided by a fully public blockchain. 

Sidechain

A sidechain is essentially a “backup” version of a blockchain that runs in parallel on the main system and stores the same data while remaining independent by using an individual consensus protocol.

This is virtually another level of security on top of the already secure blockchain system.  

types of blockchain

Blockchain Application

Now that you have a general understanding of what Blockchain is and how it operates, let’s look into where the technology can actually be applied. 

Banking & Finance

Given the nature of blockchain and the opportunities it provides, the finance industry has been the first to adopt the technology into its arsenal of digital tools. 

The already-mentioned Bitcoin has been the pioneer when it comes to blockchain-based monetary operations, paving the way for other financial systems to follow. 

That said, cryptocurrencies represent only a part of the blockchain’s potential in the Finance industry, with a big number of banks relying on the technology in their back-office operations due to security provided by it.    

Smart Contracts

Smart contracts are another point of blockchain’s application. 

Chris DeRose describes smart contracts as “self-automated computer programs that can carry out the terms of any contract. Financial security held in escrow by a network that is routed to recipients based on future events, and computer code.”  

Businesses can use smart contracts to go around regulations and lower the costs of financial operations while maintaining rigid security. This may be useful wherever multiple parties fulfill legal operations, including document turnover, trade, B2C and B2B services, goods supply, commodities renting, social networking… you name it.  

The future of blockchain technology

While the technology is still developing and is not as dominant as one would wish for, BlockChain definitely has a huge potential to grow. 

The combination of simplicity, security, and universal applicability of blockchain makes it a true gem for tasks and projects across all major industries and niches of our digital activity. 

Starting from cryptocurrencies, Blockchain is slowly but surely conquering the preference of businesses around the world. And although a relatively young technology, it seems to be staying around for a long time, if not forever.    

Have questions about Blockchain and whether your business needs it? Leave us a note and we’ll reach back to you!