BLOCKCHAIN TECHNOLOGY: HOW IT WORKS

Blockchain Technology is a decentralized, distributed ledger that stores the record of ownership of digital assets. Any data stored on the blockchain is unable to be modified, making the technology a legitimate disruptor for industries like payments, cybersecurity, and healthcare. Let's explore more about what it is, how it’s used, and its history.

Blockchain, sometimes referred to as distributed ledger technology (DLT), makes the history of any digital asset unalterable and transparent through the use of a decentralized network and cryptographic hashing. Blockchain forms a chronological single-source-of-truth for the data.

Let’s breakdown the definition:

1. Ledger: It is a file that is constantly growing.

2. Transparent: Any changes made are documented, preserving integrity and trust.

3. Decentralized: Allows for real-time accessibility, transparency, and governance amongst more than one party.

4. Chronological: Every transaction happens after the previous one.

Why Blockchain is important?

Blockchain is an especially important promising and revolutionary technology because it helps reduce security risks, stamp out fraud, and bring transparency in a scalable way.

Popularized by its association with cryptocurrency and NFTs, Blockchain technology has since evolved to become a management solution for all types of global industries. Today, you can find blockchain technology providing transparency for the food supply chain, securing healthcare, innovating gaming and overall changing how we handle data and ownership on a large scale.

Who uses the Blockchain?

Blockchain technology can be integrated into multiple areas. The primary use of blockchain is as a distributed ledger for cryptocurrencies. It shows great promise across a wide range of business applications like Banking, Finance, Government, Healthcare, Insurance Media and Entertainment, Retail and Investment, etc.

Need for Blockchain

1. Time Reduction

2. Unchangeable transactions

3. Reliability

4. Security

5. Collaboration

6. Decentralized

What are the backbones of Blockchain?

This technology consists of three important concepts for proof-of-work blockchains: Blocks, nodes, and miners.

What is a Block?

Every chain consists of multiple blocks and each block has three basic elements:

? The Data in the block

? The Nonce – “Number used only once”. A nonce in blockchain is a whole number that’s randomly generated when a block is revealed when a block is created, which then generates a block header hash

? The Hash – A hash in the blockchain is a number permanently attached to the nonce. For Bitcoin hashes, these values must start with a huge number of zeroes (i.e., be extremely small).

When the first block of a chain is created, a nonce generates the cryptographic hash. The data in the block is considered signed and forever tied to the nonce and hash unless it is mined.

What is a Miner in Blockchain?

Miners create new blocks on the chain through a process called mining.

In a blockchain, every block has its own unique nonce and hash, but also references the hash of the previous block in the chain, so mining a block isn’t easy, especially on large chains.

Miners usually use special software to solve the incredibly complex math problem of finding a nonce that generates an accepted hash. Because the nonce is only 32 bits and the hash is 256, roughly four billion possible nonce-hash combinations must be mined before the right one is found. When that happens, miners are said to have found the “golden nonce” and their block is added to the chain.

Making a change to any block earlier in the chain requires re-mining not just the block with the change, but all of the blocks that come after. This is why it’s extremely different to manipulate blockchain technology. Think of it as “safety in math” since finding golden nonces requires an enormous amount of time and computing power.

When a block is successfully mined, the change is accepted by all the nodes on the network, and the miner is rewarded financially.

“The whole point of using a blockchain is to let people – in particular, people who don’t trust one another - share valuable data in a secure, tamperproof way.” – MIT Technology Review"

What is a node in Blockchain?

Nodes are the source of truth for a blockchain. Nodes moderate a network, they make sure that users play by the rules. Without them, blockchains would essentially lose their infrastructure.

All tokens and smart contracts exist only in a node. Any website or DApp using the blockchain can read or modify the blockchain through transactions only by sending a request to an active node connected to the network. The more nodes a blockchain hosts, the more decentralized it will be.

What is Decentralization in Blockchain?

One of the most important concepts in blockchain technology is decentralization. No computer or organization can own the chain. Instead, it is a distributed ledger via the nodes connected to the chain. Blockchain nodes can be any kind of electronic device that maintains copies of the chain and keeps the network functioning.

Every node has its own copy of the blockchain and the network must algorithmically approve any newly mined block for the chain to be updated, trusted, and verified. Since blockchains are transparent, every action in the ledger can be easily checked and viewed, creating inherent blockchain security. Each participant is given a unique alphanumeric identification number that shows their transactions.

“Blockchain is composed of encrypted blocks of data which are “chained” together and secured by complex mathematical problems. The mathematical problems involve matching nonces and hashes, making it impossible to change later – The record of previous actions on the blockchain is highly accurate and secure the manipulation.”

What are Smart Contracts in Blockchain?

Smart Contracts are digital, programmed contracts that automatically enact or document relevant events when specific terms of the agreement are met. Each contract is directly controlled through lines of codes stored across a blockchain network. So once a contract is executed, agreement transactions become trackable and unchangeable. Though fundamental to the Ethereum platforms, smart contracts can also be created and used as blockchain platforms like Bitcoin, Cardono, EOS.IO, and Tezos.

What are Tokens in Blockchain?

Tokens are a digital representation of an asset or interest in something and are built on blockchain. They can also be used as investments, to store value or make purchases. Tokens are used to raised funds to develop projects.

Ethereum Programmers can create tokens to represent any kind of digital asset, track its ownership, and execute its functionality according to a set of programming instructions.

Tokens can be music files, contracts, and concert tickets. In the past couple of years, non-fungible tokens (NFTs) grew in popularity. NFTs are unique blockchain-based tokens that store digital media (like music, video or art). Each NFTs has the ability to verify authenticity, past history, and sole ownership of the piece of digital media. NFTs have become wildly popular because they offer a new wave of digital creators the ability to buy and sell their creations while getting proper credit and a fair share of profits.

Blockchain is challenging the current status quo of innovation by letting companies experiment with groundbreaking technology like peer-to-peer energy distribution or decentralization forms for new media. Much like the definition of blockchain, the uses for the ledger system will only evolve as technology evolves.

Types of Blockchains

There are four types of blockchains:

1. Public Blockchains: Public blockchains are open, decentralized networks of computers accessible to anyone wanting to request or validate a transaction (Check for accuracy). Miners who validate transactions receive rewards. Public blockchains use proof-of-work or proof-of-stake consensus mechanisms. Two common examples of public blockchains include the Bitcoin and Ethereum (ETH) blockchains.

2. Private Blockchains: Private Blockchains are not open, they have access restrictions. People who want to join require permission from the system administrator. They are typically governed by one entity, meaning they’re centralized. For example, Hyperledger is a private, permissioned blockchain.

3. Hybrid Blockchains or Consortiums: Consortiums are a combination of public and private blockchains and contain centralized and decentralized features. For example, Energy Web Foundation, Dragon Chain, and R3.

NOTE: There isn’t a 100 percent consensus on whether these are different terms. Some make a distinction between the two, while others consider them the same thing.

4. Sidechains: A sidechain is a blockchain running parallel to the main chain. It allows users to move digital assets between two different blockchains and improves scalability and efficiency. An example of a sidechain is the Liquid Network.

Blockchain Applications / Uses

· Cryptocurrency

· Cybersecurity

· Accounting and record keeping

· Supply chain

· Healthcare

· Sports

· Entertainment

· Real Estate

· Energy

· Insurance

· Services

· Automobiles

· Government

· Banking

· Retail

HISTORY OF BLOCKCHAIN

Although blockchain is a relatively new technology, it already boasts a rich and interesting history. This Brief timeline of some of the most important and notable events in the development of blockchain.

Blockchain Evolution

The first concept of blockchain dates back to 1991, when the idea of a cryptographically secured chain of records, or blocks, was introduced by Stuart Haber and Wakefield Scott Stornetta. Two decades later the technology gained traction and widespread use. The year 2008 marked a pivotal point for blockchain, as Satoshi Nakamoto gave the technology an established model and planned application. The first blockchain and cryptocurrency officially launched in 2009, Beginning the path of blockchain’s impact across the tech sphere.

2008

· Satoshi Nakamoto, a pseudonym for a person or group, publishes “Bitcoin: A Peer-to-Peer Electronic Cash System.

2009

· The first successful Bitcoin (BTC) transaction occurs between computer scientist Hal Finney and the mysterious Satoshi Nakamoto.

2010

· Florida-based programmer Laszlo Hanycez completes the first-ever purchase using Bitcoin – two Papa John’s pizzas. Hanycez transferred 10,000 BTCs, worth about $60 at the time

· The market cap of Bitcoin exceeds 1 million.

2011

· 1 BTC = 1 USD, giving the cryptocurrency parity with the US dollar.

· Electronic Frontier Foundation, Wikileaks and other organizations start accepting bitcoins as donations.

2012

· Blockchain and cryptocurrency are mentioned in popular television shows like The Good Wife, injecting blockchain into pop culture.

· Bitcoin Magazine launched by early Bitcoin developer Vitalik Buterin.

2013

· BTC market cap surpassed $1 billion

· Bitcoin reached $100/BTC for the first time.

· Buterin publishes the “Ethereum Project” paper, suggesting that blockchain has other possibilities besides Bitcoin(like smart contracts).

2014

· Companies Zynga, The D Las Vegas Hotel and Overstock.com all start accepting Bitcoin as payment.

· Buterin’s Ethereum Project is crowdfunded via Initial Coin Offering (ICO) raising over $18 million in BTC and opening up new avenues for blockchain.

· R3, a group of over 200 blockchain firms, is formed to discover new ways blockchain can be implemented in technology.

· PayPal announces Bitcoin Integration

· The first-known NFT is mined

2015

· Number of merchants accepting BTC exceeds 100,000.

· NASDAQ and San-Francisco Blockchain company team up to test the technology for trading shares in private companies.

2016

· Tech Giant IBM announces a blockchain strategy for cloud-based business solutions

· The government of Japan recognizes the legitimacy of blockchain and cryptocurrencies.

2017

· Bitcoin reaches $1,000/BTC for the first time

· Cryptocurrency market cap reaches $150 billion.

· JP Morgan CEO Jamie Dimon says he believes in blockchain as a future technology, giving the ledger system a vote-of-confidence for Wall Street.

· Bitcoin reaches its all-time high at $19,783.21/BTC.

· Dubai announces its government will be blockchain-powered by 2020.

2018

· Facebook commits to starting a blockchain group and also hints at the possibility of creating its own cryptocurrency.

· IBM develops a blockchain-based banking platform with large banks like Citi and Barclays signing on.

2019

· China’s President Ji Xinping publicly embraces blockchain as China’s central bank announces it is working on its own cryptocurrency.

· Twitter & Square CEO Jack Dorsey announces that Square will be hiring blockchain engineers to work on the company’s future crypto plans.

· The New York Stock Exchange (NYSE) announces the creation of Bakkt - a digital wallet company that includes crypto trading.

2020

· BTC almost reaches $30,000 by the end of 2020.

· PayPal announces it will allow users to buy, sell and hold cryptocurrencies.

· The Bahamas becomes the world’s first country to launch its central bank digital currency, fittingly known as the “Sand Dollar.”

· Blockchain becomes a key player in the fight against COVID-19, mainly for securely storing medical research data and patient information.

2021

· Bitcoin surpasses $1 trillion in market value for the first time.

· Popularity for the implementation of Web3 rises.

· El Salvador becomes first nation to adopt Bitcoin as legal tender.

· Tesla buys $1.5 billion in BTC, becoming the first car manufacturer to accept Bitcoin as a form of automobile payment.

· The metaverse, a virtual environment incorporating blockchain technology, garners mainstream attention.

2022

· Cryptocurrency loses $2 trillion in market value, due to economic inflation and rising interest rates.

· Google launches a dedicated Digital Assets Team to provide customer support on blockchain-based platforms.

· The U.K. government proposes safeguards for stablecoin holders.

· Popular video game Minecraft bans blockchain technologies and NFT use in its game.