In the world of cryptocurrencies, the term ‘Blockchain’ is constantly brought up. Yet, this technology which offers a solution for decentralised data collection and transmission isn’t widely understood.
Regarding this ubiquitous notion of Blockchain, definitions abound but tend to differ, which results in a little confusion. Some see in it the early stages of what one could call ‘the Internet of Value’. Others still entirely associate it with Bitcoin, the digital currency for which it was originally created, or with cryptography in general. While it is indivisible from the mining process pertaining to many cryptocurrencies, Blockchain does in fact feature multiple advantages.
What is Blockchain?
Overall, the world in which we live is organised around a centralised system within which some key actors are essential to all daily operations. Banks, governments, companies and other organisations form what is known as ‘trusted third parties’. These constitute a central authority. To transfer value (money, in particular), resorting to the infrastructure (physical or dematerialised) these trusted third parties administer and control is unavoidable.
Blockchain technology allows the conception of independent transaction systems which don’t rely on centralisation and can function without a trusted third party. This is the initial application of blockchain: the very definition of a decentralised solution through which value can transit between two entities without the need for an intermediary.
Before Blockchain, sharing a file over the Internet necessarily required its duplication. If, for instance, you wanted to share a document via email, the recipient would receive a copy of the original file, which would remain in your possession. The revolution brought about by Blockchain corresponds to the possibility of transferring value to another user without duplicating it. Thus, a highly reliable, entirely decentralised monetary system was created thanks to the Bitcoin cryptocurrency.
Depending on how one wants to take advantage of Blockchain, its definition can be slightly different. It can indeed be used to:
- Transfer assets (shares, stock, currencies, etc.).
- Ensure full traceability (of the goods and assets transferred).
- Execute smart contracts automatically.
How does Blockchain work?
The article dedicated to Blockchain on Wikipedia is relatively comprehensive and allows one to understand that it is, above all, a database organised as a ‘block chain’. Thanks to a wide network of connected computers, data is added to the Blockchain as if it were new pages of a huge book. This information is added in real time by several participants and, in the case of a public Blockchain, anyone can view these additions as soon as they appear.
Public VS Private Blockchain
In order for a Blockchain to be synchronised, it is necessary to go through a network of computers belonging to unidentifiable users. A public protocol, which anyone may download, defines how the network functions. This is how Bitcoin or Ethereum work, for instance. The maintenance of Ethereum’s Blockchain is conditioned by the use of a Blockchain wallet, Mist. Anyone who has downloaded it can therefore add information to the chain freely.
Conversely, for the private version of a Blockchain, the definition slightly deviates from its original sense. This kind of protocol indeed implies a more centralised solution, as key checking is in effect with regard to viewing privileges, permissions, etc. Only those selected participants may contribute to maintaining and developing a private Blockchain.
Every new set of Blockchain transactions is considered as a new block and added to the chain. As the first consensus in the history of cryptocurrencies, the PoW protocol (or Proof of Work) allows new blocks to be added to the chain through solving complicated equations. For each block added, a certain number of tokens in the currency in question are created. The miner then receives a reward for their work in the form of a pre-defined amount of tokens.
Highly secure and boasting over ten years of continuous operation and improvement, the Proof of Work system is tried and tested. However, its detractors criticise it for being slow and energy greedy.
Bitcoin is the oldest crypto asset, and therefore the first to have relied on PoW. Litecoin, Dogecoin or Ethereum (though the latter is about to adopt a PoS consensus) are some of the more prominent currencies mined thanks to a Proof of Work-type consensus.
In the PoS – or Proof of Stake – consensus, energy consumption is reduced to the point that validating transactions costs almost nothing. Actual people are instead physically involved in the process and need to manually log transactions to create new blocks. These people are selected among the holders of the cryptocurrency in question and receive a certain number of tokens as a reward for their participation. The more tokens they own to begin with, the more likely they are to be chosen to validate a block. This system is less secure than the PoW protocol and organising an attack (a ‘Nothing at Stake’-type attack, in particular) is both easy and inexpensive. The participants may create multiple branches (or ‘forks’) to validate several of them and pocket in additional rewards.
Among the cryptocurrencies obtained by Proof of Stake, some of the most well known are Dash and Qtum.
Among the other consensuses through which cryptocurrencies can be generated is the Proof of History (or PoH) protocol. A possible time advantage is apparently among its benefits, but it isn’t accessible to the general public for the moment.
In the Delegated Proof of Stake (or DPoS) consensus, token holders vote for representatives who will be officially in charge of validating transactions. If the PoS system relies on a wide selection of random participants, DPoS calls upon much fewer delegates and a portion of the profit is given to the voters. The process is time and energy efficient but may lead to a centralisation phenomenon.
Proof of Stake Voting (or PoSV) includes several aspects of DPoS and adds another security layer thanks to elected master nodes whose role is to validate the blocks. This system is less centralised than Delegated Proof of Work.
The Proof of Authority (PoA) consensus is automated and associated to people whose identities are verified. What is rewarded is efficiency and transparency, as the validators are held personally responsible for their own actions. The main downside of this system is centralisation.
Based on the Proof of Stake consensus, Proof of Importance (PoI) relies on mining capacity and on the amount of tokens the miner possesses. This is also a protocol which takes notoriety into account.
Made famous by Ripple, the company which adopted it for its centralised validation process, the Byzantine Fault Tolerance (BFT) consensus is highly secure. It is particularly efficient at preventing erroneous information from being transmitted.
As for the Delegated Byzantine Fault Tolerance (dBFT) consensus, it has the merit to be less centralised than it is in its non-delegated version. The Neo Blockchain offers a good representation of this system.
Who created Blockchain?
In 2008, an individual (or group of individuals) by the pseudonym of Satoshi Nakamoto published a whitepaper entitled ‘Bitcoin: A Peer-to-Peer Electronic Cash System’. That’s when the history of Blockchain started, with its definition answering a number of very precise requirements. The idea was to create a system which would allow transactions to be completed without having to rely on a third-party authority to guarantee their integrity. With Blockchain as its protocol and Bitcoin as its currency, the pioneer concept inspired the launch and the development of many cryptocurrencies and several reinterpretations of the original consensus.
What is a block?
In the technology known as Blockchain, the definition of a ‘Block’ corresponds to a set of transactions or exchanges recorded onto it. For the blocks to be created, they must be validated according to the protocol the network subscribes to.
Then comes the ‘hashing’ step, over the course of which a string of cryptographic and mathematical equations generates a unique signature: the cryptographic hashing function. Each block contains all the information pertaining to the transactions carried out in the previous chain block. That way, the correct order is always observed, and blocks can never be tampered with.
Depending on which protocol is applied, generating a new block can require more or less time and energy. Within each block, transactions are validated through a system which rewards the first miner able to solve the given equation.
What is a Blockchain node?
The nodes are all the computers which hold a copy of a given Blockchain. For instance, there exist no restrictions regarding node creation within the Bitcoin Blockchain. Other Blockchains, however, do not offer such leeway.
All the (very) many nodes contain the exact same information and guarantee the integrity of the Blockchain by definition. Tens of thousands of nodes allow not only for the data to be stored and preserved efficiently – since the possibility of it being lost by all the nodes at the same time is practically non-existent – but also quite securely.
Having a node run on one’s computer is not the same as mining and doesn’t offer any possibility to be financially compensated.
Blockchain: examples of practical applications
Contrary to what one might think, Blockchain doesn’t only pertain to cryptography. Various applications may indeed be considered when it comes to Blockchain: supply chain, logistics, banking, insurance, energy applications and more are possible. Many actors may find the technology to be of interest.
Automating the traceability of products, banking procedures, insurance claims, stock management, etc. is a very efficient way to improve the flow of exchanges and to create better responsiveness at several levels.
Blockchain technology is also under consideration in the medical industry, where it could offer storage and data transfer solutions on par with the promises of IoT (Internet of Things).
As evidenced by the many ICOs, Blockchain is only in its early stages. In 2017, for instance, capital raised (most often in Ethereum or Bitcoin tokens) through this means reached over $3.5 billion.
Lower fees, complete traceability, gain in time, excellent levels of security, decentralisation… these many promises make Blockchain the definition of a future-oriented technology. More and more companies wish to invest in Blockchain start-ups which offer some very unique architectures governed by diverse smart contracts.
Blockchain Smart Contracts
Smart Contracts were created when Ethereum was launched in 2013. Based on a language called ‘Solidity’, smart contracts are now used to automatise many processes without any intermediaries. It is thanks to smart contracts that Blockchains can automatically transfer data, provided that all the pre-defined conditions are met.
Immutably inscribed within a blockchain, they are also unfalsifiable and can function independently.
Thanks to smart contracts and to their ‘if/then’ protocols, Blockchain technology is relevant to various applications which can take external data into account and then interpret it to condition an appropriate response. For instance, an insurance company could pay their clients’ claims on an individual basis. If the driver drove their vehicle during the day and without any weather warning, they would not be eligible for the same claim as if they were driving while a weather alert had been issued.
Blockchain is at the heart of a fascinating albeit complex universe which can confuse those who are new to it. Thus, more and more Blockchain MOOCs are flourishing and allow those looking to understand the characteristics of this technology to take advantage of it more comfortably.