Blockchain: Everything You Need to Know
TABLE OF CONTENTS
- What is blockchain?
- Key features of blockchain
- Block and transaction
- How does blockchain work?
- Types of blockchain
- Importance of blockchain
- Blockchain applications
- Blockchain market size
- Blockchain companies
Blockchain, the underlying technology of bitcoin, was once just a buzzword but is now an irreversible trend that has the potential to reshape human society.
There is no consensus on the definition of blockchain. Technically speaking, blockchain is an ever-growing append-only chain of blocks, where blocks are chained together by cryptographically guaranteed hashes. Within each block on the chain are the transaction items and other extra information contained in that network.
Blockchain began as a concept from the bitcoin whitepaper by bitcoin founder Satoshi Nakamoto. The bitcoin paper uses the phrase "chain of blocks" and "block chain" instead of 'blockchain'.
The idea of blockchain first appeared in a research paper "How to Time-Stamp a Digital Document" by Stuart Haber and W. Scott Stornetta. The paper introduced the notion of "chain of time-stamps" similar to our current definition of blockchain. In general, blockchain is a combination of three technologies - cryptography, distributed ledger technology (DLT), and Consensus.
Some key features are created from this combination, making the blockchain unique, the core being immutability, which could have a profound influence on social structure, monetary and financial system, government governing philosophy, value definition, and the list goes on. Blockchain technology is the backbone of transforming our trust from trusted third parties to trust in machines. Blockchain technology is the backbone for the value network that solves the problem of double-spending without the need for a trusted central authority.
Immutability. With blockchain, it is the first time in history that humanity has the ability to keep records permanently. this feature gives us the feeling of "eternality". On the blockchain, the record is undeniable and tamper-proof. Immutability is blockchain’s most important feature. With immutability, blockchain makes trustless applications a reality.
Decentralization. A blockchain's infrastructure is supported by a network of nodes that can be anywhere in the world. Nodes on the network are usually computers and servers distributed globally. The nodes constantly update each other with the latest blockchain data. Unlike a centralized system, there is no single point of failure for the network to be attacked.
Consensus. It is the economic incentive to make miners do the right thing. It is, in essence, a reward mechanism to reward those who contribute to the security of blockchain, thus making the blockchain network more robust with time. In the bitcoin blockchain network, the incentive is newly created bitcoins in the Coinbase transaction plus transaction fees. Token (coin) is not necessarily an element of a blockchain. But most popular blockchains have tokens and most are hard forks or codebase reuse of bitcoin like Ethereum, Litecoin, Bitcoin Cash, BSV, etc. For the bitcoin network, it uses proof-of-work (PoW) consensus to solve probabilistically long-last Byzantine Generals' Problem in distributed systems. As Satoshi said, “The proof-of-work chain is a solution to the Byzantine Generals' Problem...The proof-of-work chain is how all the synchronization, distributed database, and global view problems you've asked about are solved.”
Permissionless. The blockchain network is open to everybody. Everybody can join or leave the blockchain network as a node without any permission. This is really a powerful feature as it decoupled from node numbers and the nodes communication complexity doesn’t necessarily rely on node number.
Block is a collection of transactions. Typically, a block has some metadata like transactions, a hash as a reference to the block, Height, Block reward, timestamp, Nonce, etc. Now in the extended version, it has Miner name, Fee Reward, confirmation, Transaction Volume, etc.
The transaction has a hash, received time, inputs (address and other info), output (address and other inf), etc.
All the block and transaction info are publicly available, but typically you don't know who is behind the address. There are some blockchain explorers you can use to inspect block and transaction details of bitcoin and other crypto blockchains, like blockchain.com, btc.com and blockchair.com
The blockchain working process is simply adding a new block to the existing blockchain recursively. We use the bitcoin blockchain as an example.
(1) When people make transactions, the transactions are broadcast to all miners (full nodes). Then miners collect new transactions into a block.
(2) At the same time, miners will do a proof-of-work puzzle game (proof-of-work) for the right of adding the block. When a miner solved the puzzle game, it broadcasts the block to all nodes
(3) If miners confirmed all transactions in the block are valid and unspent, miners will accept the block. Then miners will use the accepted block's hash as the previous hash and work on the creating next block.
(4) The process above is repeated endlessly.
A blockchain can be public or private. A blockchain can be permissioned and permissionless.
Typical public permissionless blockchains are bitcoin blockchain and Ethereum blockchain.
Typical public permissioned blockchain is R3.
We can categorize blockchain by consensus algorithms as well. Typical consensus algorithms are Proof of Work (PoW), Proof of Stake (PoS), and Delegated Proof-of-Stake (DPoS). PoW is the original consensus in bitcoin. Ethereum is a PoW consensus as well, but in Ethereum 2.0, it will migrate to a PoS consensus. Algorand is a pure PoS based blockchain. EOS claims to be DPoS consensus.
Blockchain’s immutability makes it possible to facilitate direct p2p transactions without trust third parties involved. To understand the importance of blockchain, we need to first understand “trust”.
Credit, Trust and Reliance
Trust and credit are everywhere in our society. Common institutions like banks are built around trust. They are trusted third parties. When you buy a house, many third parties are involved like governments, banks, real estate agencies. When it comes to the monetary and financial industry, almost everything is based on trust. If you save money in banks, your wealth is simply a digital number in bank IT systems and you have to trust them. Almost all financial services are based on trust. Even your money is issued with trust in the central bank. All fiat money is issued based on national credit.
Reducing trust and reliance
Where there is a reliance there is the risk of being enslaved. Government and other institutions tend to abuse and extend its scope in nature. When we delegate more to authorities, there are more risks of abuse. Although we have laws and regulations, these checks and balances are far from perfect when the rules are getting ever more complex. The best way is to reduce the roles of trusted third parties.
Milton Friedman, an American economist and Nobel prize winner, best known for his strong beliefs in free-market capitalism discussed a similar concept when talking about reducing the roles of government in 1999. He said:
"I think that the Internet is going to be one of the major forces for reducing the role of government. The one thing that’s missing, but that will soon be developed, is a reliable e-cash, a method whereby on the Internet you can transfer funds from A to B without A knowing B or B knowing A."
Conducive to Friedman's missing e-cash concept is blockchain-based bitcoin and other cryptos, capable of creating true free markets.
Actually, the core idea behind the bitcoin network is to make possible p2p transactions without having to rely on trusted third parties, thus removing the need for third party agencies.
"[Bitcoin is] a purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution…Commerce on the Internet has come to rely almost exclusively on financial institutions serving as trusted third parties to process electronic payments".
The bitcoin whitepaper, mentions “trust” 14 times. Satoshi Nakamoto also expressed his frustration with having to trust the monolithic central banking system. He wrote:
"The root problem with conventional currency is all the trust that's required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts. Their massive overhead costs make micropayments impossible."
While blockchain removes the trust in monetary and financial systems, it also introduces a new money issuance consensus. Bitcoin creation relies on computing power. When the ways of creating and earning money changes, the value system built around it will change accordingly.
The blockchain’s ability to reduce “trust” is beyond the monetary and financial industry, and government. There are many more blockchain applications. Typically, blockchain's application utilizes blockchain's two features: transparency and privacy.
Blockchain is widely adopted in different industries, including supply chain, insurance, Identity Management, voting system, and IoT.
Real estate. The process of buying a house is quite complex. Many certificates and materials are verified and assessed repeatedly by many parties involved. The process can be reduced and simplified by adopting blockchain-based property ownership certificates and history records. It can avoid paper certificates fraud for renting as well. In addition, blockchain can factor one whole house and sell to different investors by tokenizing the house. But it may have some legal issues. Blockchain can be used in mortgage of the property as well. For example, the Bank of China has adopted blockchain technology in property and the valuation report can be shared among alliance banks without sensitive information disclosure.
Supply chain. Supply chain companies can utilize blockchain's traceability to accelerate the process and provide (a) transparent and full controlled transactions. This can avoid some common problems like smuggling. (2) Auditability and reliability. Since the data on the blockchain can not be altered, all parties involved can trust the data and audit the data immediately and easily.
Insurance. Insurance companies can use blockchain technology to solve the double claim problem without customer data shared and disclosed. AIA International Limited has called for proposals that looked for a blockchain solution to deal with that issue. The solution shares customer information by a fingerprint of data (a.k.a. hash value). Therefore no actual information had been disclosed.
Identity Management. Blockchain-based identity management provides tamper-proof evidence for identity verification while guaranteeing enough privacy. Some universities have adopted blockchain-based certificates which can reduce fake paper ones and simplify the verification process.
Voting system. Voting is important for democracy and the voting result reflects public opinion and interest. Real voters and convenience are key factors for voting. Blockchain guarantees voting without manipulation in the voting process and reduce the risk of a hack.
IoT. IoT devices responsible for the data collection, and blockchain for the data storage. Blockchain guarantees the data in IoT networks are not modified like climate data. Blockchain also enhances IoT network robustness as well.
According to Gartner, the business added value by blockchain will be more than 3.1 Trillion USD by 2030. The growth of the Business Value of Blockchain is divided into 3 phrases: Irrational exuberance, Larger focused investment to large-scale economic value-add. According to PWC's report, blockchain technologies could boost the global economy US$1.76 trillion by 2030.
There are many blockchain companies and startups. Typical emerging blockchain companies are ESO's parent company Block.one, Blockchain.com, BlockStream, Coinbase, Gemini and ConsenSys. Some traditional companies have taken part in the blockchain industry like IBM, PWC and Microsoft.
There are some listed companies with major business being blockchain and crypto-related.
DigitalX (ASX: DCC), provides service for ICO advising.
HIVE Blockchain (TSXV: HIVE), connects blockchain and cryptos to the traditional asset markets.
Northern Data (FWB: NB2), collaborated with Canna to work with AI and blockchain development.
Overstock.com （NASDAQ: OSTK), invests in blockchain ventures spanning from finance to agriculture.
RESAAS Services (TSXV: RSS), brings the real estate industry to a cloud-based and blockchain-powered system.
Grayscale Bitcoin Trust (OTCMKTS: GBTC), established in 2013 by Digital Currency Group, focuses on digital currency investing, primarily bitcoin.
Okg Technology Holdings Ltd (HKG: 1499), Mingxing Xu is the controlling shareholder of both Okg Technology and OKEx.
Huobi Technology (HKG: 1611), is a cryptocurrency exchange and blockchain-related service provider.
Author: Kun Hu.
Johnny Chiu and Lucas Cacioli contributed to the post.
Image source: Shutterstock