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What Is Blockchain Technology?

What is blockchain technology?

Blockchain technology is an advanced database mechanism that allows transparent information sharing within business networks. A blockchain database stores data in blocks that are linked together in a chain. The data is chronologically consistent because you cannot delete or modify the series without consent from the network.

As a result, you can use blockchain technology to create an immutable or immutable ledger for tracking orders, payments, accounts and other transactions. The system has built-in mechanisms that prevent unauthorized transaction entries and create consistency in a shared view of these transactions.


Why blockchain is important?

Traditional database technologies present a number of challenges for recording financial transactions. For example, consider the sale of an asset. Once the money has been exchanged, the ownership of the asset is transferred to the buyer. 

Individually, both the buyer and the seller may record monetary transactions, but neither source can be trusted. The seller can easily claim that he hasn't received the money even though he should have, and the buyer can equally argue that he hasn't paid the money even though he hasn't.

To avoid potential legal issues, a trusted third party must monitor and verify transactions. The presence of this central authority not only complicates transactions but also creates a point of vulnerability. If the central database was compromised, both parties could suffer.

Blockchain mitigates such issues by creating a decentralized, tamper-proof system for recording transactions. In case of property transactions, blockchain creates a single ledger each for the buyer and the seller. All transactions must be approved by both parties and automatically updated in both your accounts in real time.

Any corruption in historical transactions will corrupt the entire ledger. These properties of blockchain technology have led to its use in various fields, including the creation of digital currency such as bitcoin.


What are the features of blockchain technology?

Blockchain technology has the following main features:

Decentralization

Decentralization in blockchain refers to the transfer of control and decision making from a centralized entity (individual, organization or group) to a distributed network. Decentralized blockchain networks use transparency to reduce the need for trust between participants. These prevent network participants from exerting authority or controlling each other, which reduces the efficiency of the network.

Immutability

Immutability means that something cannot be changed or changed. Once it is recorded in the shared ledger, none of the participants can tamper with the transaction. If a transaction record contains an error, you must add a new transaction to reverse the error, and both transactions will be visible to the network.

Consensus

A blockchain system establishes rules regarding the consent of participants for recording transactions. You can enter new transactions only when the majority of participants in the network give their consent.


How do different industries use blockchain?

Blockchain is an emerging technology that is being adopted by various industries in innovative ways. We describe some use cases in various industries in the following subsections:

Energy

Energy companies use blockchain technology to create peer-to-peer energy trading platforms and streamline access to renewable energy. For example, consider these uses:

  • Blockchain-based energy companies have created a trading platform for the sale of electricity between individuals. Home owners with solar panels use this platform to sell their excess solar power to neighbors. The process is largely automated: smart meters create transactions, and the blockchain records them.
  • With the blockchain-based crowdfunding initiative, users can sponsor and adopt solar panels in communities that lack energy. Sponsors can also get rent for these communities once the solar panels are built.

Finance

Traditional financial systems, such as banks and stock exchanges, use blockchain services to manage online payments, accounts, and market trading. 

For example, Singapore Exchange Limited, an investment holding company that provides financial trading services across Asia, is using blockchain technology to create more efficient interbank payment accounts. By adopting blockchain, they resolved several challenges, including batch processing and manual reconciliation of several thousand financial transactions.

Media and Entertainment

Companies in media and entertainment use blockchain systems to manage copyright data. Copyright verification is important for fair compensation of artists. Many transactions are required to record the sale or transfer of copyrighted material. 

Sony Music Entertainment Japan uses blockchain services to make digital rights management more efficient. They have successfully used blockchain strategies to improve productivity and reduce costs in the copyright process.

Retail

Retail companies use blockchain to track the movement of goods between suppliers and buyers. For example, Amazon Retail has filed a patent for a distributed ledger technology system that would use blockchain technology to verify that all goods sold on the platform are authentic.

Amazon sellers can map their global supply chains by allowing participants such as manufacturers, couriers, distributors, end users and secondary users to add events to the ledger after registering with a certificate authority.


How did blockchain technology evolve?

Blockchain technology has its roots in the late 1970s when a computer scientist named Ralph Merkle patented the hash tree or Merkle tree. These trees are a computer science structure for storing data by linking blocks together using cryptography.

In the late 1990s, Stuart Haber and W. Scott Stornetta used Merkle trees to implement a system in which document timestamps could not be tampered with. This was the first instance in the history of blockchain.

The technology has continued to evolve over these three generations:

First generation - bitcoin and other virtual currencies

In 2008, an anonymous person or group of persons known only as Satoshi Nakamoto outlined blockchain technology in its modern form. Satoshi's idea of the bitcoin blockchain used 1MB of information for bitcoin transactions. Many of the features of the bitcoin blockchain system remain at the heart of blockchain technology today.

Second Generation - Smart Contracts

A few years after the first generation of currencies emerged, developers began to consider blockchain applications beyond cryptocurrency. For example, the inventors of Ethereum decided to use blockchain technology in asset transfer transactions. His important contribution was the smart contract feature.

Third generation – the future

As companies discover and implement new applications, blockchain technology continues to evolve and grow. Companies are solving limitations of scale and computation, and potential opportunities are limitless in the ongoing blockchain revolution.


What are the types of blockchain networks?

There are four main types of decentralized or distributed networks in blockchain:

Public blockchain network

Public blockchains are permissionless and allow everyone to join them. All members of the blockchain have equal rights to read, edit and validate the blockchain. People mainly use public blockchains to exchange and mine cryptocurrencies such as bitcoin, ethereum, and litecoin.

Private blockchain network

A single organization controls a private blockchain, also known as a managed blockchain. The authority determines who can be a member and what rights they have in the network. Private blockchains are only partially decentralized because they have access restrictions. Ripple, a digital currency exchange network for businesses, is an example of a private blockchain.

Hybrid blockchain network

Hybrid blockchains combine elements of both private and public networks. Companies can set up public systems as well as private, permission-based systems. In this way, they control access to specific data stored in the blockchain while keeping the rest of the data public.

They use smart contracts to allow public members to verify whether a private transaction has completed. For example, hybrid blockchains can provide public access to digital currency while keeping bank-owned currency private.

Consortium Blockchain Network

A group of organizations governs the consortium blockchain network. The selected organizations share the responsibility of maintaining the blockchain and determining data access rights. Industries where multiple organizations have common goals and benefit from shared responsibility often prefer consortium blockchain networks. 

For example, the Global Shipping Business Network Consortium is a non-profit blockchain consortium that aims to digitize the shipping industry and increase collaboration between maritime industry operators.


What are the key components of blockchain technology?

Blockchain architecture has the following main components:

A distributed ledger

A distributed ledger is a shared database in a blockchain network that stores transactions, such as a shared file that everyone on a team can edit. In most shared text editors, anyone with editing rights can delete the entire file. However, distributed ledger technologies have strict rules about who can edit and how. You cannot delete entries after they have been recorded.

Smart contract

Companies use smart contracts to self-manage business transactions without the help of third parties. They are programs stored on the blockchain system that run automatically when predetermined conditions are met. They run if-then checks so that transactions can be completed with confidence. 

For example, a logistics company might have a smart contract that automatically makes payments once goods arrive at a port.

Public key cryptography

Public key cryptography is a security feature for uniquely identifying participants in a blockchain network. This mechanism generates two sets of keys for the network members. A key is a public key that is common to everyone in the network. The second is a private key that is unique to each member. The private and public keys work together to unlock the data in the ledger.

For example, John and Jill are two members of the network. John records a transaction that is encrypted with his private key. Jill can decrypt it with her public key. Thus, Jill is confident that John did the transaction. If John's private key had been tampered with, Jill's public key would not have worked.


What are blockchain protocols?

The term blockchain protocol refers to different types of blockchain platforms that are available for application development. 

Each blockchain protocol adapts the basic blockchain principles to suit specific industries or applications. Some examples of blockchain protocols are provided in the following subsections:

Hyperledger fabric

Hyperledger Fabric is an open-source project consisting of a suite of tools and libraries. Enterprises can use it to quickly and effectively build private blockchain applications. It is a modular, general-purpose framework that provides specialized identity management and access control features. These features make it suitable for a variety of applications, such as track-and-trace of supply chains, trade finance, loyalty and rewards, and clearing settlement of financial assets.

Ethereum

Ethereum is a decentralized open-source blockchain platform that can be used by people to build public blockchain applications. Ethereum Enterprise is designed for business use cases.

Corda

Corda is an open-source blockchain project designed for business. With Corda, you can build interoperable blockchain networks that transact in strict privacy. Businesses can use Corda's smart contract technology to transact directly, with value. Most of its users are financial institutions.

Quorum

Quorum is an open-source blockchain protocol derived from Ethereum. It is specifically designed for use in a private blockchain network, where only one member owns all nodes, or in a consortium blockchain network, where multiple members each own a portion of the network.


How does blockchain work?

While the underlying blockchain mechanisms are complex, we give a brief overview in the following steps. Blockchain software can automate most of these steps:

Step 1 – Record the transaction

A blockchain transaction refers to the movement of physical or digital assets from one party to another in a blockchain network. This is recorded as a data block and may include details such as:

  • Who was involved in the transaction?
  • What happened during the transaction?
  • When did the transaction take place?
  • Where did the transaction take place?
  • Why did the transaction happen?
  • How much property was exchanged?

  • How many pre-conditions were met during the transaction?

Step 2 – Gain consensus

Most participants on the distributed blockchain network must agree that the recorded transaction is valid. Depending on the type of network, rules of agreement can vary but are typically established at the start of the network.

Step 3 - Link the Blocks

Once participants reach a consensus, transactions on the blockchain are written in blocks equivalent to the pages of a ledger. Along with the transaction, a cryptographic hash is also added to the new block. The hash acts as a chain that links the blocks together. If the contents of a block are modified, intentionally or unintentionally, the hash value changes, providing a way to detect data tampering.

Thus, the block and chain are securely linked, and you cannot edit them. Each additional block strengthens the verification of the previous block and therefore the entire blockchain. It's like stacking blocks of wood to build a tower. You can only place blocks on top, and if you remove a block from the middle of the tower, the entire tower collapses.

Step 4 - Share Ledger

The system distributes the latest copy of the central ledger to all participants.


What is the difference between Bitcoin and blockchain?

The terms bitcoin and blockchain can be used interchangeably, but they are two different things. Since bitcoin was an early application of blockchain technology, people unknowingly started using bitcoin as blockchain, making it a misnomer. But blockchain technology has many applications outside of bitcoin.

Bitcoin is a digital currency that operates without any centralized control. Bitcoins were originally created to conduct financial transactions online, but are now considered digital assets that can be converted into any other global currency, such as USD or EUR. A public bitcoin blockchain network creates and manages a central ledger.

Bitcoin network

A public ledger records all bitcoin transactions, and servers around the world hold copies of this ledger. Servers are like banks. Although each bank only knows about the money exchanged by its customers, bitcoin servers know about every single bitcoin transaction in the world.

Anyone with a spare computer can set up one of these servers, known as a node. It's like opening your own bitcoin bank instead of a bank account.

Bitcoin mining

On the public bitcoin network, members mine for the cryptocurrency by solving cryptographic equations to create new blocks. The system publicly broadcasts each new transaction to the network and shares it from node to node. Every ten minutes or so, miners aggregate these transactions into a new block and add them permanently to the blockchain, which acts like bitcoin's definitive ledger.

Mining requires significant computational resources and takes a long time due to the complexity of the software process. In return, miners earn a small amount of cryptocurrency. Miners act as modern day clerks who record transactions and collect transaction fees.

Using blockchain cryptography technology, all participants in the network reach a consensus on who owns which coin.


What are the benefits of blockchain technology?

Blockchain technology brings many benefits to asset transaction management. We list some of them in the following subsections:

Advanced security

Blockchain systems provide the high level of security and trust that modern digital transactions require. There is always a fear that someone will manipulate the underlying software to generate fake money for themselves. 

But blockchain uses the three principles of cryptography, decentralization, and consensus to create a highly secure underlying software system that is nearly impossible to tamper with. There is no single point of failure, and a single user cannot change a transaction record.

Better efficiency

Business-to-business transactions can be time consuming and create operational bottlenecks, especially when compliance and third-party regulatory bodies are involved. Transparency and smart contracts in blockchain make such business transactions faster and more efficient.

Fast auditing

Enterprises should be able to securely generate, exchange, store and reconstruct e-transactions in an auditable manner. Blockchain records are chronologically immutable, which means that all records are always sorted by time. This data transparency makes audit processing very fast.


How is blockchain different from the cloud?

The term cloud refers to computing services that can be accessed online. You can access Software as a Service (SaaS), Product as a Service (PaaS) and Infrastructure as a Service (IaaS) from the cloud. Cloud providers manage their own hardware and infrastructure and give you access to these computing resources over the Internet. 

They provide much more resources than just database management. If you want to join a public blockchain network, you will need to provide your own hardware resources to store your copy of the ledger. You can use servers from the cloud for this purpose as well. Some cloud providers also offer full blockchain as a service (BaaS) from the cloud.


What is the difference between a database and a blockchain?

Blockchain is a special type of database management system that has more features than a regular database. We describe some significant differences between a traditional database and a blockchain in the following list:

  • Blockchains decentralize control without damaging trust in the existing data. This is not possible in other database systems.
  • Companies involved in a transaction cannot share their entire database. But in blockchain networks, each company has its copy of the ledger, and the system automatically maintains consistency between the two ledgers.
  • Although in most database systems you can edit or delete data, in blockchain you can only insert data.

What is Blockchain as a Service?

Blockchain as a Service (BaaS) is a managed blockchain service that a third party provides in the cloud. You can develop blockchain applications and digital services while the cloud provider supplies the infrastructure and blockchain building tools. All you have to do is adapt existing blockchain technology, which makes blockchain adoption faster and more efficient.

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