What Are Blockchain Technology

In this current day and age, where every innovation demonstrates unprecedented potential, I still can’t help but be astonished by Blockchain technology’s incredible potential. As both a development platform and a cryptocurrency system, the options are just as limited as the human spirit of innovation. Unfortunately, the knowledge we have about Blockchain technology tends to be scattered, incoherent, or simply plain obsolete. I’ve written this short article to help you realize the theory of Blockchain as well as its fundamental protocols.

First, in Section 1, I’ll describe the background of value storage systems and outline what’s wrong with banks serving as the central authority for maintaining value transactions. In Section 2 we’ll take a look at Blockchain philosophy as a cryptocurrency system, and a development platform. Finally, Section 3 sheds some light on the main element principles of Blockchain technology, the working process, and the current developmental phases.

1. Background

These days, with easy access to WIFI and smartphones at our fingertips, it’s easy to consider the internet for granted. But before you can understand the incredible technology of Blockchain, it’s important to grasp a few basic concepts. The internet is a network of information through which data moves from one node to a different. A node is a connection point that can receive, store, or send data, and each node reproduces and stores data infinitely.

Information on the internet spreads quickly and in a non-unique fashion. Some information shared commercially is not free, but value-driven. For example, a publisher might sell copies of the book but keep the master copy. In this example, information is transmitted through reproduction. But what happens when you’re transmitting value? If you have 100 British pounds (£100), you cannot sell copies in the same manner as a book’s publisher, because it would be valueless. Therefore, value has to be transported through a “move” format and not a “copy” format to avoid duplication. For many years experts have prevented double spending by maintaining ordered ledgers of transactions.

We don’t often take the time to consider that financial transactions generally consist of a date, time, sender, a receiver and an amount. Each person’s stake is dependant on adding incoming amounts and subtracting outgoing amounts. Hence, both significant ways of keeping track of value transfers are cash notes (physically passing money from one hand to a different) and ledgers. However, printing notes and securing against reproduction is quite challenging and involves a relatively great amount of value. Plus, if you tear a note by 50 percent it’s suddenly worth nothing.

Which leaves us with ledgers. When carefully protected, ledgers can keep track of value in a very resilient fashion. However, they require careful attention to detail and plenty of trust. All parties active in the transaction need to make certain that the person updating the records is both efficient and reliable. This implies that the security of a ledger has its very own costs and risks. With the digital revolution, the days of tracking long columns of information yourself are gone. The main method of tracking value, a digitized ledger, involves the same unique transaction details (dates, amount, sender, and receiver) as a physical ledger. For example, when you open a brand new bank account, you’re assigned a merchant account number. This identifies your transactions on a digital ledger. Every bank in the world maintains a unique, synchronous ledger which means that your value is tracked across exclusive storage locations.

Unfortunately, the banking system itself is inherently risky. The machine relies on a set of centralized databases that store worldwide financial transactions. Instead of trusting the folks in charge of updating physical ledgers, consumers are forced to trust the banks themselves for consistency, integrity and transactional security.

2. The Problem with Banks

Giving banks full control of global financial ledgers creates huge financial risks. As financial rule makers, banks are susceptible to toe the line and also twist reality. They often create value out of “thin air”, counting on the fact that they’re seen as being “trustworthy”.

Let’s consider this scenario: a bank lends money to Customer A. The transaction is added to their ledger: “Amount X has been added to Customer A, and after a certain amount of time Amount X, plus Amount Y (interest) is expected from Customer A”. This seems fairly straightforward in the abstract, but in reality, Amount X might not exist before the transaction is documented. How is it possible for banks to produce value from thin air? Through debt! Legally, banks can lend more income than they own, provided they’ve safeguarded their risks. Because of this, a lender pays non-payment insurance in addition to interest levels. This helps to ensure that interest rates are proportional to the risks taken by banks.

The problem with this system? When people take advantage of limitless money power but are unable to repay their loans, it leads to global disaster. In the fall of 2008, the collapse of the financial sector led to the bankruptcy of countless organisations.

3. Blockchain Philosophy

In the fall of November 2008, an author with the pseudonym “Sakoshi Nakamoto” suggested the necessity for a brand new kind of money system - Bitcoin. Nakamoto proposed Bitcoin to create and store value in a totally different digital form - fully decentralized. Recall that in conventional banking systems, value is stored in centralized ledgers and maintained solely by banks. However in a decentralized ledger system, everyone linked to the machine can initiate new transactions and form a consensus to validate transactions. This advancement was the response to decades of expert research. Suddenly, the challenge of decentralizing value transactions on a massive scale seemed truly possible. Bitcoin successfully recreated a decentralized digital money system and inspired new ideas of other generic value mediums, including insurance policies, certificates of ownership and many more. By creating more instances of value decentralization, the “internet of value” was born.

3.1 Blockchain Real World Applications

Though the Bitcoin platform is the most popular application of Blockchain technology, the potential of a Blockchain extends far beyond financial transactions. We can apply currency tracking concepts to other real-world applications, such as property title ownership. Let’s look at it this way: when Person A sells his/her property to Person B, Person B sends the value of the house in currency to Person A. In addition, Person A sends the ownership title or certificate to Person B. Such ownership titles can be registered with a central authority, where the record of the transaction is stored in a digital ledger.

Let’s consider another example. When you operate a movie theatre, you can keep a strict record of all the tickets you generate. You can decide the value of each movie ticket and track the creation, movement and destruction of those tickets in a ledger. In the Blockchain world, this procedure is called tokenization. It gives you to track value apart from just currency. To understand this further, I will describe the concept of transactions in section 3.2.

3.2 The Concept of Transactions

Transactions consist of four basic elements: origin, destination, value, and state. Consider Figure 1, which demonstrates the logic for a basic transaction. If the sender’s balance at the date of the transaction is greater than the transaction value, then the sender’s balance is decreased by the transaction value, and the receiver’s balance is increased by the same amount. In other words, you can only give up to the amount that you have.

On the Bitcoin platform, the essential logic is the same for those transactions in the ledger. These programs can be personalized with the addition of new variables, functions, and more advanced constructs such as loops to allow the execution of varied transaction types on a Blockchain. Moreover, structures like mortgage payment plans, insurance contracts, movie tickets, lottery tickets and energy tokens can be modelled. In the wonderful world of Blockchain, these are called smart contracts.

Smart Contracts

Smart Blockchain contracts are programs stored on a Blockchain. The functions of the programs are executed through transactions. Smart contracts include things of value such as copyrights for artists, contract for lawyers, laws in Congress, votes in polls, invoices for an accountant, bets in a lottery game, maintenance operations in a factory, procedures in a supply chain, shares in a company and many more. The transaction sizes may vary in terms of memory and computer processing power.

4. What is a Blockchain?

A Blockchain is a digital record of valuable transactions outside the control of a central authority. It uses codes that run directly on the computing devices of all individuals active in the transaction. Of course, in a Blockchain free-world, a trusted party needs to look after all the centralized transactions and maintain consistent and authentic ledgers.

There are three layers to every Blockchain concept:

1. Design goals: the properties a Blockchain software possesses such as distribution, decentralization, immutability, and peer-to-peer.

2. Implementation: A Blockchain’s developer can implement some or all the aforementioned properties. Bitcoin and Ethereum are examples of Blockchain implementations.

3. Instances: different networks working on different datasets allow you to build a different version of reality. For example, the Ethereum implementation has at least four public instances of its protocol: Rinkeby, Robsten, Kovan and the Main Ethereum network. You’re also able to create private instances for development purposes using platforms such as Remix and TestRPC.

Distributed and Centralized System: In this case, all nodes in the network store “read only‟ copies of the data, but modification happens at one centralized node. Consider Napster’s peer-to-peer file sharing system. Files were distributed across networks, allowing users to download content, but the list of the files, their locations and business logic, were centralized.

Distributed and Decentralized System: When data can be distributed and decentralized concurrently, it’s impossible to corrupt or hack the network. However, the challenge of implementing a distributed and decentralized data system lies in maintaining consistency. Blockchain manages this consistency issue through an idea known as the consensus algorithm. Counting on leading edge research, Blockchain uses cryptoeconomics and game theory to get this to possible.

The Bitcoin Implementation

Bitcoin, Ethereum and Hyper Ledger fabric are cases of the implementation of Blockchain. Like flavours of ice cream, they share the same base but appeal to different audiences. Bitcoin is implemented in a totally non-trusting environment. It is a specialized Blockchain because it is primarily designed for one application: a digital cash system. The basic element that transactions track is named unspent transaction output.

The Ethereum Implementation

Ethereum is a Blockchain implementation that depends on the same principles as Bitcoin with extra features that help it to to use in a slightly different way. For example, with Ethereum there are no unspent transaction outputs because the Blockchain has a stored state allowing it to store the total amount of each account after each block. Due to the different implementation strategy of the consensus algorithm, enough time used to generate new “blocks‟ in Bitcoin is 10 minutes while Ethereum is only 7 seconds.

Ethereum clients or nodes connect to peers through a protocol referred to as DEVp2p. In DEVp2p the customer performs functions such as receiving data, validating data, and writing data to the local database (LevelDB) and sends data to any requesting peers. The client also receives transactions and propagates them to the network, which executes the smart contract functions. Decentralized applications (also called Dapps (e.g. wallets and Explorers)) connect to the Ethereum network by way of an Ethereum node or client. A JavaScript console can be attached to a running node for invoking web3 APIs. The main element advantage of this technology? Speed! These transactions boast unprecedented efficiency.