What is blockchain technology?

2023-08-10 21:11:31
What is blockchain technology?
Blockchain technology is an advanced database mechanism that allows information to be shared transparently across enterprise networks. Blockchain databases store data in blocks, and databases are linked together in a chain. Data is consistent in time because you cannot delete or modify the chain without network consensus. Thus, you can use blockchain technology to create an immutable ledger for tracking orders, payments, accounts, and other transactions. Mechanisms built into the system prevent unauthorized transaction entry and create consistency in the shared view of those transactions.

Why is blockchain important?
Traditional database technology presents many challenges for recording financial transactions. For example, in the field of real estate sales. After the exchange of funds, ownership of the real estate will pass to the buyer. Either buyer or seller can record monetary transactions, but neither party's source can be trusted. Sellers can easily claim that they have not received money even if they have received it; similarly, buyers can argue that they have paid even if they have not.

To avoid potential legal issues, a trusted third party is required to oversee and verify transactions. The existence of such a central authority not only complicates transactions, but also creates a single point of vulnerability. If this central data port is compromised, both parties may suffer losses.

Blockchain can alleviate such problems by creating a decentralized, tamper-proof system for recording transactions. In a real estate transaction scenario, blockchain can create a separate ledger for buyers and sellers. All transactions must be approved by both parties and will be updated in both parties' ledgers in real time. Any corruption in historical transactions can lead to corruption of the entire ledger. These properties of blockchain technology allow it to be used in various industry sectors, including the creation of digital currencies such as Bitcoin.

How are different industries using blockchain?
Blockchain is an emerging technology that has been adopted in innovative ways across many industries. We describe some use cases in different industries in the following subsections:

Several energy companies are using blockchain technology to create peer-to-peer energy trading platforms and simplify access to renewable energy. For example, consider the following uses:

Several blockchain-based energy companies have created trading platforms for the sale of electricity between individuals. Homeowners with solar panels use this platform to sell their excess solar energy to neighbors. Much of the process is automated: smart meters create transactions, and blockchains record them.
With a blockchain-based crowdfunding program, users can sponsor and own solar panels in communities that lack access to energy. Sponsors can also collect rent from these communities after the solar panels are built.
Traditional financial systems such as banks and stock exchanges use blockchain services to manage online payments, accounts and market transactions. For example, Singapore Exchange Limited, an investment holding company that provides financial transaction services throughout Asia, has used blockchain technology to build more efficient inter-bank payment accounts. By adopting blockchain, the company solved several challenges, including batch processing and manual reconciliation of thousands of financial transactions.

media and entertainment
Several media and entertainment companies use blockchain systems to manage copyright data. Copyright verification is critical to the fair compensation of artists. Multiple transactions are required to record the sale or transfer of copyrighted content. Japan's Sony Music Entertainment Japan is using blockchain services to make digital rights management more efficient. The company has successfully used the blockchain strategy to improve copyright processing efficiency and reduce costs.

Several retail companies use blockchain to track the movement of goods between suppliers and buyers. Amazon Retail, for example, has patented a distributed ledger technology system that uses blockchain technology to verify and ensure that all items sold on the platform are authentic. Amazon sellers can map their global supply chain 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.

What are the functions of blockchain technology?
Blockchain technology has the following main functions:

Decentralization in blockchain refers to the transfer of control and decision-making power from a centralized entity (individual, organization or group) to a distributed network. Decentralized blockchain networks use transparency to reduce the need for trust among participants. These networks also prevent participants from exercising power or control over each other in ways that impair the functionality of the network.

Immutability means that something cannot be changed or changed. Once a participant records a transaction into the shared ledger, no participant can tamper with that transaction. If a transaction contains an error, you must add a new transaction to fix the error, and both transactions will be visible to the entire network.

A blockchain system will establish rules regarding participants' consensus on recording transactions. New transactions can only be recorded when a majority of participants in the network agree.

What are the key components of blockchain technology?
The blockchain architecture consists of the following main components:

distributed ledger

A distributed ledger is a shared database used to store transactions in a blockchain network, such as a shared file that everyone on a team can edit. In most shared text editors, anyone with editing permissions can delete the entire file. But distributed ledger technology has strict rules about who can edit and how. Once entries have been recorded, you cannot delete them.

smart contract
Many companies use smart contracts to manage business contracts themselves without the help of third parties. Smart contracts are programs stored on a blockchain system that will automatically run when pre-determined conditions are met. These programs will run conditional statement checks so that transactions can be completed with confidence. For example, a logistics company might have a smart contract that automatically pays for goods once they arrive at the port.

public key encryption
Public key cryptography is a security feature used to uniquely identify participants in a blockchain network. This mechanism will generate two sets of keys for network members. One set of keys is the public key, which is common to everyone on the network. Another set of keys is the private key, which is unique to each member. The private key is used in conjunction with the public key to unlock data in the ledger.

For example, John and Jill are two members in the network. John records a transaction and encrypts it with his private key. Jill can decrypt the transaction using her public key. In this way, Jill can be confident that John made the transaction. If John's private key has been tampered with, Jill's public key will not work.

How does blockchain work?
While the underlying mechanisms of blockchain are complex, we will provide a brief overview through the following steps. Blockchain software can automate most of the following steps:

Step 1 - Record the transaction
Blockchain transactions show the transfer of physical or digital assets from one party to another in a blockchain network. The transaction is recorded in the form of blocks, which may include the following details:

Who is involved in the transaction?
What happened during the transaction?
When did the transaction take place?
Where is the transaction conducted?
Why this transaction?
How many assets were exchanged?
How many prerequisites are met during the transaction?
Step 2 - Reaching a Consensus
A majority of participants in a distributed blockchain network must agree that a recorded transaction is valid. Depending on the type of network, the rules for reaching an agreement can vary, but are usually laid down when the network is first established.

Step 3 - Link the blocks together
Once the participants reach a consensus, transactions in the blockchain are written into blocks, which are equivalent to pages in the ledger book. Along with the transaction, a cryptographic hash is also appended to the new block. This hash acts as the chain linking the blocks together. If the content of the block is modified, intentionally or accidentally, this hash value will also change, which will provide a way to detect data tampering.

Therefore, blocks will be securely linked to the chain and you cannot edit them. Each additional block strengthens the verification of the previous block, and thus the verification of the entire blockchain. It's like building a tower by stacking wooden blocks. You can only stack blocks on top of the previous layer of blocks, if you take a block from the middle of the tower, the whole tower will collapse.

Step 4 - Shared Ledger
The system distributes the latest copy of the central ledger to all participants.

What types of blockchain networks are there?
There are four main types of decentralized or distributed blockchain networks:

public blockchain network
Public blockchains are permissionless, anyone can join them. All members of such blockchains have equal access to read, edit and verify the blockchain. People primarily use public blockchains for exchanging and mining cryptocurrencies such as Bitcoin, Ethereum, and Litecoin.

private blockchain network
An organization can control multiple private blockchains, also known as managed blockchains. The body decides who can become members and what permissions they have within the network. Private blockchains are only partially decentralized because they have access restrictions. An example of a private blockchain is Ripple, a digital currency exchange network for businesses.

Hybrid Blockchain Network
Hybrid blockchains combine elements of private and public networks. Companies can build private, permission-based systems alongside public ones. With this approach, companies can control access to specific data stored on the blockchain while keeping the rest of the data public. Companies use smart contracts to allow public members to check that private transactions have been completed. For example, hybrid blockchains could grant public access to digital currencies while keeping bank-owned currencies private.

Consortium Blockchain Network
Consortium blockchain networks are governed by a group of organizations. Multiple pre-selected organizations share responsibility for maintaining the blockchain and determining access to data. Consortium blockchain networks are often preferred for industries where many organizations share a common goal and benefit from shared responsibility. For example, the Global Shipping Business Network Consortium is a not-for-profit blockchain consortium dedicated to digitizing the shipping industry and enhancing cooperation among maritime industry operators.

What is a blockchain protocol?
The term blockchain protocol refers to the different types of blockchain platforms that can be used for application development. Each blockchain protocol adopts basic blockchain principles to suit specific industry or application needs. The following subsections provide some examples of blockchain protocols:

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

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

Corda is an open source blockchain project designed for enterprises. With Corda, you can build interoperable blockchain networks for conducting transactions in strict confidentiality. Businesses can use Corda's smart contract technology to conduct valuable transactions directly. Most of its users are financial institutions.

Quorum is an open-source blockchain protocol derived from Ethereum. The protocol is designed for use in two types of blockchain networks: private blockchain networks, where only one member owns all nodes, or federated blockchain networks, where multiple members each own the network's part.

How is blockchain technology developing?
Blockchain technology originated in the late 1970s when a computer scientist named Ralph Merkle patented hash trees (aka Merkle trees). These trees are a computer science structure used to store data by linking blocks together using cryptography. In the late 1990s, Stuart Haber and W. Scott Stornetta implemented a system for immutable document timestamps using Merkle trees. This is the first instance in the history of blockchain.

The technology has been continuously evolving and has gone through the following three generations:

First generation – Bitcoin and other virtual currencies
In 2008, an anonymous individual or group known only by the name Satoshi Nakamoto outlined the modern take on blockchain technology. Satoshi Nakamoto's idea of the Bitcoin blockchain uses 1 MB blocks of information for Bitcoin transactions. Many functions of the Bitcoin blockchain system are still at the center of blockchain technology even today.

Second Generation – Smart Contracts
In the years following the first generation of cryptocurrencies, developers began to think about blockchain applications beyond cryptocurrencies. For example, the inventors of Ethereum decided to use blockchain technology in asset transfer transactions. Their important contribution is the smart contract function.

Third generation - the future
Blockchain technology is constantly evolving and growing as numerous companies discover and implement new applications. Many companies are addressing the constraints of scale and computing power, and in the ongoing blockchain revolution, the potential opportunities are limitless.

What are the benefits of blockchain technology?
Blockchain technology can bring many benefits to asset transaction management. We list some of these benefits in the following subsections:

Advanced Security Features
Blockchain systems can provide the advanced security and trust features required for modern digital transactions. There is always the fear that someone will manipulate the underlying software to generate counterfeit money for themselves. But the blockchain uses the three principles of encryption, decentralization, and consensus to create a highly secure underlying software system that is almost impossible to tamper with. There is no single point of failure, and transactions cannot be changed by a single user.

higher efficiency
Business-to-business transactions can take significant time and create operational bottlenecks, especially when compliance and third-party regulators are involved. Transparency and smart contracts in the blockchain can make such business transactions faster and more efficient.

Faster Audit
Businesses must be able to securely generate, exchange, archive and reconstruct electronic transactions in an auditable manner. Blockchain records are chronologically immutable, meaning that all records are always in chronological order. Such data transparency makes the audit process faster.

What is the difference between bitcoin and blockchain?
Bitcoin and blockchain are used interchangeably, but they are two different things. Since Bitcoin is an early application of blockchain technology, people unintentionally