A Beginner’s Guide to
Blockchain technology is an undeniably ingenious invention. It was originally the brainchild of a team or an individual known by the pseudonym Satoshi Nakamoto, who created Bitcoin in 2008. However, a lot has changed since 2008, and blockchain has evolved into something much greater.
Blockchains have found a way to ameliorate or improve the way a number of industries function. This includes supply chain management, healthcare, online gaming, Internet of Things, marketplaces, property, security, energy, privacy, protection against identity thefts and even governance. The technology is so fluid and adaptable that it can be used in just about any case, as is seen by the number of blockchain projects launched successfully over the last few years.
If you are looking to understand blockchain technology because you (like millions others) believe it is the next best thing, you are in the right place. This guide will explain everything you need to know about blockchain, including the way it works and growth areas. Let’s start with the basics.
What is Blockchain Technology?
In the simplest of terms, a blockchain is a series of time-stamped immutable data records which gets managed by a cluster of different computers that is not controlled by a single entity. Each of these data blocks or simply blocks is secured together by cryptographic principles. So, why does blockchain have industry-disrupting capabilities? What makes them so special?
Why Is Blockchain Revolutionary?
The backbone for a new type of internet was created by Satoshi Nakamoto when digital information was allowed to be distributed freely and not copied. There is no central authority in blockchain networks. The information on blocks is open for anyone to see since the ledger is shared and immutable. Hence, by nature, everything that is built on blockchain is transparent. The network works in such a way that all participants are held accountable for their actions on the network.
Zero Transaction Costs Involved
There are no transaction costs involved with blockchains. There are only minimal infrastructure costs. Blockchains are an easy and ingenious method of passing information from point A to point B in a manner that is safe and fully automated.
One party initiates the transaction by creating a block. This then gets verified by thousands (in some cases millions) of computers distributed globally around the net. When a block gets verified, it is automatically added to the network (more about verification mechanisms later).
This verified block does not just create a unique record, but also creates a unique history to the information. For a record to be falsified, it would take thousands of comupters communicating simultaneously to do so; which, is virtually impossible.
For instance, VeChain is a Dapp built on Ethereum which allows any end-customer to scan the QR code on a product label with their smartphone to determine the trace origin of it. This helps in identifying fake or counterfeit products and is also useful in tracing the origin of food products. While the Dapp was designed to focus only on luxury goods, it has since diversified into accounting for the consumers in the health industry too.
Major Industry Disruption Capabilities
Ultimately, blockchain technology would disrupt major industries by eliminating the need for match-making foundations and also the middle-man responsible for service fees. The fact that blockchain tech is flexible enough to resonate well in diverse industries, makes it something the current industry needs to be aware of.
Blockchains are not just limited to cryptocurrencies and developing an alternate currency for governments to bank on. Even though, Bitcoin is still the single-largest blockchain project, there are multiple other projects, like Ethereum, which provides a framework for the creation of decentralized applications (Dapps).
A Dapp called Elysium intends to disrupt the way medical records are exchanged right now. It uses blockchain technology to simplify the exchange of medical records, therapies and drugs. This allows for a more streamlined distribution of data and information, including patient’s medical history, genetic records, and current status, among various healthcare providers, pharmacies, insurance providers, and other players.
Offers Enhanced Security
Also, with the increasing digitization and plethora of online sites where you are required to share your personal information, you are never really sure that your identity is safe. There have been numerous accounts of data hacks and instances of identity thefts, with Facebook’s data breach being the latest.
Blockchain tech offers a poignant solution to privacy and identity protection issues as is seen in numerous successful projects. For instance, Metadium, created using blockchain capabilities, is a ‘next-generation identity protocol’ which helps users protect, manage, and use their online identity securely. Users get to decide which aspects of their identity they want revealed while making online transactions.
A new take on digital identity management is brought forth by Barcelona-based Validated ID. This blockchain platform caters to users from eCommerce and the remote economy. It helps to “validate” the online identity of a person you are interacting and cuts down the risk of hacking or people using fraudulent websites to scam you out of your information.
Making Middlemen Redundant
There are several use cases of blockchain technology that can make the current architecture of middlemen redundant. Apple or Spotify charge a significant amount of money from revenue generated by artists, which could be completely eradicated with the help of blockchain. This would in turn, make music profitable again for the creators around the world to directly sell their music and receive payments without losing a cut from the middle-men or suffering from
There are already many successful blockchain platforms that are focused on bringing content creators and content consumers together in a manner that benefits the creator and the end-user. For instance, Steemit and D-tube blockchain platforms allow content users to directly tip creators. Currently, Steemit is also offering STEEM as an incentive to creators to upload their content.
Another example of unnecessary costs associated with middlemen is the gig economy hub Fivver. Fivver charges $0.50 on every 5 transactions. Blockchain technology has the power to make this transaction free. With mass-adoption of blockchains, platforms like Fivver would cease to exist as producers and consumers can directly transact in a safe way.
Blockchain tech threatens the existence of recent entrants such as Uber and Airbnb as well. All you need to disrupt the business model of these companies is to encode the transactional information for your overnight stay or car ride using blocks. Blockchains offer a perfectly secure way to encode information; which, has already begun to challenge conventional economy by eliminating the need for match-making platforms and cutting out the fee-processing middleman.
Mechanisms Behind Blockchain Tech
Data on a blockchain is immutable, shared, and transparent to everyone. The database isn’t located on a particular computer, as every record is public and verified. There is no centralized form of information for hackers to gain access to, as data is hosted by millions of computers spread across the globe, and accessible to anyone who has internet.
Think of a railway company to understand the mechanisms behind blockchain. You would purchase tickets through an app or a website. In this transaction, a credit card company would take their share for processing the transaction online. The railway operator can save on this processing fee by using blockchain and can streamline the entire ticketing process by moving it to blockchain.
Railway Company and the passenger are two parties in this transaction. The ticket is a block which gets added to the ticketing blockchain. Your ticket can be similar to a monetary transaction on the blockchain – a unique, un-falsified record that is independently verifiable. The final ticket blockchain could also be a record for all transactions on a certain route or, say, the entire network which comprises of every journey taken and every ticket sold.
The key to blockchain is that it is free. Blockchain when used by the Railway Company would be capable of transferring and storing money. It would also eliminate all business models and processes relying on acquiring a cut of the ticket price for processing the transaction.
However, to get this process taken care of, a lot of complicated calculations and algorithms are involved. Blockchains require consensus mechanisms for verification.
1. Proof of Work Consensus Mechanism
The oldest consensus mechanism is proof-of-work or POW, which is used in the Bitcoin blockchain. In a nutshell, this is how transactions on POW consensus work:
Digital signatures are created on a blockchain network by making use of public and private keys. These ensure security and consent.
The need for authorization arise once authentication is completed using these keys.
Participants of the network are allowed by the blockchain to perform mathematical verification in order to reach consensus or agree on a particular value.
The sender would use their private key to make a transfer. They would also announce information about the transaction over the network. A block is created with information regarding timestamp, digital signature and the receiver’s public key.
This information block would be broadcasted throughout the network to commence the validation process.
Miners available in the network would solve a mathematical puzzle in relation to the transaction. This process requires the miners to invest their computing power.
The miner who solves the puzzle first gets rewarded in the form of crypto-assets. For instance, if it is a Bitcoin blockchain, the miner would receive bitcoins as reward for completing the solution. This concept is called proof-of-work.
Upon solving the puzzle first, the miner receives rewards in the form of bitcoins. This is referred to as proof-of-work mathematical problems.
The block is time stamped once majority of nodes arrive at a consensus. It is then added to the blockchain.
Other major types of consensus mechanisms include:
(Proof of Stake)
POW consumes extensive energy for solving mathematical puzzles. Ethereum, the second most popular crypto-asset after Bitcoin, employs POS. Vitalik Buterin, founder of Ethereum, realized the need for a consensus mechanism that prevented few large conglomerates from owning the major share of mining, as in the case of Bitcoin. POS is based on the coins being staked by a participant. A staker has a better chance of validating a block and adding it to the chain with a higher amount of tokens staked. The rewards offered to the staker are in the form of transaction fee.
3. DPOS (Delegated Proof of Stake)
This is a variation to the original POS. Coin holders are allowed to use their asset balance to elect a list of nodes (validators) for the purpose of adding new blocks of transactional information to the blockchain. Coin holders are also given voting rights to change network parameters. DPOS is different from POS which is more like winning a lottery. DPOS is a structured way of awarding ownership and influence within the network. EOS, Tezos and Tron are all examples of this POS model.
4. PBFT (Practical Byzantine Fault Tolerance)
Miguel Castro and Barbara Liskov introduced PBFT in 1999 at the MIT Laboratory for Computer Science. PBFT helps in tackling the Byzantine Generals’ Problem. The way PBFT works is that each party (General) gets to decide whether a piece of information gets submitted to the blockchain or not. Internal state is utilized by each party to compute when a party receives the message to add to the blockchain. Individual decisions are shared among the network and final decision is determined on the basis of every individual decision. Stellar, Hyperledger, and Ripple projects make use of PBFT as their algorithm.
5. DAG (Directed Acyclic Graph)
Directed Acyclic Graph (DAG) can be called Blockchain 3.0 if Bitcoin’s POW was Blockchain 1.0 and Ethereum’s POS is Blockchain 2.0. DAG in graph theory is a finite directed graph which does not have directed cycles. The algorithm is well-known for solving computer science problems, such as finding the best data process and route. Bitcoin has become highly inefficient with each block taking up to 20 minutes to be added. DAG helps solve this problem by running simultaneously on different chains. DAG is called the future of instant blockchain transactions with minimal transaction fees. Currently, a China based project called ITC (IoT Chain) is utilizing DAG to complete over 10,000 transactions per second.
It is important to grasp the concept of crypto-assets if you want to understand how blockchains work. Most projects employing blockchain tech are decentralized, which means there is no single authority controlling the operations as is common in traditional enterprises. Instead, these projects use crypto-assets, in the forms of coins and tokens to incentivize the community.
For instance, in our above-mentioned explanation of Bitcoin transactions requiring miners to solve complex mathematical equations, it is clear that miners are self-motivated to invest in costly ASIC mining equipment to earn a portion of bitcoins as reward. The same holds true for Monero (XMR) which allows instant payments to be made globally while maintaining privacy.
Cryptoassets are value holding assets that are based on the principles of cryptography. Specifically, these are virtual assets that are stored and maintained on a blockchain. The market is growing at a tremendous rate. In May 2016, the cryptoasset industry was valued at $9 Billion, which has exploded to a whopping $420 Billion in November 2019.
The power of crypto is humongous and it is yet to be completely unleashed. The increase in crypto sector has captured the full attention of major players in every sector including: entrepreneurs, developers, financial system, and the media. Crypto-assets are loosely categorized in seven different types. These are individually explained as below:
Growth of Blockchain
Blockchains are expected to be the focal point in the coming technological Industrial Revolution 4.0. However, the development of the industry as a whole is slow since cryptocurrencies have not been embraced in mainstream industrial sectors yet.
A World Economic Forum survey has suggested that by the year 2027 10% of GDP on a global scale shall be stored on the blockchain. Just to put this in perspective, e-commerce is also only grabbing 30% of the retail market share despite the fact that online shopping is ubiquitous these days. So 10% is huge and there are signs that progress will be even faster than this timescale. It is expected that by 2030 Blockchain technology shall add business value worth $3.1 Tn.
Forecasts also suggest that revenues from global blockchain technology will experience a massive growth in the coming years. The market is expected to make a climb of $23.3 billion in size by the end of 2023. Statistics state that financial sector has been the quickest to invest in this field and large firms like Chase, Morgan Stanley and TD America are all looking to get in on the action.
The coming years will find blockchain tech being openly embraced in the fields of healthcare, energy, supply chain management, government voting and even traditional banking. Blockchain tech is moving towards mass-adoption every day with more widespread awareness and new projects being launched all the time to test just how much blockchain as a whole can drive us forward.
Where to Start?
If you are hooked onto blockchain-tech and think you are ready to begin diversifying into individual projects, then this is where you can explore some of the top cryptos competing in this new space. Blockchain technology has significantly exploded and is being adopted by an increasing number of industries and communities. Blockchain is something that is evolving at the blink of an eye. The time to hop on is right now, before everyone else realizes just how great an opportunity blockchain presents for the future.