Blockchain is a type of distributed ledger for maintaining a permanent and tamperproof record of transaction-based data. A blockchain functions as a decentralized database that is managed by computers belonging to a peer-to-peer (P2P) network. Each of the computers in the distributed network maintains a copy of the ledger to prevent a single point of failure (SPOF), and all copies are updated and validated simultaneously.
In the past, blockchains were commonly associated with cryptocurrencies, or digital currencies such as Bitcoin, or alternate versions of Bitcoin like Bitcoin Cash. Blockchain technology itself may be a foundation for a new type of financial system and enable new payment systems.
Today, blockchain applications are being explored in many industries as a secure and cost-effective way to create and manage a distributed database and maintain records for digital transactions of all types.
Blockchain examples and use cases
Bitcoin was one of the most visible use cases of blockchain, crashing, however, in 2018 when its price fell by 65%-80% from its peak value. Bitcoin and other cryptocurrencies such as Ethereum or Litecoin can be used the same way as any other distributed database.
In 2016, the online retail company Overstock.com used blockchain to sell and distribute more than 126,000 company shares. This marked the first time a publicly traded company used blockchain to support stock transactions. R3, a global consortium of financial institutions, also uses blockchain to record, manage and synchronize financial information using blockchain APIs (application performance interfaces) for specific platforms.
In early 2020, Theta Labs (a blockchain company), partnered with Google Cloud. This partnership will allow Google Cloud users to deploy and run nodes from Theta's blockchain network.
In 2019, all the excitement around blockchain started to slow, but progress in certain industries showing the technology may have an additional chance to mature. The biggest industries that are further investing into blockchain in 2020 include financial services, life sciences and healthcare.
Banks and financial institutions across the globe are exploring how they can use blockchain to improve security. Digital currency users do not need a bank account to use cryptocurrency normally. Other industries, including healthcare, government and technology, are investigating how they can use blockchain to enable the secure exchange of data such as personal health information (PHI), digital assets like downloaded entertainment, and real estate deeds. Manufacturing and other similar businesses also see some potential to utilize blockchain to manage smart contracts and track materials as they move through their supply chains.
Types of blockchain
Blockchain platforms can be either permissionless or permissioned. Permissioned blockchain requires approval to access -- they are essentially private blockchain systems. Permissionless blockchain does not require permission to enter the blockchain network. In a public, permissionless blockchain like Bitcoin, every node in the network can conduct transactions and participate in the consensus process. In a private, permissioned chain like Multichain, every node might be able to perform transactions, but participation in the consensus process is restricted to a limited number of approved nodes.
There are different blockchain platforms that can be used. For example, there's Ethereum blockchain, Hyperledger Fabric and OpenChain. Ethereum blockchain is an open source and custom-built blockchain platform that was widely used in 2019. It is considered to be an industry-leading blockchain platform for enterprise organizations.
Hyperledger Fabric is another open source blockchain platform used by industries such as finance and manufacturing. Hyperledger Fabric is designed for permissioned networks. The platform can also be used for decentralized hosting and storage of applications with "smart contracts."
OpenChain is an open source blockchain platform for organizations that want to manage and preserve digital assets. An administrator of an OpenChain blockchain will define the rules used in the ledger. Users can then exchange value on the ledger, adhering to the rules.
How blockchain works
A blockchain ledger consists of two types of records, individual transactions and blocks. The first block consists of a header and data that pertains to transactions taking place within a set time period. The block's timestamp is used to help create an alphanumeric string called a hash.
After the first block has been created, each subsequent block in the ledger uses the previous block's hash to calculate its own hash. Before a new block can be added to the chain, its authenticity must be verified by a computational process called validation or consensus. At this point in the blockchain process, a majority of nodes in the network must agree the new block's hash has been calculated correctly. Consensus ensures that all copies of the distributed ledger share the same state.
Once a block has been added, it can be referenced in subsequent blocks, but it cannot be changed. If someone attempts to swap out a block, the hashes for previous and subsequent blocks will also change and disrupt the ledger's shared state. When consensus is no longer possible, other computers in the network are aware that a problem has occurred and no new blocks will be added to the chain until the problem is solved. Typically, the block causing the error will be discarded and the consensus process will be repeated.
Blockchain adoption considerations
In choosing a blockchain platform, an organization should keep in mind which consensus algorithm to use. The consensus protocol is a core piece of a Blockchain network. It is a procedure where all peers in a blockchain network will reach an agreement about the present state in the distributed ledger -- this helps establish trust between users in blockchain. The consensus algorithm is perhaps the most crucial aspect of selecting a blockchain platform. There are four standard methods blockchain and other distributed database platforms use to arrive at a consensus. Generally, public platforms choose algorithms like Proof of Work (PoW) because they are easy for other network nodes to verify. Common consensus algorithms include:
- PoW algorithm are used to select a miner for the next block generation.
- Practical Byzantine Fault Tolerance (pBFT) algorithm was designed to work for asynchronous systems.
- Proof of Stake (PoS) algorithms are commonly used instead of PoW, and they work by having validators invest in the currency of the system through keeping some of their coins as stake. The validators will then begin validating blocks.
- Delegated Proof of Stake (DPoS) algorithms are designed using a voting and election process in order to protect blockchain malicious use or centralization.
Advantages and disadvantages of blockchain
Experts cite several key benefits to using blockchain.
- Security is considered one of the significant advantages of this technology. It is almost impossible to corrupt a blockchain because the information is shared and continually reconciled by thousands, even millions, of computers, and blockchain has no single point of failure.
- Transactions are efficient.
- It's not a problem if one node goes down because all the other nodes have a copy of the ledger. Confirmed blocks are very difficult to reverse, meaning registered data is very difficult to remove or change.
- Costs should be reduced because there is no need for reliance on third-party
Disadvantages of blockchain
Experts say blockchain also has potential drawbacks, risks and challenges.
- With public blockchains, there are questions about trust and who is responsible should a problem arise.
- There are also questions about whether organizations are capable or willing to invest in the infrastructure.
- Changing data in a blockchain is typically hard and takes a lot of work.
- Because of the use of private keys, users have to keep track of their private keys in order to not effectively lose their money.
- Storage can grow to be very large over time, which risks the loss of nodes if the ledger becomes too large for users to download.
- Blockchain is susceptible to 51% attacks, which is a specific attack designed to overwhelm other participants in the network and change blocks.
Blockchain privacy and security
Security is seen as one of the major advantages of blockchain. Blocks are always stored chronologically. Blockchain is seen as secure because it is very difficult to change a block once it has been added to the end of the blockchain -- each block has its own hash code and the hash code of the block that comes before it. If a hacker tries to edit a block, the block's hash will change, meaning the hacker would have to change the next block's hash in the chain, and so on. So, to change one block, a hacker would then have to change every other block that comes after it, which would take a massive amount of computing power.
To gain the trust of a user, a blockchain network can test a computer by using a consensus model, like a PoW.
However, blockchain is still suspectable to 51% attacks. This type of attack is where an attacker has more than 50% control over all the computing power on a blockchain. The attacker then has the ability to overwhelm all other participants on the network. This type of attack is unlikely, though, because it would take a large amount of effort and a lot of computing power to execute.
History of blockchain
A protocol similar to blockchain was first proposed in a dissertation by David Chaum in 1982.
In 1991, Stuart Haber and W. Scott Stornetta worked on furthering the description of a cryptographically secured chain of blocks. From this point on, some individuals began working on developing digital currencies.
In 2008, a developer working under the pseudonym Satoshi Nakamoto developed a white paper that established the model for blockchain -- this included the hash method used to timestamp blocks. One year later, in 2009, Satoshi Nakamoto implemented a blockchain using the currency Bitcoin. To this day, no one knows for sure who Satoshi Nakamoto really is.
In 2014, blockchain technology began to become more separate from the idea of a specific currency. It is seen for its potential for financial transactions in general. In 2016, more organizations began looking into adopting blockchain technologies; however, in 2019, Gartner found that just 1% of CIOs were adopting blockchain. Just a little more than that -- 8% -- were in short-term planning on looking into or implementing blockchain. However, the largest industries investing in blockchain -- namely, financial services, life sciences and healthcare industries -- still show significant interest in the use of blockchain.