Blockchain is the technology behind cryptocurrencies like Bitcoin. Blockchain technology enabled a peer-to-peer digital cash system called Bitcoin. On the Bitcoin network, users are in complete control of their account balances and transactions. Unlike traditional financial systems, there is no third party that can alter transactions on a blockchain. Blockchain has many use cases beyond cryptocurrency. Since its inception, Bitcoin’s underlying technology has been developed to find applications in other areas. Over the past year, it is determined that blockchain has use cases in industries from health care to supply chain management and many more.
By: Mrugakshee Palwe | Dec 10, 2019 | Modified May 21, 2020
Blockchains, in general, have three properties:
Traceability is the ability to know where something came from (Provenance) and know where it ended up (Destination). This is a useful property for tracking where money came from, and what it was eventually used for. This is also useful for determining the origin of items.
Immutability means whatever happens on the blockchain, stays on the blockchain. This is a very useful property for providing trust within a system. If the data cannot be changed, then we have an easier time believing that what the network said happened, actually did happen, and no third party has tampered with the data.
Transparency is provided by several factors. The source code of most blockchains are open source, and can be audited by anyone wishing to understand the network. With respect to Bitcoin, all transactions can be viewed by the public, which increases the ability to audit and trust the activity on the network. These factors contribute to the transparency of the network.
The invention of the internet is a common comparison to the way blockchain and cryptocurrency is entering the mainstream. After the internet was established, anyone from around the world had access to information. The ability to publicize your voice became possible, followed by the ability to keep current with the times. The internet essentially decentralized information, creating an internet where we can easily trade, transfer, and share information.
What the internet did to information, blockchain is doing to money. Various blockchains are creating the internet of money, a global financial ecosystem that allows us to trade, transfer, and share value in a decentralized way. Just like pre-internet, we relied on centralized sources for our information. We currently rely on centralized entities dubbed as banks to provide our financial infrastructure. Blockchain is changing this paradigm at a staggering rate.
Bitcoin was invented on October 31st, 2008, and launched January 3rd, 2009. The attempt to figure out of how to securely link together transactions goes back as far as 1997 with foundations rooted in “HashCash”, a pre-bitcoin phenomenon. Without the founders of Bitcoin figuring out how to create a tamper-proof chain of transactions, Bitcoin would not be possible.
So how does it all work?
The Bitcoin blockchain is series of individual blocks that contain transactions taking place on the network. Computers around the world maintain the same copy of each individual block. These computers form the Bitcoin Network, and maintain the security and authenticity of the blockchain.
The transactions that take place on the network are chunked together into blocks, and linked together cryptographically, and thus the blockchain has been an obvious choice of words to describe the underlying technology to Bitcoin and other cryptocurrencies.
In the original white paper where Satoshi Nakamoto introduced Bitcoin he detailed a “peer to peer electric cash system”. Peer to peer means that there is no need for a third party to authenticate transactions on the network.
Cash transactions are a peer to peer payment system. There is no third party required to facilitate the transaction between you and a merchant for a purchase or transfer when using cash. The property of cutting out the middle man in online transactions has the potential to disrupt many industries. For example, from making supply chains more efficient to making global financial transactions faster and cheaper.
Cryptocurrency is an application of blockchain. Just like the internet serves many applications (think websites), there is a wide range of cryptocurrencies, each with their own unique purpose serving as applications on their own blockchain. Blockchain is the underlying infrastructure that make cryptocurrency possible.
Another point worth noting is that not all blockchains have an associated cryptocurrency. While cryptocurrency is the first application of blockchain, industry professionals have found ways to apply the technology in a variety of ways that don’t require a cryptocurrency to be tied to the blockchain.
A new industry is emerging in the technical corners of the planet. In finance, blockchain has many use cases including tokenization, cross border transactions, and censorship-resistant payments.
In other industries, blockchain can be used to form agreements in business relationships to reduce disputes and ambiguity between partners. Smart contracts, which are self-executing coded contracts, have enabled new forms of digital agreements. This becomes very useful as it digitizes the contract and automates its execution.
Applications that are build on top of blockchains are called decentralized applications, or dApps for short. dApps are applications that exist on decentralized networks such as Ethereum. Ethereum can be thought of as an application or token platform, with the capability of hosting dApps. Your dApplication can leverage aspects of blockchain such as the durability of decentralized networks, or the censorship resistance of cryptocurrency, simply by deploying your idea on top of an existing blockchain. You don’t need to worry about the underlying computer infrastructure, as this is provided to you by willing participants all over the world.
Blockchains are just software built by humans, and humans can make mistakes. That being said, the Bitcoin blockchain has been active for more than a decade, without a single successful hack performed on the network. The developers of Bitcoin have decided to make trade-offs with the software, opting for more security and trust, instead of an efficient network that can process a global load of transactions.
Many hacks have taken place on blockchain networks in the last decade. Hackers either exploit the code directly, or gain control of the network through the governance mechanisms. For example, in order to hack the Bitcoin network through governance, you would need to control 51% of the network. This task has been deemed impossible, as the Bitcoin network is so widely distributed that it is nearly impossible to amass that much computational power. However, other blockchain networks are smaller, and thus, much more vulnerable to a 51% attack.
Blockchains can be examined in a number of ways. One of those ways is by looking at who has access to the network. The Bitcoin network, for example, is completely open to anyone and everyone to use, without bias. The Bitcoin network applies no preferential treatment to you based on social status, or geographic location. It is for these reasons that Bitcoin is considered a public network.
A private network is more suited for use cases that require permission for accessing and utilizing the network. A private network is better suited for enterprise purposes, such as supply chains, and closed financial systems.
The downsides of blockchain need to be talked about in the context of what that particular blockchain is trying to solve. If the blockchain is aiming to be global payments system, that that blockchain needs to be primed to scale to meet demand, while maintaining security for its users. This is a hotly debated topic, but it all boils down to how blockchains are implemented and governed.
If we look at Bitcoin, for example, the blockchain uses more electricity than the country of Ireland in a single year to process no more than 7 transactions per second. Contrast this to VISA, being able to process 65k transactions per second, and Bitcoin doesn’t quite meet the standards. What is worse is that adding more computers to the Bitcoin network doesn’t solve the scalability problem. As more computers are added to the network, the network gets stronger security, but remains to process only 7 transactions per second.
Since the inception of Bitcoin, developers have created new blockchains that are more scalable, but are arguably less secure than the security that the bitcoin network provides.