Blockchain - What is that?

Introduction

Since its conception in 2009, blockchain has gained mainstream popularity and is getting more popular yearly. Bitcoin, created by Satoshi Nakamoto, an anonymous persona, first introduced the blockchain concept.

We can define a blockchain as a decentralized database of data that can’t be deleted or changed. There are validators that validate transactions, and on the bitcoin network, they are called “miners”. In reality, a validator is a “node”(which essentially means a computer).

Even before blockchain, there were distributed systems. One innovation of blockchain that helped it become popular was the financial incentive it creates for the network's validators.

For the network to function and be decentralized, there needs to be an infrastructure that maintains it - like regular servers. In the blockchain, there is not a single entity that pays for servers, so the system is created so that everyone can participate and offer their computing power to maintain the network, and in return, they earn the currency of that network. For this to work, users of the network that want to send transactions need to pay a certain price, and that price is called a “gas fee”.

Example - Regular company vs Blockchain

Let’s compare a regular software product, like Instagram, to the blockchain.

For Instagram to work, there needs to be infrastructure. They need to have the servers where the images are stored, they need to have backend code for DMs to work, they need to have authentication for login and accounts, and a lot more complicated stuff to make it work.

All of this is costly. Servers are not some abstract concept - they are physical computers, and they use electricity and the internet which needs to be paid for.

In the case of Instagram, this is paid by the company, a centralized entity. All of the costs of development, infrastructure, offices, and electricity - are paid for by Instagram.

In a decentralized system, there isn’t a single entity that can pay for these costs so the system is created so that anyone can use their own computing power and offer it to the network as a “server”. Because this is costly, no one would want to offer their computing power with nothing in return - so the concept of financial incentive is created. Users pay for the service of creating transactions to the system, and the system distributes the value among the validators.

Wallets

When we create the wallet, the private-public key pair is created. The basic technology used is PKI (Public Key Infrastructure), where the public key is actually your wallet address.

Mining

When all transactions are submitted, every 10 seconds (for Bitcoin) those transactions are collected into a block. Miners compete to be able to record that block on the Blockchain aka save it on the “database”. For users - every 10 minutes, transactions are confirmed.

As the name says - “Blockchain” - the transactions are collected into blocks, every subsequent block (a batch of transactions) is connected, and every last block calls the next block as the first element, so the block header of the next block would be the last part of the last block.

Mining is a software-based accounting function to record transactions on the blockchain ledger.

“Nonce” is short for “number only used once” - every 10 minutes a network issues a nonce, (32-digit alphanumeric code) which is a random number generated by software, and then every participating mining machine itself makes guesses on what this number may be.

For Bitcoin, around 4 billion guesses per second.

Then one random machine worldwide would guess the nonce or closest to the nonce and be awarded the mining rewards - the new block is being discovered, and the miner gets the financial incentive.

ICO

When talking about Blockchain, we can’t just cover the technical aspects. This technology also introduced new financial instruments and funding options, and it creates a revolution in the finance industry.
ICO (Initial Coin Offering) is a new kind of crowdfunding financing source.
Crowdfunding is a regulated and valid form of funding - so ICO is like Kickstarter for crypto projects. Raising money in ICO means that you give away coins, not equity.
Benefit for the investor - you can realize the liquidity immediately.
Over the years, as decentralized apps evolved, so did their financing options. More types of ICOs have emerged with different use-cases, like IDO (Initial DEX Offering) and IEO (Initial Exchange Offering).

As Bitcoin is a cryptocurrency, its application of the Blockchain is used as a form of digital payments - making immediate cash transfers over the network. Blockchain can be applied in financial services, for example, real estate, where companies exchange digital securities.

It is revolutionary because any digital asset can be recorded on the blockchain.

Blockchain Applications

Examples

Visa, passport, diplomas - especially with the introduction of the Soulbound tokens
Medical industry - control of the use of drugs and substances
Supply chain in the logistics industry
Healthcare - health insurance billing, electronic medical records
IoT (Internet of Things)
Smart assets - bonds, stocks, options, futures, insurance
Smart contracts - a contract in the form of code that is registered on the Blockchain and executes the code when required

Consensus Algorithms

Blockchain is a distributed solution - in distributed systems, there are many nodes on an open network transferring traffic.

Two main problems in this kind of system need to be solved: the double-spending problem and Byzantine fault tolerance.

Double-spending is the risk that a digital currency can be spent twice. It’s a potential problem unique to digital currencies because digital information can be reproduced relatively easily by savvy individuals who understand the blockchain network and the computing power necessary to manipulate it.

Byzantine fault tolerance is a property of a computer system that allows it to reach consensus regardless of the failure of some of its components.

Consensus is a way to come to the new truth state of affairs on our network and update all nodes. This means that a consensus is used by network participants to decide what is the truth, and for this to be possible, several mechanisms have been created.

A consensus algorithm is what updates the truth state. It’s a mechanism used in computer systems and blockchain to achieve the necessary agreement on a single state of the network among distributed processes on multi-agent systems, such as with cryptocurrencies. It’s useful in record-keeping, among other things.

The two most popular consensus algorithms in blockchain are Proof-of-Work(PoW) and Proof-of-Stake(PoS).

Proof-of-Work algorithm - mining process of making the investment to guess the nonce 4B times per second, and investing that energy, performing computational work, in order to guess that random number.

Proof-of-Stake algorithm - involves miners validating additional blocks if they have greater amounts of money/tokens locked up in the system.

A node is the most basic unit and critical part of a blockchain infrastructure, storing its data and allowing all communication(transactions) to pass through. It can be run by any personal computing device or a server. Nodes are interconnected and hence, can readily pass data amongst each other.

There are several other consensus algorithms, but these two are most often used.

Ethereum is, at the time of writing this post, Proof-of-Work, but there’s a plan to switch it to PoS.

Distributed Systems

A distributed system is a computing environment in which various components are spread across multiple computers on a network.

Blockchains are a specific type of distributed system.

Distributed systems contain two particular categories of components - nodes and message passing. Nodes are meant to represent separate machines, or processes, while message passing is represented as arrows. Their purpose is to demonstrate that all machines are directly or indirectly connected.

Components in this system process information concurrently, as opposed to a single process that operates one step at a time.

While all nodes can attempt to stay synchronized, there is no single clock or computer to access for the current time. Each node is responsible for maintaining its own time. In the event of a failure, protocols protect the system from individual failure, ensuring that the job gets done no matter what.

Correctness of a distributed system means achieving its intended goal. To ensure correctness, one uses a consensus algorithm achieving the following: validity, agreement, and termination.

Validity - any value decided upon must be proposed by one of the processes.

Agreement - all non-faulty processes must agree on the same value.

Termination - all non-faulty nodes will eventually decide on some value.

Crypto

One thing that the blockchain is most known for is crypto.

Cryptocurrency is a digital currency that does not rely on any centralized entity or any central authority to maintain it. Instead, it’s maintained by the protocols and processes on a decentralized network.

For the maintainers of the blockchain network to have the financial incentive to keep it alive, the solution is earning the native cryptocurrency of that blockchain that could be worth a certain value now or in the future. Maintaining the network is the investment of your computing power and time and counting on the native cryptocurrency to be worth more in the future.

Bitcoin is the first cryptocurrency, but there was a lot of research and innovation done long before it. Some of the attempts include the “e-Cash” concept by David Chaum in 1983, “DigiCash” founded by David Chaum in 1990, “DigiCash” founded by Adam Back in 1997, and “B-money” and “Bit Gold” proposals by Wei Dai and Nick Szabo in 1998.

Today, a bunch of new cryptocurrencies are created every day, and most of them are “get rich quick” and “pump and dump” schemes with the only purpose of making the creators rich while leaving the investors empty-handed.

As with every new technology, like the Internet, there are a lot of scams, especially in the beginning, but in the future when people get more familiar with the blockchain and crypto, this could be a lot less problematic issue.

Conclusion

The Blockchain, even though it was created in 2009, is still a relatively young technology that is still discovering new ways to create value.

It created a revolution in many different fields, such as computer science - both software and hardware, finance, economy, philosophy, investing, medicine, and many more.

The component of decentralization is the key one in this technology and that is what gives hope to the people. Even if the blockchain doesn’t end up being the technology that is widely used in the future, it still opened the philosophical discussion about removing the power from centralized entities and giving it to the protocol. We don’t have to trust a single entity with our data or transactions but we can trust the system that is open and public.

Now is still the experimental time for Blockchain technology with a lot of advocates and skeptics. It’s still in the early stages, and we are yet to see its full potential and development.