Fundamentals of Blockchain Technology

Thanks to Prerit Shah for contributing this article!

In an ordinary business network, tangible or intangible assets change ownership through markets. Transactions are usually recorded in each party’s ledger. It is generally not possible to check that two people’s ledgers match, because no one wants to show everyone a full list of their assets and transactions.

Blockchain aims to solve this by giving everyone in the network a copy of a ledger showing every transaction. This is designed to remove ambiguity and prevent fraud: everyone can verify that a transaction took place, under encryption to protect privacy.

Why Blockchain?

If you’re wondering why people use blockchain, you need to understand its application in the business context. Businesses never work in isolation and connectivity benefits business networks of customers, suppliers, etc. In fact, these networks tend to cross geographical and regulatory boundaries.

The complicated system of business networks, however, has two key problems. First, let’s say two people – Peter and Kevin – are doing business together. If Peter wants to tally the transaction that he has logged in his ledger with the transaction that Kevin has logged in his ledger, he won’t be able to because Kevin would not be comfortable showing all the asset logs to Peter. Second, in much the same way, verifying any contracts can be an issue, leading to exhausting legal disputes.

Blockchain serves as a solution to these problems by allowing transactions to be shared with the participants in a business network. Blockchain is a shared, replicated ledger with smart contracts. It is a ledger that logs each transaction, but it is shared with each participant so that the logs of transactions are always identical. It is replicated; every participant retains a copy to avoid any single points of failure. Smart contracts through blockchain provide a shared set of rules associated with each transaction while offering the ability to remove ambiguity and friction from trade.

Three Pillars of Blockchain Technology

1. Decentralization

Traditionally, centralized systems stored all the user information in one place. This is easier to keep track of the information you need. But it makes the information an easy target for potential hacks. It also requires downtime if the system needs maintenance or a software update. And if the system ever shuts down or gets corrupted, all the data can be lost.

Blockchain provides a decentralized system where everyone in the network owns the information. This also takes out any costs related to third-party interference.

2. Transparency

Transparency means that the flow of assets would be visible to everyone in the network. But it maintains privacy. It does not share identity of the participants. If Peter sent 1 Bitcoin to Kevin, the transaction appearing in the ledger would be something like:

“1MF1bhsFLkBzzz9vpFYEmvwT2TbyCt7NZ sent 1 BTC to
9vpFYEmvwT2TbyCt7NZJ1MF1bhsFLkBzzz”

That long string of gibberish cannot be traced back to Kevin or Peter. If you write someone a check, their bank has to confirm with your bank that you have enough money. The blockchain can do it anonymously.

But cryptocurrencies are just one aspect of Blockchain technology. This kind of transparency can preserve a secure record of transactions in any field. It could be a supply chain saying that one company filled an order placed by another. Or it could be in real estate, tracking ownership of some plot of land. Without blockchain, there are whole government offices devoted to this.

3. Immutability

Immutablilty means that once something has been logged in the ledger, it cannot be changed.

Blockchain uses complex hashing algorithms to store information. These algorithms create strings with the same size, no matter how minor or major changes in the data. Bitcoin, for example, uses SHA-256 which creates strings 256 bits long.

Even if a minimal change in the data would change the hash drastically. The change would appear in all the chain blocks and completely change the chain. This property is known as the “Avalanche Effect.” This is how Blockchain attains immutability.

If someone wanted to add a fake transaction, they would have to find some other data that creates the same 256-bit string. This is not literally impossible, but there is no known way to do it even with the world’s best supercomputers. You can assume that any transaction recorded in the blockchain did really happen.

Uses of Blockchain and Future Scope

The blockchain can cut out the middleman in almost any service model. Currently, finance offers the most use cases. Blockchain GUI devised applications called “wallets” are used to buy things with Bitcoins and to store cryptocurrencies.

Online transactions and identity management technologies are closely related to each other. The blockchain is already used in transactions, so it is safe to assume that it will be used in applications of identity management. The Blockchain is also developing in industries like real estate, education, and health.