An Introduction to Blockchain
The crypto community is, of course, highly enthusiastic about blockchain. Yet, they often think of blockchain as merely an abstract technology that backs some cool tokens that go up in value, but often without a deep understanding of what blockchain really is. So let’s get back to the basics: What is blockchain?
In simple terms, blockchain is a tamper-proof, distributed ledger that supports the procedure of monitoring assets and recording transactions within a network. Assets can be intangible (such as licensing, patents, copyrights, intellectual property, and films) or tangible (such as a vehicle, cash, house, and land). Anything that has value can be tracked and exchanged via blockchain networks, which decreases the risks and costs for all parties involved. Businesses rely heavily on information—the faster and more reliably it can be transmitted, the better. This is where blockchain excels, as it provides distributed, immediate, and entirely transparent data stored on a tamper-resistant ledger, accessible only to network participants who have permission. A blockchain network can track accounts, production, orders, payments, and a variety of other things. Since members have a unified view of the truth, they can understand all details of a transaction from start to finish, giving them greater confidence and new efficiencies and opportunities. In my view, this is what makes blockchain particularly interesting compared to current alternatives: its transparency.
The Key Characteristics of a Blockchain
Here are the elements that form the basis of blockchains and make them what they are:
Distributed Ledger Technology (DLT): Every network participant can access the shared ledger and its immutable record of transactions. Through this distributed ledger, transactions only need to be recorded once, eliminating the duplication of effort that is common in traditional business networks.
Immutability of Records: No participant can alter or tamper with a transaction once it has been recorded on the ledger. If a transaction record contains an error, another transaction must be added to reverse the original, with both transactions then visible.
Smart Contracts: To increase transaction speeds, smart contracts, which are sets of rules, are stored on the blockchain and automatically executed. A smart contract could stipulate the terms for corporate bond transfers, travel insurance payments, and much more. Everything in DeFi happens through smart contracts.
How Does it Work?
Every single transaction is documented as a “block” of data as it occurs. These transactions can illustrate the movement of every asset, whether it be tangible or intangible. Each block of data can record any type of information—what, when, where, who, how much, or even conditions such as the temperature of food shipments, for instance.
Every block is linked to the blocks before and after it. These blocks then form a complete chain of data as the movement of an asset takes place from one location to another or when its ownership changes. The blocks verify the precise sequence and timing of transactions and are linked together securely, preventing any block from being altered or a new block from being inserted between two existing ones. Hence the name—blockchain; a chain of blocks.
Furthermore, this chain is irreversible. Every block that is added strengthens the validation of the preceding block and, thus, the entire blockchain. This immutability makes the blockchain completely resistant to changes by any malicious individuals, thereby creating a ledger of transactions that every member of the network can trust.
Advantages of Blockchain Technology
There are many areas that need improvement within sectors. For example, operations often spend time and resources on third-party validations and repetitive record-keeping. Alternatively, various record-keeping systems may be susceptible to fraud and other online threats. Data verification can be slowed by a lack of transparency. And, since the introduction of the Internet of Things (IoT), transaction volumes have surged. All of these factors can slow down businesses, harm bottom lines, and reinforce the need for something better, such as blockchain.
More Trust: With blockchain, network members know they are getting reliable, timely data, and that their sensitive records are shared only with network members who have specific access.
Better Security: All network participants must agree on data reliability, and all authenticated transactions are immutable, meaning they are permanently recorded and cannot be deleted by anyone—not even by the network admins.
More Efficient: Time-consuming reconciliations are eliminated because of the distributed ledger that is shared across network participants. And then there are smart contracts, which can be stored on blockchains and be automatically executed, enhancing efficiency further.
Blockchain Network Types
There are numerous ways one can build a blockchain network, such as public, permissioned, private, or consortium:
Public Blockchain Networks: A public blockchain is a network where anyone can join or participate, like Bitcoin, for example. Downsides might include significant energy consumption, no transactional privacy, and lesser security.
Private Blockchain Networks: In a private blockchain network, one organization governs the network, decides who may participate, runs the consensus protocol, and maintains the shared ledger. Depending on the application, this can significantly increase trust and confidence. Private blockchains can also be operated behind a corporate firewall and even hosted on-premises.
Permissioned Blockchain Networks: Businesses that set up a private blockchain will often establish a permissioned blockchain. It should be noted that even public blockchains can be permissioned. Restrictions are placed on who is allowed to participate in the network and in what transactions, and participants must be granted permission or invited to join.
Consortium Blockchains: Here, several organizations share the responsibilities of managing a blockchain. These pre-selected organizations decide who may submit transactions or access data. A consortium blockchain network is well-suited for business situations where all parties need to be permissioned and share responsibility for the network.
With many practical uses currently in place and being explored, blockchain is now carving a niche for itself, thanks largely to bitcoin and other cryptocurrencies. It is also becoming a buzzword that every investor around the world is familiar with. As such, blockchain applications are well-positioned to make government and business operations more efficient, cheaper, secure, and reliable, all with few or no intermediaries.