Blockchain

Blockchain has been a major tech topic over the past 10 years, with widespread discussion but limited understanding of its concept and operation. Despite its complexity, the essence of blockchain is straightforward and holds great promise for transforming various industries from within.

What is a Blockchain?

Blockchain is a continually growing digital database. A list like this is composed of numerous data blocks that are organized chronologically, linked, and protected by cryptographic proofs.

Although blockchain technology predates Bitcoin, it is a critical underlying component of most cryptocurrency networks, serving as a decentralized, distributed, and public digital ledger responsible for maintaining a permanent record (chain of blocks) of all previously confirmed transactions.

The original blockchain prototype was created in the early 1990s by computer scientist Stuart Haber and physicist W. Scott Stornetta, who used cryptographic techniques in a chain of blocks to safeguard digital documents against data manipulation.

Haber and Stornetta's work undoubtedly influenced the work of Dave Bayer, Hal Finney, and many other computer scientists and cryptography enthusiasts, ultimately leading to the establishment of Bitcoin, the first decentralized electronic cash system (or simply the first cryptocurrency). The Bitcoin whitepaper, written under the pseudonym Satoshi Nakamoto, was published in 2008.

Blockchain transactions take place on a peer-to-peer network of geographically dispersed computers (nodes). Each node keeps a copy of the blockchain and contributes to the network's functionality and security. This is what distinguishes Bitcoin as a decentralized digital money with no borders, no censorship, and no need for third-party intermediation.

The blockchain, as a distributed ledger technology (DLT), is purposefully designed to be very resistant to manipulation and fraud. This is because, as a database of records, the Bitcoin blockchain cannot be altered or tampered with without an impractical amount of electricity and computational power.

The Proof of Work consensus method is what allowed Bitcoin to be created as a Byzantine fault tolerance (BFT) system, which means that its blockchain may continue to operate as a distributed network even if some of the participants (nodes) exhibit dishonest conduct or poor functioning. The Proof of Work consensus algorithm is a necessary component of the Bitcoin mining process.

Blockchain technology may also be adopted and utilized in other areas such as healthcare, insurance, supply chain, and so on. Although it was created to function as a distributed ledger (on decentralized systems), it may also be used on centralized systems to ensure data integrity or save operating expenses.

How are Blockchain and Cryptocurrency Connected?

Blockchain allows for direct trading of cryptocurrencies between buyers and sellers without the involvement of banks or intermediaries. Cryptocurrencies and other digital assets rely on blockchain technology.

DeFi, which refers to a set of blockchain-based applications in the cryptocurrency world, aims to eliminate intermediaries in finance and empower users through smart contract-based services. These DeFi applications are decentralized, giving users more control over their funds as they have the ability to make changes or additions to the applications themselves.

How Secure is Blockchain?

Blockchain is often claimed to be "unhackable," but a 51% attack can compromise its security by giving a single party control over more than half of a blockchain's computing power. This enables the attacker to corrupt the shared ledger, falsify entries, and double-spend, as well as potentially fork a new chain.

There are two main types of blockchain, public and private, each offering different security levels. Public blockchains are validated by computers connected to the public internet, while private blockchains limit participation to known organizations. Public blockchains prioritize anonymity, while private blockchains allow for selective endorsement by known users. However, this also means that only participants with the proper access and permissions can maintain the ledger, and there may still be insider threats.

As blockchain technology rapidly evolves, developers must prioritize security in the creation of their applications and services. This includes performing risk assessments, creating threat models, and conducting code analysis through various testing methods. Building security in from the start is critical to the success and security of blockchain applications.

Ways to Build a Blockchain Network

Building a blockchain network can be done in several ways, including through a public, private, permissioned, or consortium approach.

A public blockchain network is one that is open for anyone to participate in, such as Bitcoin. However, these networks have several drawbacks such as the need for substantial computational power, low privacy for transactions, and weak security which are important considerations for enterprise blockchain use cases.
A private blockchain network, on the other hand, is similar to a public network in that it is decentralized and peer-to-peer, but it is governed by a single organization that controls who is allowed to participate, execute a consensus protocol and maintain the shared ledger. This type of network can improve trust and confidence between participants, especially if it is run behind a corporate firewall and hosted on-premises.
A permissioned blockchain network is usually set up by businesses for their private blockchain. It restricts who is allowed to participate in the network and in what transactions. Participants need to obtain an invitation or permission to join. Public blockchain networks can also be permissioned.
In a consortium blockchain, multiple organizations share the responsibilities of maintaining the blockchain. The pre-selected organizations determine who may submit transactions or access the data. This type of blockchain is ideal for businesses when all participants need to be permissioned and share the responsibility for the blockchain.

Dark Web and Blockchain

Blockchain provides privacy and security to users, but it also enables illegal trading and activities. One notable example is the Silk Road, a notorious dark web marketplace for drugs and money laundering that was shut down by the FBI in 2013. This shows how the dark web allows illegal activities through the use of anonymous browsers and cryptocurrencies.

However, current US regulations require financial institutions to verify their customers' identities and monitor for any illegal activity. This presents a challenge for the use of cryptocurrencies for illegal activities, as it may become easier for criminals to transact, but at the same time, it provides financial access to people who need it.

While early on Bitcoin was used for illegal purposes, its transparency and growth as a financial asset has shifted illegal activities to other cryptocurrencies. Currently, illegal activities make up only a small fraction of all Bitcoin transactions.

Conclusion: From Buzzword to Business Revolution

The buzz around blockchain is growing louder with its increasing adoption and exploration in various industries. The association with bitcoin and cryptocurrency has further boosted its recognition, making it a hot topic among investors. Its potential to improve accuracy, efficiency, security, and cost-effectiveness with fewer intermediaries makes it an attractive solution for businesses and governments alike.

The Future is Now: Legacy Companies Embracing Blockchain - It's only a matter of time before legacy companies fully adopt blockchain technology. The recent surge in NFTs and tokenized assets is just the beginning of its potential. The next few decades hold great promise for the growth and development of blockchain, making it a technology worth watching in the coming years.