Blockchain, distributed ledger, and cryptocurrency such as bitcoin have the same underpinning technology where the hash code is computed based on a block or data snapshot. A subsequent block, or data content, hash code derives from a previous computed hash code. A distributed ledger should have financially oriented operations embedded as part of the block. Cryptocurrency, such as bitcoin, should have the history of transactions performed on the currency, such as payments.
This a single server containing all data. Any potential attack on this network will result in the degradation of service for all users. All data stored in the central server can be compromised once a hacker gains access.
A decentralized network is composed of many mirrored servers that are often specific to a geographical region. This network belongs to a single institution. Any potential attack on this infrastructure could affect service and data specific to the region.
A distributed network is composed of a multitude of individual nodes. Each node has the same capability in terms of data distribution and storage. All nodes are externally accessible for processing a transaction. An attack on a single node does not degrade the entire network. Users can still process transactions with other unaffected nodes. Finally, there’s no single entity in the network that manages the data.
What you should know about blockchain technology?
Blockchain is a database that has the following features:
- Data is stored in blocks that are connected with each other. A newly formed block is linked, or chained, to its predecessor. The term blockchain reflects this arrangement.
- The chaining is accomplished via fingerprints. Each block is assigned a hash code or fingerprint. A subsequent block stores the hash code of its predecessor. A new hash code calculation is based on the previous block’s hash code.
- The blockchain is running on a distributed network.
- The history of blockchain cannot be altered, so it’s not changeable. Any transactions are appended and can’t ever be removed.
- Blockchain is publicly accessible. Any user joining the network has access to view blockchains.
- Blockchain is safe through cryptography. Any detected vulnerability in blockchain is an attribute of erroneous implementation.
Blockchain as a distributed ledger
Often, blockchain is referred to as a distributed ledger. Consequently, the distributed ledger inherits all blockchain features. Among them are:
- The ledger is synchronized across all nodes.
- The ledger data is maintained by all miners.
- The data authenticity is enforced through hash codes.
Hashing is a process of generating data of a constant length based on the variable size of input data. Key characteristics of the hashing function are:
- It’s a one-direction function. By having a generated hash code, it’s impossible to reproduce input data.
- Any minor changes to data cause the hash code to be outdated.
The hashing function is fundamental in understanding that the history of blockchain is not changeable. Any change of content in the block causes the hash code to be recomputed, consequently causing cascading changes for the remaining blocks. The blockchain network will detect that the hash code doesn’t match the content, so it rejects the blockchain.
Let’s check an example of a block
Hash is this block’s hash code.
Confirmation is a count of subsequent blocks added.
Height is the position of this block measured from the beginning of the blockchain.
Block transactions lists all transactions associated with this block.
Nonce is the solution of the cryptographic challenge.
Block reward is the reward for the miner retrieving the block.
Benefits and shortcomings of blockchain technology
- Authenticity of data is guaranteed since transaction verification is performed by numerous unrelated members of the distributed network. Consequently, we’re assured that there was no unauthorized data manipulation.
- Costs of maintaining data can be delegated to individual participants in the peer-to-peer network. For example, a bank institution can reduce costs associated with a money transfer.
- A distributed network sustained by unrelated members eliminates dependency on the central control entity.
- Transaction throughput in centralized systems can take a substantial amount of time while a transaction in blockchain can take 10 minutes or less. For example, international wire transfers take days while an equivalent transaction in blockchain is measured in minutes. More here.
- Privacy in blockchain is maintained at the transaction or data level. However, this subject is evolving and various blockchain implementations provide the means for hiding or sharing the data.
- Security in blockchain is achieved on the premise of consensus algorithm and transaction approval.
- Accountability and transparency is achieved due to open-source availability of most of the blockchain implementations. Consequently, anyone is able to look at the source code and evaluate the mechanisms employed by various blockchain labels. On top of that, anyone can suggest an improvement or way to fix an issue. These changes go through an open-source approval process, and this is a widely acceptable procedure.
- Blockchain has the potential to replace the banking system or introduce banking-like functionality in areas where one isn’t available. Because of this, all transactions can be performed, verified, and maintained in history simply by any participant in the blockchain network.
- There’s the energy cost associated with the calculation of hash code utilizing a consensus algorithm. This is called ”proof of work,” also known as “mining.” This can be viewed as both an advantage or disadvantage. It’s desirable that the hash code is computationally intensive. The more calculations it employs, the safer the network. On the other hand, the electricity used by computers to compute the hash code is increasing in costs every year. Because of this, mining drives reusable sourced electricity propagation. Ideally, costs to run the mining wouldn’t cost anything.
- Blockchain is a slow database. For instance, Bitcoin can perform seven transactions per minute and Etherum 20 per second. On the other hand, Visa performs 24,000 credit card transactions per second. Despite this huge gap in performance, new entrants in blockchain are improving the performance of transactions.
- Illegal activities are a consequence of the anonymity of network users. That could imply that it’s prone to abuse and illegal activity. However, the entire history of transactions is available to anyone for verification. In contrast, cash transactions are not verifiable by anyone.
- Minimal regulations in blockchain and cryptocurrencies lay the groundwork for criminal activity. The level of regulation varies between countries. Currently, the blockchain industry is working towards an increase of rules and regulations governing the use of this technology.
The high valuation of bitcoin in relation to the US dollar is a product of the scarcity of computational resources. There’s an ultimate cap of 21 million units of bitcoin and a few million remaining to be mined. In general, more utility and interest rest upon this computed resource so that more market participants, in the form of traditional industries, are willing to pay for it.