What is blockchain?

Where did it come from? What impact does it have on today’s techniques of finance and trade?

The need for secure communication existed with the independence of groups of people and the formation of tribes and nations, long before modern times. Motives may have differed but the purpose remains the same; security and secrecy. This need resulted in the creation of cryptography, the practice and study of techniques for secure communication in the presence of adversarial behavior. Over a decade ago, a new application of cryptography emerged under the name of blockchain. 

Blockchain was first introduced to the world of finance in 2008, with Bitcoin being the currency and only means of transaction on this distributed public ledger. Before diving into the concept behind blockchain, let us examine the below graph to get a better understanding of acceptance of blockchain and cryptocurrency. In the graph, the growing adoption of Bitcoin in the past decade speaks for the value blockchain technology offers. It’s noteworthy to mention that the solidity of blockchain comes from the investment of all its users, which we will better understand by explaining what distributed ledger is and comparing it to the traditional centralized network familiar to financial institutions all around the world.

Distributed Ledger Technology (DLT) often called shared ledger, is relatively easy to comprehend. It is a database of transactions that exist and is synchronized across numerous locations, institutions, or geographies. The magic behind this database is that it is accessible and also authenticated by everyone on its network, meaning, no individual person or entity is in control of the information stored on it. Before it sinks as an unsafe procedure, let us scratch the surface and establish that for any modifications to be made on this ledger, a form of consensus has to be provided by all the involved parties on the network. Only then, the requested modification will have impact and get synchronized across the ledger. For the same reason, a decentralized ledger displays a security advantage over traditional ledgers which often have a single point of failure.

how does it work?

Blockchain is an application of DLT, and the difference between the two is of a technological foundation. When two individuals decide to exchange a unit of value (virtual currency or asset) using blockchain and the sending party initiates a transaction towards the receiving end. The transaction gets in a queue with other ongoing transactions. This queue is referred to as a “block.” A network of users in the blockchain network where the transaction is taking place then receives the block of transactions. The assets in this transaction could be anything from a non-fungible token (NFT: a unique and non-interchangeable unit of data stored on a blockchain) to a paper or a photo.

The users volunteering to verify blocks often known as nodes, assess the transactions and determine their validity through math procedures, based on a set of rules in the blockchain. A transaction is deemed legit once verified by 51% of participating nodes. Each verified block of transactions is time-stamped with a cryptographic hash. Each block also includes a reference to the preceding block’s hash, resulting in a “chain” of records that can only be faked by convincing enough nodes that the modified data in one block and all prior blocks is correct. Such a probability is thought to be impossible.

What are the common types of blockchain?

Having established that there is a set of rules and agreements for each blockchain, we now ought to explore the common types of blockchain and the purpose of each.

Public blockchain: the first and common type of blockchain. Featuring no kind of privacy, this type is accessible to everyone with the right tools. Anyone can resemble a node on this blockchain and participate in the act of sending and receiving transactions as well as validating blocks (mining).

Examples: Bitcoin blockchain and Ethereum blockchain.

Private blockchain: can only be accessed by an invitation. Once inside, the activities a member can carry out may also be permissioned and limited. This type is often referred to only as DLT.

Examples: Ripple (XRP)

Hybrid blockchain: as the name suggests, it is a blockchain with different proportions of centralized and decentralized features. While maintaining benefits such as openness and security, it allows administrators to be selective about who has access.

Examples: IBM food trust.

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