Blockchain simplified for beginners – News
Blockchain. Bitcoin. Cryptocurrency. For the past decade, these words have floated in the public consciousness as the keys to amassing vast wealth. Here’s a quick introduction to blockchain if you’re late to the party
Planned to change the world by transforming the realm of currency and record keeping, Blockchain seems to be the new guy on the “block” people can’t stop talking about.
But did you know that this Digital Ledger Technology (DLT) that could potentially revolutionize how we transact online was founded by a mysterious genius who has yet to come forward to claim his invention? Wait, we’re getting ahead of ourselves.
What is Blockchain?
Before we take a deep dive into blockchain’s dramatic backstory, let’s first understand the basics of the concept.
A blockchain essentially means a new way of recording digital information on the interweb in the form of records or “blocks” that are linked to each other. These blocks have irreversible data and timestamps on them and, like regular chains, improve in strength with the addition of more links or blocks. It is almost impossible to change the data recorded on a single block – it would require you to change the entire chain – and is therefore considered extremely immutable and secure by design. The higher the number of blocks or nodes, the more difficult it is to manipulate or modify them.
Although the rudimentary idea of a blockchain was introduced as early as 1981 by the American scientist and cryptographer David Lee Chaum, it was brought to life by an individual or group of individuals who used blockchain technology to create a ledger to record the transactions to a digital cryptocurrency called Bitcoin in October 2008. This person(s) is referred to, pseudonymously (or in reality), as Satoshi Nakamoto, and more than a decade after Bitcoin was born, crypto-enthusiasts continue to pay homage to this ideological figurehead and manager.
But who is Satoshi Nakamoto? Wouldn’t someone who had led something so transformative and glorious want to step into the limelight and accept the scorn (and criticism) that the world would shower upon them? Interestingly, after the release of the Bitcoin White Paper – a protocol documenting the idea and arguments for Bitcoin – the enigmatic mastermind seemed to disappear from the plane of existence altogether. Despite currently owning over $46 billion, no one knows if Satoshi is even alive.
Types of blockchains
There are four different types of blockchains that are used for four different purposes. While public blockchains are permissionless, open blockchains that anyone with a device and an internet connection is authorized to log into, private blockchains are more exclusive as only members chosen by the organizations can join these networks.
Bitcoin and Ethereum, both platforms that have grown wildly popular over the past decade or so, are both permissionless blockchains that you or I can be a part of. Consortium blockchains are those owned by more than one organization. Hybrid blockchains are those that are a combination of private and public blockchains. In this scheme, some data will be stored on public nodes that can be accessed by everyone, while the rest will be in private nodes that can only be seen by a cherry-picked few.
Advantages of Blockchain
The very creation of the blockchain technology was supposed to guarantee complete decentralization across its members. A blockchain is an example of a peer-to-peer (P2P) network. This means that each computer will occupy the position of both the server and the client. Without considering any device as primary or central, the data is broken down and shared among all, thereby ensuring a copy of the transaction on all devices, and securing it against cases of error. The members of the blockchain are governed only by the rules of the consensus protocol.
P2P networks equalize where no one device has or exerts more power than the others, making blockchain a fairly egalitarian system. If there is no regulatory body, how do things work, you might ask? Through smart contracts. While smart contracts have no legal connotations, they are simply commands written into the system that will perform actions when the necessary conditions are met. These conditions will be decided by the members in advance, underscoring the democratic nature of platforms built on a blockchain.
On blockchains, timestamps and critical data are encrypted into the node and therefore become immutable without changing every other block in the entire chain. This gives it the rare power of immutability – once a transaction has taken place, it is permanently remembered on the chain using a huge amount of electricity. Your private information is not infiltrated by third-party bases or companies, and you have more agency in what to disclose online and how.
Because blockchains are P2P, your critical data is not stored on a single device; it is shared between many. This ensures security and maximizes privacy. All of this makes it far more difficult for a hacker to break into your data because they have to spend an even greater amount of energy hacking, which they would much rather spend mining new blocks.
A related idea that sustains blockchains is that all the transactions are recorded in the blocks in such a way that it becomes impossible to change them. It is also completely transparent to all members of the network, and makes all foul play easily traceable. This aspect also guarantees players that their currency is not compromised or “double used” by previous owners – which involves sending the same coin for two different transactions – by going through a verification process that is publicly available.
While this is by no means an easy or energy efficient exercise, the elusive Satoshi found a way through Bitcoin. Usually, transaction details are hidden from all but the parties involved to improve security. But here the transaction details are open to the public without mentioning the specific identities of the parties to ensure that everything is open.
In the original white paper, Nakamoto talks about how one of the biggest pitfalls of the banking system is that it operates on the trust-based model that is “inherently weak.” But a central governing authority becomes indispensable to maintain credibility for lenders and to avoid cases of abuse and fraud. Banks are a pain and come with huge transaction fees, but you simply tolerate them so your money stays safe.
Through Bitcoin, Nakamoto proposes to replace this trust with cryptographic proof – the timestamp encoded in each node that provides irrefutable insight and proof of the transaction that can be verified.
How does a blockchain ensure higher efficiency? People loathe banks for a variety of reasons: long lines, stacks of paperwork, human interaction and logistical delays are a few. But with blockchains, things promise to be different. Through smart contracts, transactions take place instantly, when the conditions are met, satisfying everyone in the system. They are automated and depend on nothing and no one. Blockchain transactions are not only designed to be secure, but also seamless and incredibly efficient.
Challenges blockchain faces
Scalability means being able to make adjustments to the workload that the devices in a blockchain network must undertake. Simply put, it is quite difficult to increase the individual bandwidth and programming power – general working capacity, that is – of the individual devices that share the data. The more nodes added, the slower the whole process becomes due to congestion. This reduces efficiency, which is said to be one of the biggest advantages of the technology.
A blockchain platform often involves acquiring a virtual bitcoin wallet to transact. This wallet has a public key, which acts as the blockchain identity or a ‘user ID’ by which others identify you, as well as a long private key, which is your password, which you should remember.
Misplacing this key will result in information/currency theft or you being locked out of that network, thus losing your assets entirely. This means that only a very small percentage of tech-savvy people with a thorough understanding of how blockchains and cryptocurrencies work can use it.
To understand how blockchains use large amounts of energy, you must first understand what “data mining” is. Data mining is a validation protocol to confirm the validity and legitimacy of the information on the block. It is what improves the security of your transactions.
Most platforms do this through what is called the Proof of Work (PoW) method where ‘miners’ compete with each other to solve complex mathematical problems to obtain cryptographic proof. This process uses a staggering amount of energy and is not sustainable in the slightest. In fact, Bitcoin, which is the largest blockchain network, uses almost 198 terawatt hours of energy annually. That’s more than the entire country uses!
In order to cope with the increasing carbon footprint, work is being done to develop alternative methods for data validation that do not pump out nearly as much carbon dioxide into the air. Although developers have been largely successful – seen through the creation of greener blockchains such as Algorand (ALGO), Chia (XCH) and Cardano (ADA) – they have not been as widely used or as popular as consumers. The question to be asked is, can we really afford to make transactions using a ledger that will continue to dig the collective climate crisis hole that we have created for ourselves?
The term may sound complicated, but all means of interoperability is to be able to seamlessly integrate and communicate across different networks. Each blockchain network is built differently and governed by different rules and capabilities. One of the challenges that blockchains face, as a system, is that these different organizations that share very little common ground cannot mediate and communicate with each other with ease.
Another subsequent issue is that it is extremely difficult to integrate blockchain technology into existing financial systems. Although legacy systems are clunky and outdated, organizations are hesitant to switch out because it can lead to extensive changes and loss of data to the cracks in between. Shifting cold turkey to the new technology may take a long time, as “the adoption of blockchain is not only a technological, but primarily a psychological challenge,” according to a Frontiers article on the subject.
As with Web3 as a whole, since the point of this whole endeavor is that it is decentralized with no designated leader, standardization becomes nearly impossible. As mentioned before, everyone wants to have full control over their assets, but no one wants to board a ship without a captain. In the event that security breaches – such as double-spending or cryptographic cracking – take place, the lack of a central authority makes it difficult to demand accountability or reversal of breaches.
While the history of blockchain is certainly mystifying, we hope we’ve managed to demystify the concept for you. Blockchains mean both dazzling rags to riches stories as well as stunning falls from grace in the form of million dollar scams and pyramid schemes. While the idea itself is groundbreaking in proposing a democratized, fair and above all efficient way of making money, the execution has proven to be a mixed bag so far. But whether blockchain is a fad or the future is up to you to decide.
