What is Blockchain? – The Defiant

Over the past decade, blockchain has become integrated into everyday language. For a good reason – thanks to Bitcoin, blockchain technology has been implemented across a number of industries.

After proving itself with Bitcoin, blockchain is likely to be the key technology behind many central banks’ digital currencies (CBDCs). The question then is, what is so innovative about blockchain technology?

What problems does Blockchain solve?

At a basic level, blockchain is nothing more than a type of database. Every time you log in to an online account, such as Twitter, Google or Facebook, you connect to a database. As the word implies, each database is a set of information, which is organized in a logical order.

Databases make it easier to manage and update sets of information. What distinguishes blockchain as a database technology?

1. Blockchain is a distributed database. Computers on a network – nodes – run identical copies. Therefore, if one copy of a node is compromised in any way, the redundancy of the blockchain network ensures that it will continue to run.
2. Nodes are synchronized to update the database. If some nodes give an incorrect entry that does not match the rest of the nodes (51%), the entry is rejected.
3. Blockchain forms the database in chronological order. Because each block of data is time-stamped, it creates a chain. This has the effect of creating immutability. If a particular block of data was tampered with, a new chain would branch out, effectively creating a false database that is rejected by the network.
4. Added data blocks are encrypted individually through the hashing method. Simply put, hashing turns one value into a string of fixed length characters. Using the same formula that produces the hash, all data of any size is then transformed into a fixed-size dataset. Therefore, hashing is not only useful for validating data, but for storing it in such a way that it does not reveal the original input.

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Given these key features, blockchain is a decentralized, distributed, immutable and secure database, also often called DLT – distributed ledger technology. Depending on how such a general ledger is distributed, we have different blockchains that serve different purposes.

How is a blockchain network secured?

The best starting point would be to evaluate how cloud computing works. Specifically, one of the most popular workspace environments is Google Doc / Sheet. When such a document is created, the author grants sharing rights to users.

For their part, they can change the document, with each change visible to anyone who was given sharing rights. Therefore, the work with Google Doc / Sheet is to access and change a distributed data chain. In Bitcoin’s blockchain, which generates the most popular cryptocurrency that once reached a market value of $ 1T, the originator is Satoshi Nakamoto as the pseudonymous creator.

Instead of giving sharing rights to individual users, Satoshi Nakamoto, the creator of Bitcoins, made the network public and open source. Using the Script programming language, Bitcoin is nothing more than a smart contract that records whether the BTC token has been used or purchased.

What prevents someone from customizing the smart contract so that used tokens can be recycled? This problem is known as double consumption, and all blockchain functions fall into place to solve it. Going back to the analogy above, a Google Doc user can simply manipulate the datasets. The data chain will then be updated to all other users, and present false data as true. Needless to say, it would be impossible to create a viable cryptocurrency with such a loose system.

Blockchain addresses this monumental issue in a revolutionary way:

• Each data block in the chain consists of the three elements: the transaction data itself, a 32-bit nonce number that is randomly generated when the block is created, and the said hash.
• When a data block is time-stamped, it is signed with the generated nonce number, linked and transformed into a cryptographic hash.
• The network participants who keep blockchain copies make these blocks, in a process called mining. Because each block is unstamped with hashish, in addition to referring to the previous block in the chain, mining becomes a complex task.

The power of mining

Mining was deliberately designed to create a barrier to tampering. In particular, miners use specialized software that solves mathematical problems so that they can find a nonce that generates a hash that is accepted as the next block in the chain.

Nonce itself is a 32-bit randomly generated number, while the encryption hash is a 256-bit function. This translates to a huge 4B of potential non-hash combinations to be extracted before the right block is found. When one is not found, it is added to the chain as a verified block when consensus is reached from the majority of nodes.

For all this work, the miner receives a reward in the form of the network’s original cryptocurrency. When it comes to Bitcoin, this will be BTC. Such a reward system represents the cornerstone of decentralization because network participants are inherently incentivized to participate.

In short, the computational power needed to carry out this mining process creates such a barrier that it is virtually impossible to manipulate blockchain networks. After all, this is why Bitcoin is making headlines on its power consumption, usually compared to a country. According to Digiconomist, the Bitcoin network currently uses 204 TWh as annual consumption, which is comparable to a country the size of Thailand.

However, such energy consumption only applies to Proof-of-Work (PoW) blockchains where work is translated into electricity use necessary to solve cryptographic mathematics, represented as the miner’s hash power that contributes to the network’s total hash rate (TH / s).

In contrast, Proof-of-Stake (PoS) blockchains use the financial efforts of native tokens to achieve the same goal. For this reason, miners are called validators in PoS networks.

For example, when Ethereum switches from PoW to PoS, energy consumption is ready to go down by 99.95%, according to the Ethereum Foundation.

Types of blockchains

The primary divergence point for blockchains is whether they are unauthorized or permissible, which should not be confused with private vs. unauthorized. public. This difference is closely related to the number of nodes confirming the blockchain network. They have fewer nodes because there is a permission barrier that prohibits access to approved blockchains. Consequently, such blockchains are highly centralized. On the upside, they are generally faster because fewer nodes confirm data blocks. That said, permitted blockchains can also be public.

One such public / permitted hybrid blockchain is Ripple. In Ripple (XRP), network participants (nodes) are allowed to maintain the network by Ripple, Coil and XRP Ledger Foundation. Together, they create unique node lists (UNLs), based on the node’s reliability level. The latter is mainly about the node’s previous performance and provable identity.

The Ripple blockchain network currently runs on 35 trusted nodes. In comparison, the two best cryptocurrencies, Bitcoin (BTC) and Ethereum (ETH), run on significantly more decentralized networks, at 15,539 and 6,089 nodes, respectively.

Together, based on the primary permission / unlicensed criteria, blockchains can be public, private, hybrid, and federated (consortium-controlled).

Can any data be recorded on a blockchain?

Bitcoin (BTC) popularized blockchain technology with use as a peer-to-peer (P2P) digital money. Because Bitcoin was designed to have a limited access of 21 million coins, it is not subject to inflationary forces. In the same way, because it operates on such a decentralized network, no central bank will ever be able to tamper with the money supply as the Federal Reserve does with the dollar.

Stable coins

However, all data can benefit from blockchain’s immutability, security, and decentralization. The dollar itself can be tokenized in the form of stack coins. These types of cryptocurrencies remove volatility from the equation while providing global payment networks comparable to those like Visa, but even faster and cheaper.

The most prominent blockchain payment networks that emphasize stack coins are Terra and Tron. There are a number of ways in which stablecoins maintain their commitment to the dollar. Some give them collateral with 1: 1 cash reserves, such as USD Coin (USDC). Terras UST stablecoin uses an algorithmic security system, where the original LUNA cryptocurrency is burned (removed from the circulation) to buy UST when the point goes over the 1: 1 ratio.

Vice versa, UST tokens are burned to buy LUNA when the pin goes under the 1: 1 dollar stick. Whether common or algorithmic, stack coins represent frictionless 24/7 payment systems. Central banks’ digital currencies (CBDCs) are trying to catch up, but central banks will control them completely and remove financial privacy in the process.

Origin of assets

Outside payment systems, blockchain networks can be used to verify the origin of assets. For example, a work of art can be tokenized with a smart contract such as an NFT – non-fungible token. The same goes for audio, e-books, video and even real estate. For example, CityDAO uses the blockchain to tokenize real estate in Wyoming to manage land development and ownership.

In the same way, blockchain networks can establish their origin in the supply chain. For example, Walmart uses Hyperledger Fabric, a licensed blockchain, to establish traceability of consumer products. Therefore, if a food gets bad, it can be traced back to the source, along with all the treats along the way.

Smart contracts

The largest blockchain use comes from the built-in smart contracts. These are executed agreements that are triggered when conditions are met, stored on a blockchain. Although all blockchain networks use smart contracts, it took Ethereum to make it easy to deploy them as dApps – decentralized applications.

When dApps are combined with the immutability / security of the blockchain, an entire financial infrastructure can be recreated in a decentralized way:

• Markets without market makers – Uniswap, Sushiswap, Balancer
• Banking without banks – Anchor, Aave, Compound, Curve
• Auction house without auctioneer – OpenSea, Rarible, SuperRare

Currently, it is over $ 200B worth of cryptocurrencies locked across smart contract platforms. They provide services from decentralized exchanges (DEXs) and lending to NFT marketplaces and insurance, such as Nexus Mutual.

Voting

In the end, even the actual voting can be symbolized. Perhaps this will be the most robust way to ensure choice. If a person’s identity is linked to the wallet address, which has already been verified through the KYC / AML rules, it would be a simple matter for that person to cast votes that cannot be tampered with.

Of course, this will best be done on public and highly decentralized networks such as Ethereum. Voice registrations can then be anonymised, transparent, unchangeable, traceable and auditable. Effectively, just as Bitcoin proved that it solved the problem of double consumption, the same can be done with double voting. After all, they are both accounting entities.

Should Blockchain replace all databases?

In conclusion, what is a blockchain good for? Should organizations use it as a standard computing solution? To answer that, we must keep in mind that the key function of the blockchain is data redundancy stemming from decentralization. When we understand that, we can measure the balance between long-term record storage and cost efficiency.

When it comes to blockchain smart contracts, if the gatekeeper / mediator in the traditional setup is either inefficient or too expensive, it’s time to replace it with a smart contract platform. For example, the tourism company TUI Group implemented smart blockchain contracts to connect customers directly with hotel suppliers, and effectively replaced the booking system.

Finally, if it is important for the record to contain all historical data, there is no better way than to create a time-stamped and redundant data chain, the blockchain.