Blockchain Technology

Blockchain Technology By Lebohang Bernard Motseki | Email: lbmotseki@gmail.com

Introduction As blockchain continues to grow and become more user-friendly, the obligation is on individual to learn this evolving technology to prepare for the future. If you are new to blockchain, then this is the right place to gain solid foundational knowledge. In this article, you learn how to answer the question, “what is blockchain technology?” You’ll also learn how blockchain works, why it’s important, and how you can use this field to advance your career. Blockchain applications go far beyond cryptocurrency and bitcoin. With its ability to create more transparency and fairness while also saving businesses time and money, the technology is impacting a variety of sectors in ways that range from how contracts are enforced to making government work more efficiently.

What Is Blockchain Technology?

Blockchain is a method of recording information that makes it impossible or difficult for the system to be changed, hacked, or manipulated. It is a distributed ledger that duplicates and distributes transactions across the network of computers participating in the blockchain. Blockchain technology is a structure that stores transactional records, also known as the block, of the public in several databases, known as the “chain,” in a network connected through peer-to-peer nodes. Typically, this storage is referred to as a ‘digital ledger. Every transaction in this ledger is authorized by the digital signature of the owner, which authenticates the transaction and safeguards it from tampering. Hence, the information the digital ledger contains is highly secure.

Types of Blockchain

There are four different types of blockchains. They are as follows:

Private Blockchain Networks

Private blockchains operate on closed networks, and tend to work well for private businesses and organizations. Companies can use private blockchains to customize their accessibility and authorization preferences, parameters to the network, and other important security options. Only one authority manages a private blockchain network.

Public Blockchain Networks

Bitcoin and other cryptocurrencies originated from public blockchains, which also played a role in popularizing distributed ledger technology (DLT). Public blockchains also help to eliminate certain challenges and issues, such as security flaws and centralization. With DLT, data is distributed across a peer-to-peer network, rather than being stored in a single location. A consensus algorithm is used for verifying information authenticity; proof of stake (PoS) and proof of work (PoW) are two frequently used consensus methods.

Permissioned Blockchain Networks

Also sometimes known as hybrid blockchains, permissioned blockchain networks are private blockchains that allow special access for authorized individuals. Organizations typically set up these types of blockchains to get the best of both worlds, and it enables better structure when assigning who can participate in the network and in what transactions.

Consortium Blockchains

Similar to permissioned blockchains, consortium blockchains have both public and private components, except multiple organizations will manage a single consortium blockchain network. Although these types of blockchains can initially be more complex to set up, once they are running, they can offer better security. Additionally, consortium blockchains are optimal for collaboration with multiple organizations.

Why is Blockchain Popular?

Suppose you are transferring money to your family or friends from your bank account. You would log in to online banking and transfer the amount to the other person using their account number. When the transaction is done, your bank updates the transaction records. It seems simple enough, right? There is a potential issue which most of us neglect. These types of transactions can be tampered with very quickly. People who are familiar with this truth are often wary of using these types of transactions, hence the evolution of third-party payment applications in recent years. But this vulnerability is essentially why Blockchain technology was created. Technologically, Blockchain is a digital ledger that is gaining a lot of attention and traction recently. But why has it become so popular? Well, let’s dig into it to fathom the whole concept.

Record keeping of data and transactions are a crucial part of the business. Often, this information is handled in house or passed through a third party like brokers, bankers, or lawyers increasing time, cost, or both on the business. Fortunately, Blockchain avoids this long process and facilitates the faster movement of the transaction, thereby saving both time and money. Most people assume Blockchain and Bitcoin can be used interchangeably, but in reality, that’s not the case. Blockchain is the technology capable of supporting various applications related to multiple industries like finance, supply chain, manufacturing, etc., but Bitcoin is a currency that relies on Blockchain technology to be secure.

What Is a Blockchain Platform?

While a blockchain network describes the distributed ledger infrastructure, a blockchain platform describes a medium where users can interact with a blockchain and its network. Blockchain platforms are created to be scalable and act as extensions from an existing blockchain infrastructure, allowing information exchange and services to be powered directly from this framework. An example of a blockchain platform includes Ethereum, a software platform which houses the Etherium, or ether, cryptocurrency. With the Ethereum platform, users can also create programmable tokens and smart contracts which are built directly upon the Ethereum blockchain infrastructure.

What is Ethereum?

Ethereum is an open source, distributed software platform based on blockchain technology. It is a decentralized open-source platform based on blockchain domain, used to run smart contracts i.e. applications that execute the program exactly as it was programmed without the possibility of any fraud, interference from a third party, censorship, or downtime. It serves a platform for nearly 2,60,000 different cryptocurrencies. It has its own native cryptocurrency called Ether and a programming language called Solidity. Ether is a cryptocurrency generated by ethereum miners, used to reward for the computations performed to secure the blockchain. Ethereum is Bitcoin's main competitor. Ethereum enables developers to build decentralized applications. Miners produce Ether tokens that can be used as a currency and to pay for usage fees on the Ethereum network.

It is an open-source blockchain platform that offers smart contract facilities, which are a type of digital contract. Solidity was first introduced as a new type of programing language for the Ethereum platform. Developers use the Solidity programming language to develop smart contracts. Using Solidity, you can program the contracts to do any type of task. Cryptocurrency researcher Vitalik Buterin first described Ethereum in a proposal in 2013 that suggested the addition of a scripting language for programming to Bitcoin. Ethereum's development was funded by an online crowdsale, which is crowdfunding done through issuing cryptocurrency tokens, and the project came online on July 30, 2015. Ethereum Virtual Machine (EVM) Ethereum Virtual Machine abbreviated as EVM is a runtime environment for executing smart contracts in ethereum. It focuses widely on providing security and execution of untrusted code using an international network of public nodes. EVM is specialized to prevent Denial-of-service attack and confirms that the program does not have any access to each other’s state, also ensures that the communication is established without any potential interference.

How does Ethereum work? Ethereum uses a blockchain network. The network is made up of nodes computers of volunteers who mine for the coin. The nodes produce the Ether tokens, and mining creates the cryptography upon which the currency is based. Because mining is a demanding use of a computer's resources, miners are rewarded with Ether. The Ethereum platform offers the computationally complete Ethereum Virtual Machine (EVM). EVM executes scripts worldwide across its network of distributed public nodes. These nodes provide the processing power for decentralized applications developers create to run on the network. Developers may buy Ether to pay for the use of the network, or they can mine for the tokens themselves, becoming a part of the network. An internal mechanism called Gas sets the pricing of transactions on the network.

What is Smart Contract? Smart contracts are high-level program codes that are compiled to EVM byte code and deployed to the ethereum blockchain for further execution. It allows us to perform credible transactions without any interference of the third party, these transactions are trackable and irreversible. Languages used to write smart contracts are Solidity (a language library with similarities to C and JavaScript), Serpent (similar to Python, but deprecated), LLL (a low-level Lisp-like language), and Mutan (Go-based, but deprecated). Smart contracts are carried across the network in the same blockchain that records the ledger of transactions for the Ether cryptocurrency. These digital contracts can have conditions that run on scripts until fulfilled. Ethereum has built-in mechanisms to detect when an agreement is not met. Smart contracts can be used to exchange things such as properties, money and stocks on the back of an Ether token.

From the time of Ethereum's creation in July 2015 until Sept. 15, 2022, Ethereum used the Proof of Work (PoW) model to execute and verify transactions with the cryptocurrency, using the Ethereum Mainnet blockchain. Proof of Work is a type of consensus algorithm that is used for verification and data integrity. On Sept. 15, 2022, the Ethereum community completed what is known as "The Merge" with a transition to a Proof of Stake (PoS) consensus algorithm running on the Beacon Chain. For Ethereum and its users the benefit of moving to Proof of Stake (PoS), include potentially faster transaction speeds, while using less overall energy to process and validate transactions. Ethereum and Ether: What is the difference? Ethereum is a blockchain-based network. It is a platform that developers can use to build applications and program the smart contracts on which virtual currency is based. Like blockchain, it can be used for many different types of applications, including a number of financial uses. Ether (ETH) is Ethereum's native cryptocurrency. It is bought and sold using the Ethereum platform. It is one of many cryptocurrencies that can be traded using the Ethereum network. It is also used to reward miners when they add blocks to a blockchain. Ether supports the Ethereum network; it pays for computational services and applications built on the platform. It is described as the fuel that Ethereum runs on.

The Process of Transaction

One of Blockchain technology’s cardinal features is the way it confirms and authorizes transactions. For example, if two individuals wish to perform a transaction with a private and public key, respectively, the first person party would attach the transaction information to the public key of the second party. This total information is gathered together into a block.

The block contains a digital signature, a timestamp, and other important, relevant information. It should be noted that the block doesn’t include the identities of the individuals involved in the transaction. This block is then transmitted across all of the network's nodes, and when the right individual uses his private key and matches it with the block, the transaction gets completed successfully. In addition to conducting financial transactions, the Blockchain can also hold transactional details of properties, vehicles, etc. Here’s a use case that illustrates how Blockchain works: • Hash Encryptions blockchain technology uses hashing and encryption to secure the data, relying mainly on the SHA256 algorithm to secure the information. The address of the sender (public key), the receiver’s address, the transaction, and his/her private key details are transmitted via the SHA256 algorithm. The encrypted information, called hash encryption, is transmitted across the world and added to the blockchain after verification. The SHA256 algorithm makes it almost impossible to hack the hash encryption, which in turn simplifies the sender and receiver’s authentication. • Proof of Work In a Blockchain, each block consists of 4 main headers. • Previous Hash: This hash address locates the previous block. • Transaction Details: Details of all the transactions that need to occur. • Nonce: An arbitrary number given in cryptography to differentiate the block’s hash address. • Hash Address of the Block: All of the above (i.e., preceding hash, transaction details, and nonce) are transmitted through a hashing algorithm. This gives an output containing a 256-bit, 64 character length value, which is called the unique ‘hash address.’ Consequently, it is referred to as the hash of the block. • Numerous people around the world try to figure out the right hash value to meet a pre-determined condition using computational algorithms. The transaction completes when the predetermined condition is met. To put it more plainly, Blockchain miners attempt to solve a mathematical puzzle, which is referred to as a proof of work problem. Whoever solves it first gets a reward. • Mining In Blockchain technology, the process of adding transactional details to the present digital/public ledger is called ‘mining.’ Though the term is associated with Bitcoin, it is used to refer to other Blockchain technologies as well. Mining involves generating the hash of a block transaction, which is tough to forge, thereby ensuring the safety of the entire Blockchain without needing a central system.

What Is a Miner in Blockchain?

Miners create new blocks on the chain through a process called mining. In a blockchain every block has its own unique nonce and hash, but also references the hash of the previous block in the chain, so mining a block isn't easy, especially on large chains. Miners use special software to solve the incredibly complex math problem of finding a nonce that generates an accepted hash. Because the nonce is only 32 bits and the hash is 256, there are roughly four billion possible nonce-hash combinations that must be mined before the right one is found. When that happens miners are said to have found the "golden nonce" and their block is added to the chain.

Blockchain is an emerging technology with many advantages in an increasingly digital world: The advantages of Blockchain technology outweigh the regulatory issues and technical challenges. One key emerging use case of blockchain technology involves “smart contracts”. Smart contracts are basically computer programs that can automatically execute the terms of a contract. When a pre-configured condition in a smart contract among participating entities is met then the parties involved in a contractual agreement can be automatically made payments as per the contract in a transparent manner. Smart Propertyis another related concept which is regarding controlling the ownership of a property or asset via blockchain using Smart Contracts. The property can be physical such as car, house, smartphone etc. or it can be non-physical such as shares of a company. It should be noted here that even Bitcoin is not really a currency--Bitcoin is all about controlling the ownership of money. Blockchain technology is finding applications in wide range of areas—both financialand non-financial. Financialinstitutions and banks no longer see blockchain technology as threat to traditional business models. The world’s biggest banks are in fact looking for opportunities in this area by doing research on innovative blockchain applications. In a recent interview Rain Lohmus of Estonia’s LHV bank told that they found Blockchain to be the most tested and secure for some banking and finance related applications. Non-Financialapplications opportunities are also endless. We can envision putting proof of existence of all legal documents, health records, and loyalty payments in the music industry, notary, private securities and marriage licenses in the blockchain. By storing the fingerprint of the digital asset instead of storing the digital asset itself, the anonymity or privacy objective can be achieved.

• Highly Secure It uses a digital signature feature to conduct fraud-free transactions making it impossible to corrupt or change the data of an individual by the other users without a specific digital signature. • Decentralized System Conventionally, you need the approval of regulatory authorities like a government or bank for transactions; however, with Blockchain, transactions are done with the mutual consensus of users resulting in smoother, safer, and faster transactions. • Automation Capability It is programmable and can generate systematic actions, events, and payments automatically when the criteria of the trigger are met.

Disadvantages Blockchain and cryptography involves the use of public and private keys, and reportedly, there have been problems with private keys. If a user loses their private key, they face numerous challenges, making this one disadvantage of blockchains. Another disadvantage is the scalability restrictions, as the number of transactions per node is limited. Because of this, it can take several hours to finish multiple transactions and other tasks. It can also be difficult to change or add information after it is recorded, which is another significant disadvantage of blockchain.

Blockchain in Money Transfer Pioneered by Bitcoin, cryptocurrency transfer apps are exploding in popularity right now. Blockchain is especially popular in finance for the money and time it can save financial companies of all sizes. By eliminating bureaucratic red tape, making ledger systems real-time and reducing third-party fees, blockchain can save the largest banks lots of money. These companies use blockchain to efficiently transfer money.

Blockchain Smart Contracts Smart contracts are like regular contracts except the rules of the contract are enforced in real-time on a blockchain, which eliminates the middleman and adds levels of accountability for all parties involved in a way not possible with traditional agreements. This saves businesses time and money, while also ensuring compliance from everyone involved. Blockchain-based contracts are becoming more and more popular as sectors like government, healthcare and the real estate industry discover the benefits. Below are a few examples of how companies are using blockchain to make contracts smarter.

Blockchain in Healthcare Blockchain in healthcare, though early in its adoption, is already showing some promise. In fact, early blockchain solutions have shown the potential to reduce healthcare costs, improve access to information across stakeholders and streamline businesses processes. An advanced system for collecting and sharing private information could be just what the doctor ordered to make sure that an already bloated sector can trim down exorbitant costs.

Blockchain Logistics A major complaint in the shipping industry is the lack of communication and transparency due to the large number of logistics companies crowding the space. According to a joint study by Accenture and logistics giant DHL, there are more than 500,000 shipping companies in the US, causing data siloing and transparency issues. The report goes on to say blockchain can solve many of the problems plaguing logistics and supply chain management. The study argues that blockchain enables data transparency by revealing a single source of truth. By acknowledging data sources, blockchain can build greater trust within the industry. The technology can also make the logistics process leaner and more automated, potentially saving the industry billions of dollars a year. Blockchain is not only safe, but a cost-effective solution for the logistics industry.

Blockchain and NFTs Non-fungible tokens (NFTs) have been the hottest blockchain application since cryptocurrency. The year 2021 brought a rise in these digital items that are currently taking the world by storm. NFTs are simply digital items, like music, art, GIFs and videos that are sold on a blockchain, ensuring that a sole owner can claim full rights to it. Thanks to blockchain technology, consumers can now claim sole ownership over some of the most desirable digital assets out there.

Blockchain in Government One of the most surprising applications for blockchain can be in the form of improving government. As mentioned previously, some state governments like Illinois are already using the technology to secure government documents, but blockchain can also improve bureaucratic efficiency, accountability and reduce massive financial burdens. Blockchain has the potential to cut through millions of hours of red tape every year, hold public officials accountable through smart contracts and provide transparency by recording a public record of all activity, according to the New York Times. Blockchain may also revolutionize our elections. Blockchain-based voting could improve civic engagement by providing a level of security and incorruptibility that allows voting to be done on mobile devices. The following companies and government entities are a few examples of how blockchain applications are improving government.

Blockchain in Media Many of the current problems in media deal with data privacy, royalty payments and piracy of intellectual property. According to a study by Deloitte, the digitization of media has caused widespread sharing of content that infringes on copyrights. Deloitte believes blockchain can give the industry a much needed facelift when it comes to data rights, piracy and payments.

Blockchain’s strength in the media industry is its ability to prevent a digital asset, such as an mp3 file, from existing in multiple places. It can be shared and distributed while also preserving ownership, making piracy virtually impossible through a transparent ledger system. Additionally, blockchain can maintain data integrity, allowing advertising agencies to target the right customers, and musicians to receive proper royalties for original works.

WHAT IS PROOF-OF-STAKE (POS)? Proof-of-stake underlies certain consensus mechanisms used by blockchains to achieve distributed consensus. In proof-of-work, miners prove they have capital at risk by expending energy. Ethereum uses proof-of-stake, where validators explicitly stake capital in the form of ETH into a smart contract on Ethereum. This staked ETH then acts as collateral that can be destroyed if the validator behaves dishonestly or lazily. The validator is then responsible for checking that new blocks propagated over the network are valid and occasionally creating and propagating new blocks themselves.

Proof-of-stake comes with a number of improvements to the now-deprecated proof-of-work system:

• Better energy efficiency – there is no need to use lots of energy on proof-of-work computations • Lower barriers to entry, reduced hardware requirements – there is no need for elite hardware to stand a chance of creating new blocks • Reduced centralization risk – proof-of-stake should lead to more nodes securing the network • Because of the low energy requirement less ETH issuance is required to incentivize participation • Economic penalties for misbehaviour make 51% style attacks exponentially more costly for an attacker compared to proof-of-work • The community can resort to social recovery of an honest chain if a 51% attack were to overcome the crypto-economic defenses.

VALIDATORS To participate as a validator, a user must deposit 32 ETH into the deposit contract and run three separate pieces of software: an execution client, a consensus client, and a validator. On depositing their ETH, the user joins an activation queue that limits the rate of new validators joining the network. Once activated, validators receive new blocks from peers on the Ethereum network. The transactions delivered in the block are re-executed, and the block signature is checked to ensure the block is valid. The validator then sends a vote (called an attestation) in favor of that block across the network. Whereas under proof-of-work, the timing of blocks is determined by the mining difficulty, in proof-of-stake, the tempo is fixed. Time in proof-of-stake Ethereum is divided into slots (12 seconds) and epochs (32 slots). One validator is randomly selected to be a block proposer in every slot. This validator is responsible for creating a new block and sending it out to other nodes on the network. Also in every slot, a committee of validators is randomly chosen, whose votes are used to determine the validity of the block being proposed.

What is a Proof of Stake (PoS) consensus algorithm? A Proof of Stake (PoS) consensus algorithm is a set of rules governing a blockchain network and the creation of its native coin, that is, it has the same objective as a Proof of Work (PoW) algorithm in the sense that it is an instrument to achieve consensus. Unlike PoW, there are no miners involved in the process. Instead, participants in the network who want to be involved in proving the validity of network transactions and creating blocks in a PoS network have to hold a certain stake in the network, for instance by placing a certain amount of the network’s currency in a wallet connected to its blockchain.

This is known as “placing a stake” or “staking”. A block creator in a PoS system is limited to creating blocks proportionate to his or her stake in the network. Thus, PoS networks are based on deterministic algorithms, meaning that validators of blocks are elected depending on the nature of the stake. For instance, selecting account balance as the sole criterion on which the next valid block in a blockchain is defined could potentially lead to unwanted centralisation. This would mean that wealthy members in a network would enjoy great advantages.