What is Blockchain? Pros, Cons, Benefits, Security & Types
A blockchain is a chain of blocks that contains information. They have an interesting property: once some data has been recorded inside a blockchain, it becomes very difficult to change it.
1. What is blockchain?
The blockchain is a digital collection of transactions. An example of blockchain: Person A, let’s call her Anna, wants to sell her mother’s old house to person B, let’s call him Bob. Bob and Anna agree to the transaction but want to make it official, but instead of a lawyer, bank, or another authority figure, they get their friends to witness the exchange.
Now, everyone sees that Anna gives the title to Bob. Should Bob decide to transfer the house to a new owner, let’s call her Carrie, he will have to give all the related documents from himself, Anna, her mother, and all the other previous title holders to Carrie in front of a bunch of witnesses for proof. This is exactly how the blockchain works. Details of transactions are recorded onto what we call blocks.
Along with that data, each block has its own unique code name called a “hash” that is time stamped during the transaction or the creation of the block. Every block also contains the unique hash of the previous block.This is what connects one block to another, hence the name “BLOCKCHAIN.”
Before a new block is created, it has to be validated by a network of distributed nodes using cryptography. Nodes are the different computers that have access to the blockchain. In order to verify the addition of a new block, the nodes solve for its math-based encrypted signature, known as cryptography.
This is what makes the blockchain unique. With this technology, records are stored and transactions are verified by not just one single authority, but by the consensus of multiple privately-owned computers.
Once a block is verified, the new entry is accepted and officially recorded onto the blockchain. As an incentive, the people who verify the transactions are rewarded bitcoins. This is what keeps the system running. Now that we understand how it works, what’s the big deal?
What makes the blockchain so revolutionary? Its number one appeal is security. Because data is secured with Cryptography and because the information is stored across various computers, it is impossible for anyone to change or delete the data without others on the network noticing.
2. How does a blockchain work?
Each block contains some data, the hash of the block and the hash of the previous block. The data that is stored inside a block depends on the type of blockchain.
The bitcoin blockchain for example stores the details about a transaction in here, such as the sender, receiver and amount of coins. A block also has a hash. You can compare a hash to a fingerprint.
It identifies a block and all of its contents and it’s always unique, just as a fingerprint. Once a block is created, its hash is being calculated. Changing something inside the block will cause the hash to change.
So in other words: hashes are very useful when you want to detect changes to blocks. If the fingerprint of a block changes, it no longer is the same block. The third element inside each block is the hash of the previous block. This effectively creates a chain of blocks and it’s this technique that makes a blockchain so secure.
Let’s take an example:
Here we have a chain of 3 blocks. Each block has a hash and the hash of the previous block. So block number 3 points to block number 2 and number 2 points to number 1.
Now the first block is a bit special, it cannot point to previous blocks because it’s the first one. We call this the genesis block.
Now let’s say that you tamper with the second block. This causes the hash of the block to change as well. In turn, that will make block 3 and all following blocks invalid because they no longer store a valid hash of the previous block.
So changing a single block will make all following blocks invalid. But using hashes is not enough to prevent tampering. Computers these days are very fast and can calculate hundreds of thousands of hashes per second.
You could effectively tamper with a block and recalculate all the hashes of other blocks to make your blockchain valid again. So to mitigate this, blockchains have something called proof-of-work. It’s a mechanism that slows down the creation of new blocks.
In Bitcoins case: it takes about 10 minutes to calculate the required proof-of-work and add a new block to the chain. This mechanism makes it very hard to tamper with the blocks, because if you tamper with 1 block, you’ll need to recalculate the proof-of-work for all the following blocks. So the security of a blockchain comes from its creative use of hashing and the proof-of-work mechanism.
But there is one more way that blockchains secure themselves and that’s by being distributed. Instead of using a central entity to manage the chain, blockchains use a peer-to-peer network and anyone is allowed to join. When someone joins this network, he gets the full copy of the blockchain. The node can use this to verify that everything is still in order.
Now let’s see what happens when someone creates a new block. That new block is sent to everyone on the network. Each node then verifies the block to make sure that it hasn’t been tampered with. If everything checks out, each node adds this block to their own blockchain.
All the nodes in this network create consensus. They agree about what blocks are valid and which aren’t. Blocks that are tampered with will be rejected by other nodes in the network. So to successfully tamper with a blockchain you’ll need to tamper with all blocks on the chain, redo the proof-of-work for each block and take control of more than 50% of the peer-to-peer network.
Only then will your tampered block become accepted by everyone else.
Blockchains are also constantly evolving. One of the more recent developments is the creation of smart contracts. These contracts are simple programs that are stored on the blockchain and can be used to automatically exchange coins based on certain conditions.
3. Is blockchain secure?
Is the blockchain safe? The blockchain is a continuously growing list of records called blocks which are linked and secured using cryptography. As it is a decentralized system it is maintained by multiple participants on the network who are responsible for securing the data.
But, can you trust a bunch of strangers to take good care of the information? As a difference with traditional institutions responsible to keep these records, the blockchain was designed to be immutable.
This is how it works: every record that has been written on the blockchain is secured by a unique cryptographic key. This key is virtually unhackable. When a new record is written on the same block everything from their previous record, including its content and its key, is put into a formula to generate the key of the second record.
This interaction creates dependency. When a third record is created, the content and the keys of the first two records are put into a formula to establish the third key. This dependency essentially chains all the records together. The same process is then repeated until the block is full.
This way, every record created makes it dramatically more complex to alter history, because as an open network, anyone can verify it if the history is correct just by looking back at the previous blocks.
4. Bitcoin vs. blockchain?
Bitcoin and blockchain, the two terms are often interchangeably used because they’re closely related but they refer to two distinct things.
That is why so many people equate it with the technology blockchain that powers it nonetheless. It is only one of the crypto currencies that blockchain powers. There are others like aetherium, litecoin, manero,… which are also popular even though the term bitcoin has more than one meaning. Bitcoin starting with a small B refers to the token or the digital currency whereas bitcoin starting with the capital B refers to the blockchain network that maintains the public ledger or the cryptocurrency.
Bitcoin with a small B Bitcoin is an unregulated digital currency system that allows you to transfer assets across the globe using blockchain technology. In other words, it is a decentralized electronic payment system the technology was invented by the enigmatic. Satoshi Nakamoto, whose identity has remained a secret since the technology’s invention.
In 2008, bitcoin was a highly secure peer-to-peer network that uses a distributed ledger management system that is both transparent and secure. It was invented with the vision to eliminate third-party intermediaries like governments and brokers from online transactions to create a system of economy and trade which is undoubtedly one for the future.
Bitcoin is legitimate and immutable. It tackles issues of currency manipulation and loose banking systems and can even be exchanged for real money. It is no wonder that the currency’s price has skyrocketed in recent times especially since it borrows features from blockchain.
Blockchain is often likened to the Internet of the 90s due to its revolutionary entry into the digital world. It is an incorruptible system for recording transactions that is open, verifiable and yet secure. It is used to trade crypto currencies like bitcoin and for other purposes like maintaining voting records or medical data.
Blockchain is secure because it does not record transactions at one central point which can easily be hacked. It uses a distributed system for verification that checks itself at regular intervals to maintain consensus on records. It is described as the internet of value because it eliminates all intermediaries in transactions and is used for purposes like exchanging assets online through smart contracts making peer-to-peer payments in the sharing economy.
Crowdsourcing venture capital funds from a peer-to-peer economy making regulations transparent in governance and for verifying the history of things in supply chain auditing. Blockchain is durable, robust, transparent and incorruptible. It is a revolutionary technology that promises to transform our digital future.
5. Blockchain vs. bank?
Blockchain technology allows the entire financial services industry to optimize business processes by effectively sharing data in a more transparent and more secure way. Blockchain technology is quickly reshaping the landscape of financial services as both b2c and b2b consumers aim to gain a more authentic view into their personal lives. Business finances current profit pools and business models are becoming quite inefficient and are being forced to deal with the risk of complete disruption
What are the benefits of blockchain technology in the financial services industry although the benefits are already quite extensive. Let’s look at six of those benefits:
5.1. Payments
Crypto currencies such as Bitcoin which has since its introduction to the global financial stage been viewed as a threat to the control of monetary policy. Many central bank’s are shifting toward payment systems that integrate with blockchain technology.
5.2. Funding and investing
When blockchain is used to raise startup capital or to create brand-new service offerings. These transactions can now be completed in a peer-to-peer fashion. In exchange, investors may receive tokens that represent expansive future value
5.3. Accounting
Since blockchain is a shared ledger that processes transactions in real time, it has the potential to improve accounting efforts by lowering overall costs which are associated with the reconciliation of Ledger’s and freeing up resources for identity.
5.4. Identity
The ability to verify customers is one of the key cornerstones of the financial services industry. Thanks to built-in cryptographic protection. Blockchain technology could potentially offer an optimal identification protection model allowing for increased forms of security and data protection.
5.5. Inexpensive
Compared to many of the more traditional methods of moving funds through banks and credit or merchant systems, blockchain payments are both expensive and fast with built-in forms of identity verification. Users don’t
have to go through any extra steps.
5.6. Fraud
Fraud is reduced. Hackers have the potential to threaten almost every facet of the financial services industry. However, common forms of fraud such as DDoS attacks are significantly reduced with blockchain technology.
The future of blockchain technology in the financial services industry is expansive functionality. When it comes to transparency, identity and transactions. Blockchain technology could have a significant impact on financial services and will help to increase speed and efficiency with significantly reduced costs.
6. How are blockchain used?
How can this technology be used in the real world? Let’s start with the most obvious and most popular application of blockchains and that is cryptocurrencies.
6.1. Odometer
By tampering with the odometer someone can make a car appear to be newer and less worn out, resulting in customers paying more than what the car is actually worth. The government tries to counter this by collecting the mileage of cars when they get a safety inspection but that’s not enough. So instead we could replace regular odometers with smart ones that are connected to the internet and frequently write the cars mileage to a blockchain. This would create a secure and digital certificate for each car.
And because we use a blockchain, no one can tamper with the data and everyone can lookup a vehicle’s history. In fact, this is already being developed by Bosch’s IoT lab and they are currently testing it on a fleet of 100 cars in Germany and Switzerland. So blockchains are great at keeping track of things over time.
6.2. Keep track of things
Besides odometers, you can also keep track of things like intellectual property or patents or it can even function as a notary. A notary is someone who can confirm and verify signatures on legal documents. But we can just as well use a blockchain for it.
The online website stampd.io for instance, allows you to add documents to the bitcoin or ethereum blockchain. Once added, you can always prove that you created a document at a certain point in time much like a notary although right now blockchains aren’t on the same level as notaries in a legal perspective.
6.3. Digital voting
Voting happens either on paper or on special computers that are running proprietary software. Voting on paper costs a lot of money and electronic voting has security issues. In recent years we’ve even seen countries move away from digital voting and adopting paper again because they fear that electronic votes can be tampered with and influenced by hackers.
But instead of paper, we could use blockchains to cast and store votes. Such a system would be very transparent as everyone could verify the voting count for themselves and it would make tampering with it very difficult.
The Swiss company Agora is already working on such a system and it’s going to be completely open source. But there are many challenges. First, you have to be able to identify voters without compromising their privacy. Secondly, if you allow people to vote with their own computers or phone, you have to take into account that those might be infected with malware designed to tamper with the voting process.
6.4. Withstand denial-of-service attacks
A tough nut to crack but if it becomes reality it could make for a more transparent and practical voting system. Let’s move to yet another example: The food industry.
They could use blockchain technology to track their food products from the moment they are harvested or made, to when they end up in the hands of customers. See every year almost half a million people (420,000) die because of food-borne diseases and that’s partially because it takes too long to isolate the food that is causing harm.
Blockchains could help us to create a digital certificate for each piece of food, proving where it came from and where it has been. So if a contamination is detected, we can trace it back to its root and instantly notify other people who bought the same batch of bad food.
Walmart and IBM are currently working on such a system. It allowed them to trace the origin of a box of mangoes in just 2 seconds, compared to days or weeks with a traditional system. A system like this could be applied to other industries as well. We could use it to track regular products and battle counterfeit goods by allowing anyone to verify whether or not the product comes from the manufacturer you think it does.
6.5. Track package and shipment
That is something that IBM and container shipping giant Maersk are working on: a decentralized ledger to help with making global trade of goods more efficient.
6.6. Smart contract
Blockchains can be even more powerful when we add smart contracts to them. These contracts are tiny computer programs that live on the blockchain and can perform actions when certain conditions are met.
Insurance companies could use smart contracts to validate claims and calculate a payout. Or they could allow us to only pay for car insurance when we’re driving. But it goes even further. With smart contracts we can secure our own data on a blockchain. They could for instance allow us to store our medical records on a blockchain and only allow doctors to access them when we approve it with a digital signature.
In the same fashion, you could store your personal identity there and choose what data you want to reveal. Ordering alcohol in a bar for instance only requires you to prove that you’re over the legal drinking age and with smart contracts, you can deliver that proof without revealing anything else.
6.6. Collecting royalties for artists
A future streaming service could set up two smart contracts: one where users send their monthly subscription to and one that keeps track of what the user has listened to.
At the end of each month, the smart contract that holds the subscription fee can automatically distribute the money to artists, based on how many times their songs have been listened to. So as you can see, blockchain technology can be used in so many different ways. This video is just a brief overview of how they can be used and it’s by no means a complete list of all applications.
7. Pros and cons of blockchain?
7.1. Advantages
– Greater transparency: Transaction histories are becoming more transparent through the use of blockchain technology. Because blockchain is a type of distributed ledger, all network participants share the same documentation as opposed to individual copies. Shared version can only be updated through consensus. Which means everyone must agree on it to change a single transaction. Records would require the alteration of all subsequent records and the collusion of the entire network. The decentralized nature of the blockchain is what makes them immune to takeovers or corruption by centralized entities such as banks and governments. It goes further while distributing this data across a wide network of unrelated computers and systems, also means the blockchain ledger is available for anyone to access, verify, audit data and transactions.
– Accounting blockchain allows users to record transactions that virtually eliminates human error and protects data from tampering. The data is verified every single time. They are passed on from one blockchain node to the next in addition to the guaranteed accuracy of your records. Such a process will also leave a highly traceable audit trail.
– Supply chain management: This revolutionary technology offers the benefit of traceability and cost effectiveness. Blockchain allows for the tracking of goods, origin quantity and more. This simplifies processes like ownership, transfers, production process assurance and payments.
– Peer-to-peer global transactions bitcoin which uses blockchain technology allows for the fast secure and cheap transfer of funds across the globe while there are already services. Like paypal, it processes international payments. They usually have specific limitations.
– Process integrity: Users can trust that transactions will execute exactly as the protocol commands and removes the need for a trusted third party. Due to security reasons, this program was made in such a way that any block or even a transaction that adds to the chain cannot be edited, which ultimately provides a very high range of security.
– Lower transaction costs and the elimination of exchanging assets through third-party. Intermediaries allow blockchain to greatly reduce transaction fees.
– Traceability: The format of blockchain is designed in such a way that it can easily locate any problem and correct it if there is any. It also creates an irreversible audit trail.
– Security blockchain technology is highly secure because of the reason each and every individual who enters into the blockchain network is provided with a unique identity which is linked to his account. This ensures that the owner of the account himself is operating the transactions; the block encryption in the chain makes it tougher for any hacker to disturb the traditional setup of the chain.
– Paster processing before the invention of the blockchain the traditional banking organization took a lot of time in processing and initiating the transaction. But after the blockchain technology, the speed of the transaction increased to a very high extent. Before this the overall banking process takes around three days to settle. But after the introduction of blockchain, the time reduced to nearly minutes or even seconds.
7.2. Disadvantages
– Heavy energy consumption: The consumption of power in the blockchain is comparatively high as in a particular year. The power consumption of bitcoin miners was alone more than the per capita power consumption of 159 individual countries keeping a real-time. Ledger is one of the reasons for this consumption. Because every time it creates a new node, it communicates with each and every other node at the same time.
– Maintenance cost: The average cost of the bitcoin transaction is 75 dollars to 160 dollars by the energy consumption. The storage problem might be covered by the energy issues that cannot be resolved. Every bitcoin network client stores the entire transaction history. It became as large as 100 gigabytes. The more transactions processed on the network, the faster the size grows.
– Uncertain regulatory status: In each and every part of the world, modern money has been created and controlled by the central government. Blockchain becomes a hurdle for bitcoin to get accepted by the pre-existing financial institutions.
– Volatility: Many of the cryptocurrencies that use decentralized blockchains are extremely volatile to the governments. Investors, businesses and other groups of people are trying to decide whether or not they want to adopt them, which can cause a lot of volatility.
– Transaction delays: One of the biggest drawbacks of the major blockchains that have been created so far is that they usually take a fairly long time, typically a few hours to register transactions. There are ways to work around this limitation such as using off-chain transactions still in most cases writing data to a blockchain is not instantaneous
– Unavoidable security flaw: There is one notable security flaw in bitcoin and other blockchains if more than half of the computers working as nodes to service the network tell a lie. The lie will become the truth this is called a 51 attack and was highlighted by Satoshi Nakamoto when he launched bitcoin for this reason. Bitcoin mining pools are monitored closely by the community ensuring no one unknowingly gains such network influence.
– Doesn’t guarantee full transparency: Moving data to a blockchain can be one way to help make your software project or company more transparent. But it doesn’t suddenly make everything about open. You could have a closed source application that stores data on a blockchain.
– Signature verification: All transactions made on the blockchain network need to be signed by using a public private cryptography scheme called elliptic curve digital signature algorithm. This is necessary because transactions propagate between nodes in the pure fashion of the generation. Verification of these signatures is computationally complex in centralized databases.
8. What is a blockchain platform?
If you’re looking to get started, here are the top 10 platforms to consider.
8.1. Iota
Despite being one of the younger blockchain offerings on the market today, iota is one of the most exciting. They took to the blockchain landscape with a mission to fundamentally change the way people access distributed ledger technology. Iota doesn’t actually use any chains or blocks and is instead powered by its own unique technology
8.2. Quorum
Quorum’s promise is a trusted technology suite that puts blockchain to work for your business. The solution modifies the core of the ethereum structure to offer something speedier and more efficient for permissioning. It’s a great choice for those looking to manage large private transactions and comes with the added bonus of full service support
8.3. OpenChain
The open chain platform is a public blockchain platform that was developed by coinprism. This powerful environment helps companies create fantastic systems for experimentation and anyone can use it to spin up a new instance of blockchain within seconds. There’s no miner in the open chain environment giving you less cost to worry about.
8.4. Hyperledger Sawtooth
Hyperledger Sawtooth is an enterprise blockchain platform for building distributed ledger applications and networks and comes to you from the Linux foundation. Experts can use the platform to create, deploy and execute distributed ledgers. Hyperledger also makes it easy to enable digital records without central authorities and provides numerous opportunities to extend your functionality.
8.5. eos
Another new kid on the blockchain is eos. This platform is intended for developing decentralized applications for businesses. The company behind eos distributed a billion tokens for the platform to ensure its cryptocurrency would spread around the world. Now anyone can use eos blockchain to create customizable environments.
8.6. OpenLedger
OpenLedger is providing custom blockchain development options and blockchain services to businesses worldwide. It is all about supporting digital transformation. Services include a dedicated team of blockchain professionals. Anyone can get started with blockchain. In particular, OpenLedger has over 50 expert software development and architecture specialists helping the company’s global client base leverage existing blockchain solutions.
8.7. Corda
Corda is an open source blockchain platform which helps businesses to create more secure and private transaction experiences. Notably, corda doesn’t have its own cryptocurrency like many other blockchain platforms. It operates on a permissioned model and allows businesses to unlock a better level of privacy. Corda also offers a granular level of control over digital records
8.8. Ripple
Ripple is a blockchain platform that focuses on the financial side of the digital revolution. Businesses can create global payments or build their own custom financial solution. It also comes with solutions for minimizing liquidity expenses and sending rapid payments. Currently, more than 300 companies are using the platform to create and deploy financial assets
8.9. Ethereum
Since 2013, ethereum has been offering developers an open source distributed computing platform where they can discover all the benefits of blockchain. As a decentralized system, ethereum utilizes a peer-to-peer approach. Users can write code that controls digital value, runs exactly as programmed and is accessible anywhere in the world.
8.10. IBM
Companies across the globe are using IBM’s popular and exciting blockchain platform which offers more transparent environments for company operations. In turn, IBM is leading the business world into a new era of collaboration and innovation.
Conclusion
The blockchain offers rich opportunities for maintaining a high level of data safety. Thanks to reliable data encryption mechanisms, data integrity, network resilience and scalability as a result switching from a traditional system to a blockchain based system can be beneficial to organizations in almost any industry. But just as with any revolutionary solution, organizations should be ready to deal with a number of drawbacks and complications. When using a blockchain to improve the cyber security of their products, among the key challenges are reliance on private key adaptability issues and lack of expertise.