Blockchain technology is an advanced data mechanism that allows for transparent sharing of information within a business network. A blockchain stores data in blocks that are linked together like a chain. The data is chronologically consistent because you cannot delete or modify the chain without network consensus. As a result, you can create an immutable ledger using blockchain technology to track orders, payments, accounts, and other transactions. This system has built-in mechanisms that prevent unauthorized transaction entries and create consistency in the shared view of transactions. Blockchain is a distributed data or ledger shared among nodes of a computer network. As a database, a blockchain stores information electronically in digital format. Blockchains, known for their crucial role in cryptocurrency systems like Bitcoin, maintain a secure and decentralized record of transactions. The innovation of blockchain is that it guarantees the fidelity and security of a record of data and generates trust without the need for a trusted third party.
A major difference between a conventional database and a blockchain is the method of structuring data. A blockchain groups information into blocks, which are sets of information. Blocks have a certain storage capacity and, when filled, are closed and linked to the previously filled block, forming a chain of data known as the “blockchain.” All new information is compiled in a newly created block that follows the freshly added block and is added to the chain once filled.
A conventional database does not structure its data in blocks, while a blockchain, as the name suggests, structures its data in blocks that are linked together. This data structure naturally creates an immutable timeline of data when implemented in a decentralized nature. Once a block is filled, it becomes part of the timeline. Each block is given a precise timestamp when it is added to the chain.
2.1 – Why is blockchain important?
Traditional database technologies face several challenges in recording financial transactions. For example, consider the process of selling a property. After the exchange of money, the ownership of the property is transferred to the buyer. Individually, both the buyer and seller can record the financial transaction, but neither method is entirely reliable. The seller could easily claim that they did not receive the money even though they did. Similarly, the buyer could claim they have paid even though they haven’t. To avoid potential legal issues, a trusted third party should monitor and verify the transaction. The presence of this central authority not only complicates the transaction process but also introduces a risk element. If the central database is compromised, both parties could be at risk. Blockchain reduces these issues by creating a decentralized and immutable system for recording transactions. In the scenario of property transactions, blockchain creates a ledger for both the buyer and seller. All transactions must be approved by both parties and are automatically updated in their ledgers in real-time. Any corruption in historical transactions would corrupt the entire ledger. These features of blockchain technology have led to its adoption in various sectors, including the creation of digital currencies like Bitcoin.
2.2 – How do different industries use blockchain?
Blockchain is an emerging technology that various industries are adopting in innovative ways. Below are some applications of blockchain across different industries:
2.2.1 – Energy
Energy companies use blockchain technology to create peer-to-peer energy trading platforms and smooth access to renewable energy. For example, blockchain-based energy companies have created a trading platform for individuals to sell electricity to each other. Owners of homes with solar panels use this platform to sell their surplus solar energy to neighbors. The process is largely automated: smart meters prepare transactions, and the blockchain records them. With blockchain-based crowdfunding initiatives, consumers can sponsor solar panels in communities without energy access and become their owners. After the construction of solar panels, sponsors can also collect rent for these communities.
Traditional financial systems such as banks and stock exchanges use blockchain services to manage online payments, accounts, and market trading. For example, the Singapore Exchange Limited, an investment holding company that provides financial trading services across Asia, uses blockchain technology to create a more efficient interbank payment account. By adopting blockchain, they have resolved several challenges, including batch processing and reconciliation of thousands of financial transactions.
2.2.3 – Media and Entertainment
Media and entertainment companies use blockchain systems to manage copyright data. Copyright verification is essential for the fair compensation of artists. Multiple transactions are required to record the sale or transfer of copyrighted material. Sony Music Entertainment Japan uses blockchain services to make digital rights management more efficient. They have successfully used blockchain strategy to improve productivity and reduce costs in copyright processing.
2.2.4 – Retail
Retail companies use blockchain to track the movement of goods between suppliers and buyers. For example, Amazon Retail has filed a patent for a distributed ledger technology system that will use blockchain technology to verify that all goods sold on the platform are authentic. Amazon’s sellers, participants such as manufacturers, couriers, distributors, end users, and secondary consumers, can add events to the ledger after registering with a certified authority, thereby mapping their global supply chain.
2.3 – What are the features of blockchain technology?
The key features of blockchain technology are:
2.3.1 – Decentralization
Decentralization in blockchain refers to the transfer of control and decision-making from a central entity (individual organization or group) to a distributed network. Decentralized blockchain networks use transparency to reduce the need for trust among participants. These networks also prevent participants from exercising control or authority over each other in ways that could compromise the network’s functionality.
2.3.2 – Immutability
Immutability means that something cannot be changed or altered. Once a transaction is recorded in the shared ledger, no participant can tamper with it. If there is an error in the transaction record, you must add a new transaction to reverse the mistake, and both transactions will be visible on the network.
2.3.3 – Consensus
A blockchain system establishes rules about participants’ consent to record transactions. You can only record a new transaction when the majority of the network’s participants give their consent.
2.4 – What are the key components of blockchain technology?
The key components of blockchain technology are:
2.4.1 – A distributed ledger
The distributed ledger in a blockchain network is not just shared data that stores transactions like a shared file that every team member can edit. In most shared text editors, anyone with editing rights can delete the entire file. However, distributed ledger technologies have strict rules about who can edit and how they can edit. You cannot delete entries after recording them.
2.4.2 – Smart contracts
Companies use smart contracts to automate business agreements without the need for a third party. Smart contracts are programs stored on a blockchain system that automatically execute when predefined conditions are met. They run if-then checks to complete transactions with confidence. For example, a logistics company might have a smart contract that automatically makes payment once goods arrive at the port.
2.4.3 – Public key cryptography
Public key cryptography is a security feature that uniquely identifies participants in a blockchain network. This method generates two sets of keys for network members. One key is public, common to everyone in the network. The other key is a private key, unique to each member. Private and public keys work together to unlock (decrypt) data in the ledger. For example, John and Jill are two members of the network. John records a transaction encrypted with his private key. Jill can decrypt it with her public key. Thus, Jill can be sure that John made the transaction. If John’s private key had been tampered with, Jill’s public key would not work.
2.5 – How does blockchain work?
While the underlying mechanisms of blockchain are complex, we will provide a brief overview of the steps in the following sections. Blockchain software can automate most of these steps:
Step 1: Record the transaction
A blockchain transaction represents the movement of physical or digital assets from one party to another within the blockchain network. It is recorded as a data block and may include the following details:
- Who was involved in the transaction?
- What happened during the transaction?
- When did the transaction occur?
- Where did the transaction take place?
- Why did the transaction happen?
- How many assets were exchanged?
- How many prerequisites were met during the transaction?
Step 2: Gain consensus
Most participants on the distributed blockchain network must agree that the recorded transaction is correct. Depending on the type of network, the rules of agreement may vary, but they are generally established at the network’s inception.
Step 3: Link the blocks
Once participants reach a consensus, the transaction is written in blocks on the blockchain, equivalent to pages in a ledger book. Along with the transaction, a cryptographic hash is also included in the new block. The hash functions as a chain that links the blocks together. If the block’s content is intentionally or unintentionally changed, the hash value changes, helping to detect data tampering. Thus, blocks and chains are securely linked and cannot be edited. Each additional block strengthens the verification process of the previous block and thus the entire blockchain. This process is like stacking wooden blocks to build a tower, where you can only stack the top blocks, and if you remove a block from the middle, the entire tower collapses.
Step 4: Share the ledger
The system distributes the latest copy of the central ledger among all participants.
2.6 – What are the types of blockchain networks?
Blockchain includes the following four main types of decentralized or distributed networks:
2.6.1 – Public blockchain networks
Public blockchains are permissionless and allow anyone to join. In this type, all members of the blockchain have equal rights to read, edit, and verify the blockchain. People primarily use public blockchains for exchanging and mining cryptocurrencies like Bitcoin, Ethereum, and Litecoin.
2.6.2 – Private blockchain networks
A single organization controls the private blockchain, also known as a managed blockchain. The authority determines who can become a member of this blockchain network and what rights they will have in the network. Private blockchains are only partially decentralized because they have access restrictions. Ripple, a digital currency exchange network for businesses, is an example of a private blockchain.
2.6.3 – Hybrid blockchain networks
Hybrid blockchains combine elements of both private and public networks. Companies can establish a private, permission-based system with a public system. This way, these networks control access to specific data stored in the blockchain while keeping the rest of the data public. They use smart contracts to allow public members to check whether a private transaction has been completed. For example, hybrid blockchains can provide access to digital currency to the public while keeping the ownership of traditional currency (traditional currency) private to banks.
2.6.4 – Consortium blockchain networks
A group of organizations controls consortium blockchain networks. Pre-selected organizations share the responsibility of maintaining the blockchain and determining access rights to the data. Industries with many organizations with common goals and benefiting from shared responsibility often prefer consortium blockchain networks. For example, the Global Shipping Business Network Consortium, a not-for-profit blockchain consortium, aims to digitize the shipping industry and enhance cooperation among maritime/shipping industry operators.
2.7 – What are blockchain protocols?
The term blockchain protocol refers to various types of blockchain platforms available for application development. Each blockchain protocol adapts the basic principles of blockchain to specific industries or applications. Some examples of blockchain protocols are provided below.
2.7.1- Hyperledger Fabric
Hyperledger Fabric is an open-source project that includes a collection of tools and libraries. Enterprises can use it to quickly and efficiently create private blockchain applications. It is a modular, general-purpose framework that offers unique identity management and access control features. These features make it suitable for various applications such as supply chain track and trace, commercial finance, loyalty and rewards, and financial asset clearing and settlement.
2.7.2- Ethereum
Ethereum is a decentralized open-source blockchain platform that people can use to develop public blockchain applications. Ethereum is designed for enterprise use in business use cases.
2.7.3 – Corda
Corda is an open-source blockchain project designed for businesses. With Corda, you can create interoperable blockchain networks that conduct transactions with strict confidentiality. Businesses can use Corda’s smart contract technology to directly transact with value. Most of its users are financial institutions.
2.7.4-Quorum
Quorum is an open-source blockchain protocol derived from Ethereum. It is specifically designed for use in private blockchain networks where only one member owns all nodes or in consortium blockchain networks where multiple members own a part of the network.
2.8- How did blockchain technology develop?
The roots of blockchain technology can be traced back to the late 1970s when a computer scientist named Ralph Merkle patented hash trees or Merkle trees.
These trees use cryptography to link blocks and secure data, forming a structure in computer science. In the late 1990s, Stuart Haber and W. Scott Stornetta used Merkle trees to implement a system where document timestamps could not be tampered with. This was the first instance in the history of blockchain. Blockchain technology has continuously evolved in three generations, which are as follows: 2.8.1- First generation: Bitcoin and other virtual currencies In 2008, an anonymous individual or group of individuals, known only as “Satoshi Nakamoto,” described blockchain technology in its modern form. Satoshi’s concept of the Bitcoin blockchain used 1 MB blocks of information for Bitcoin transactions. Many features of the Bitcoin blockchain system are still central to blockchain technology today.
2.8.2 – Second generation: Smart contracts
A few years after the emergence of first-generation currencies, developers began to consider blockchain applications beyond cryptocurrency. For example, the inventors of Ethereum decided to use blockchain technology for asset transfer transactions. The feature of smart contracts was their significant contribution.
2.8.3- Third generation: the future
As companies discover and implement new applications, the evolution and development of blockchain technology continue. Companies are solving scalability and computational limits and the potential opportunities in the ongoing revolution of blockchain technology are limitless.
2.9 – What are the benefits of blockchain technology?
Blockchain technology offers several benefits in the management of asset transactions. Some of these benefits are described below:
2.9.1 – Advanced security
Blockchain systems provide a high level of security and trust required by modern digital transactions. There is always a fear that someone could manipulate the underlying software to create fake money for themselves. But blockchain uses three principles of cryptography, decentralization, and consensus to create an extremely secure underlying software system that makes tampering virtually impossible. There is no single point of failure, and a user cannot alter transaction records.
2.9.2 – Improved efficiency
Business-to-business transactions can take a considerable amount of time and create operational bottlenecks, especially when compliance and third-party regulatory bodies are involved. Transparency and smart contracts in blockchain make such business transactions faster and more efficient.
2.9.3 – Faster auditing
Enterprises must be able to securely create, exchange, store, and reconfigure electronic transactions in an auditable manner. Blockchain records are immutable, meaning all records are always arranged in chronological order. This transparency makes the audit process much faster.
2.10 – What is the difference between Bitcoin and blockchain?
Bitcoin and blockchain are often considered synonymous, but they are two different things. Since Bitcoin was the initial application of blockchain technology, people inadvertently began using the term Bitcoin for blockchain, leading to misuse of the name. However, there are many applications of blockchain technology beyond Bitcoin that span almost every aspect of life. Bitcoin is a digital currency that operates without any central control. Bitcoins were originally designed for online financial transactions but are now considered a digital asset that can be converted into any other global currency, such as the US dollar (USD) or euro (euro). A public Bitcoin blockchain network creates and manages a central ledger.
2.10.1 – Bitcoin network
A public ledger records all Bitcoin transactions and servers around the world keep copies of this ledger. Servers, like banks, are aware of every Bitcoin transaction in the world, unlike banks, which only know about the money their customers exchange. Anyone with additional computing resources can set up one of these servers, called a “node.” It’s like opening your own Bitcoin bank instead of a bank account.
2.10.2 – Bitcoin mining
Members of the public Bitcoin network mine for new blocks by solving cryptographic equations for cryptocurrency. The system publicly broadcasts each new transaction on the network and shares it from node to node. Every ten minutes or so, miners collect these transactions into a new block and permanently add them to the blockchain, which acts as Bitcoin’s final account book.
Mining requires significant computational resources and takes considerable time due to the complexity of the software process. In return, miners receive a small amount of cryptocurrency. Miners act as modern clerks who record transactions and collect transaction fees.
All network participants agree on who owns which coins using blockchain cryptography technology.
2.11- What is the difference between a database and blockchain?
Blockchain is a specific type of database management system with more features than a conventional database. Below are some key differences between a traditional database and a blockchain:
- Blockchains decentralize control without compromising existing data trust, which is not possible in other database systems.
- Companies involved in transactions cannot share their entire database, but in blockchain networks, each company has its own copy of the ledger, and the system automatically maintains a consistent link between the two ledgers.
- Although most database systems allow you to edit or delete data, you can only add data in a blockchain.
2.12 – How is blockchain different from the cloud?
The term cloud refers to computing services that can be accessed online. You can access software as a service (SaaS), product as a service (PaaS), and infrastructure as a service (IaaS) from the cloud. Cloud providers manage their hardware and infrastructure and provide you with access to these computing resources over the internet. They provide many resources besides database management. If you want to join a public blockchain network, you need to provide your hardware resources to store your copy of the ledger. You can also use a server from the cloud for this purpose. Some cloud providers also offer complete blockchain as a service (BaaS).
2.13- What is Blockchain as a Service?
Blockchain as a Service (BaaS) is a managed blockchain service provided in a third-party cloud. It allows you to develop blockchain applications and digital services while the cloud provider supplies the infrastructure and blockchain building tools. You just need to customize the existing blockchain technology, making the adoption of blockchain faster and more efficient.
Closing Chapter: Blockchain as the Keystone of Web 3.0
As we stand on the brink of the next digital revolution, blockchain technology emerges not just as an underpinning for cryptocurrencies but as the backbone of Web 3.0. Its promise of decentralization, enhanced security, and improved efficiency heralds a new era of internet innovation, where transparency, trust, and user empowerment are paramount. The journey into this new digital frontier is filled with opportunities and challenges alike. By embracing blockchain, we open the door to endless possibilities, crafting a future where technology serves as a catalyst for global change and progress. Join us as we explore the depths of this exciting evolution, where the future of the internet is decentralized, secure, and accessible to all.