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  • Writer's pictureAkeju Abiola

A Comprehensive Guide to Understanding Blockchain Technology

Updated: Dec 21, 2023

What is blockchain in simple words
Blockchain knowledge

Introduction

On August 18th, 2008, Satoshi Nakamoto, an anonymous person, or a group of anonymous persons registered the domain www.bitcoin.com, triggering a series of events that would alter the course of history. This entity proceeded to publish the Bitcoin white paper, a document outlining Bitcoin's use case. One defining technology mentioned in the published white paper was "Blockchain," a relatively unknown technology at the time. 


Blockchain will go on to power Bitcoin, bringing the onset of a transformative wave that has not only revolutionized the financial industry but also extended its impact to various sectors, including shipping, commerce, international remittance, payments, virtual reality, and many others. This article will demystify blockchain, explain its core concepts and types, and highlight its applications. 


So, let's look beyond the jargon and explore the essence of blockchain, where it all began, how it operates, and the remarkable potential it holds for shaping our interconnected future.


Blockchain Technology

Have you used Excel before? Excel is a spreadsheet application owned by Microsoft that enables you to enter several rows and columns of information, which can be called using different functions. When the dataset becomes too bulky for Excel to run, it is merged into database management software.


Database software essentially aggregates data from different sources. These data are usually too big to fit into a single Excel document. Imagine a dataset containing all the full names, occupations, dates of birth, genders, addresses, and marriage statuses of every passenger who flew American Delta Airlines in 2022. For context, according to Statista, Delta Airlines ferried 30.07 million passengers through Atlanta International Airport alone in 2022. Imagine this dataset sitting in an Excel file. It could take days to load! Database software is therefore important for this size of data.


You've got to imagine one last time. Ready?... Imagine a database where a group of connected computers holds records of transactions. This database operates on specific rules. Once a new transaction is entered, it cannot be edited but can only be updated with a new transaction entry to the database. This is because all the computers on the network form a consensus before adding new information to the network. Therefore, a computer cannot go rogue and edit information already entered into the system; it will require the approval (consensus) of the other computers on the network.


How is information stored on this network?

Information is stored in virtual compartments called blocks. Each block can only hold 1MB of information. When it is full, it is linked together with the previous block using the cryptographic keys of the previous block and a timestamp of the transaction.


The computer network or database described above is what is called a blockchain. A blockchain is a decentralized and publicly available database that stores information across several computers in such a way that once information is entered, it becomes impossible to edit. This means that the data held on the blockchain is immutable and cannot be edited. The database is essentially blocks of data that are “chained” together with a cryptographic hash.


What is a cryptographic hash?

Consider a cryptographic hash, a secret code that a computer creates to secure data or information. The generated code is unique to the information, such that even a tiny change in the data will completely change the code. It's a one-way process, meaning you can't figure out the original information just by looking at the code.


Cryptographic hashing keeps things like passwords and digital information secure because even if someone sees the code, he or she can't easily figure out what it represents. They are used in various ways to keep your digital information safe and ensure that it hasn't been tampered with.


The cryptographic hash used to join blocks in a blockchain, particularly in Bitcoin, is usually represented as a hexadecimal number with a fixed length. For example, Bitcoin uses the SHA-256 (Secure Hash Algorithm 256-bit) hashing algorithm, which is equivalent to 64 hexadecimal characters per hash.


Blockchain Consensus Mechanism

You now understand that a blockchain is a publicly accessible ledger where records of information are kept in an immutable way. Since a network of computers interacts to provide information to the database (blockchain), there should be a way of ensuring safety, security, and consensus on the network. This is where the "consensus mechanism" comes in. 


To begin, consensus means “to reach an agreement." The consensus mechanism, therefore, means the mode or method of agreement between computers on a blockchain network. It is the method of agreeing on who adds new blocks to the blockchain.


Types of Consensus Mechanisms

Proof of Work (PoW): This is one of the most popular consensus mechanisms. From its literal meaning, participants (called miners) have to show proof of work done before they are allowed to add new blocks to the blockchain. The work here is solving complex mathematical problems to validate transactions and create new blocks. This process, called mining, requires a great deal of computational power and energy. Whoever solves it first is allowed to add new blocks to the blockchain and gets a block reward. Bitcoin, the most successful cryptocurrency, runs on the Proof of Work consensus mechanism.


Proof of Stake (PoS): In this consensus mechanism, participants (called validators) are chosen to create new blocks based on the volume of tokens they are willing to stake or lock up in the ecosystem. The higher the number of tokens staked in the ecosystem, the higher the chances of being selected to create the next block on the blockchain. Eth 2.0 runs on the proof-of-stake consensus mechanism.


Delegated Proof of Stake (DPoS): The delegated proof of stake (DPOS) is an evolution of the Proof of Stake consensus mechanism. Here, token holders vote for a limited number of delegates who have the authority to create blocks on behalf of all participants in the group. Selected delegates take turns producing blocks that are added to the blockchain. Voting also takes place at a pre-set time to maintain consensus.


Proof of Burn (PoB): As the name implies, the proof of burn consensus mechanism gives mining rights to participants who have burned a specified number of tokens. Token burning requires sending tokens to an inaccessible or unspendable wallet address. Burning tokens are used as a way to prove loyalty and commitment to the network, thus earning rights to add new blocks to the blockchain. Counterparty (XCP) uses the proof-of-burn protocol.


Proof of Capacity (PoC): In this consensus mechanism, storage space is what determines who adds new blocks to the blockchain. Miners show their capacity by allocating storage space to their devices. The more space allocated, the better the chances of creating new blocks. A notable crypto that runs on the proof-of-capacity consensus mechanism is Signum (SIGNA), formerly known as Burstcoin (BURST)


Proof of Authority (PoA): This consensus mechanism uses a limited number of approved and identified participants as authority nodes. These nodes then take turns creating and adding new blocks. It is a common consensus mechanism for private or consortium blockchains with known participants. The VET blockchain is a great example of a blockchain running on the proof-of-authority consensus mechanism.


TYPES OF BLOCKCHAIN

Having gained insight into various consensus mechanisms, let's examine the four primary types of blockchains: public, private, hybrid, and consortium blockchains.


Public Blockchain

Public blockchains are blockchains that are open and accessible to anyone with an internet connection. Anyone who meets the hardware requirements can join the network and compete to validate transactions. This openness promotes inclusivity and transparency within the blockchain ecosystem. In addition to being open, public blockchain operations are decentralized. Unlike traditional centralized systems, where a single entity has control over the entire network, public blockchains distribute control among a network of nodes (computers connected to the network). Decentralized control ensures that no single entity can manipulate or control the blockchain. Bitcoin and Ethereum are great examples of public blockchains. Bitcoin was the first decentralized cryptocurrency and remains the most well-known and widely used public blockchain. Ethereum, on the other hand, is a programmable blockchain platform that enables the creation of smart contracts and decentralized applications (DApps).


Private Blockchain

Unlike public blockchains, private blockchains are more exclusive. Just like public companies have to share their financial records every quarter and limited liability companies don't have to, private blockchains also keep their data private. They are run by central authorities who control who can join the network, allowing only authorized entities. This makes private blockchains more private and secure, making them a good choice for those who want a controlled and confidential blockchain setup. This exclusivity ensures that the network is composed of trusted participants who have undergone a vetting process. They also limit participation to enhance security and privacy, as only selected parties are allowed to validate transactions and access the ledger. This controlled access also allows for improved control over network governance and regulatory compliance.


One striking characteristic of private blockchains is their centralized control. In a private blockchain, centralized control allows for efficient decision-making, coordination, and implementation of updates or changes to the blockchain's rules and protocols. It also simplifies the process of resolving disputes and enforcing compliance within the network. However, it is important to note that the level of centralization can vary among different private blockchain implementations, with some being more centralized than others.


A notable example of a private blockchain is the Hyperledger Fabric, developed by the Linux Foundation's Hyperledger project. It is a prominent private blockchain platform that offers flexibility, scalability, and enhanced privacy features. It is widely adopted by enterprises for building authorized blockchain networks tailored to their specific needs.


Hybrid Blockchain

A hybrid blockchain is a combination of the functionality of two different blockchains—public and private blockchains. It offers the benefits of both types of blockchains, providing a balance between transparency and privacy. In a hybrid blockchain, certain transactions or data can be kept private, while others can be made public. This allows for greater flexibility and scalability in blockchain applications. One important advantage of a hybrid blockchain is the ability to customize the level of access and participation. 


Organizations can choose to keep sensitive information private while still benefiting from the security and immutability of a public blockchain for other transactions. This makes hybrid blockchains particularly suitable for industries such as finance, healthcare, and supply chain management, where there is a need for both transparency and confidentiality. Making necessary information available to those who need it and redacting the confidential information.


The private component of a hybrid blockchain is managed by a central authority or a consortium of trusted participants. This centralized control ensures that the network remains secure and compliant with regulatory requirements. At the same time, the public component allows for broader participation and verification by a decentralized network of nodes. The combination of the strengths of both public and private blockchains cancels out the limitations of either of them. 


In terms of applications, hybrid blockchains have been used in various industries. For example, in finance, a hybrid blockchain can enable secure and transparent cross-border transactions while protecting sensitive financial information. In supply chain management, a hybrid blockchain can provide end-to-end visibility while protecting sensitive information about suppliers and customers. An example of a hybrid blockchain is the Swisscoin.


Consortium Blockchain

Do you remember the concept of a private blockchain? Understanding this will provide valuable insights into consortium blockchains. Imagine several corporations collaborating to establish a private blockchain tailored for inter-company cross-technology solutions. Such blockchains are usually consortium blockchains. The unique aspect of a consortium blockchain is that it allows a pre-selected set of nodes to control the consensus process. 


For instance, in a consortium consisting of 20 institutes, a transaction could be considered valid only if 18 nodes sign the block. The presence of nodes from multiple organizations ensures greater privacy and governance over the network. The collaborating entities work together to share and modify information, thereby maintaining workflow, scalability, and accountability. Consortium blockchains effectively combine the advantages of both private and public blockchains, offering enhanced privacy and scalability. Hyperledger and Ripple operate as consortium blockchains.


Proof of Stake and the 51% Attack 

The 51% attack rule underscores a potential security vulnerability in blockchain networks, particularly those employing proof-of-work consensus mechanisms. As explained earlier, miners or validators vie to add new blocks by solving intricate mathematical problems in the proof-of-work systems. The 51% attack threat emerges when a single entity or a collaborative group acquires control of over 50% of the network's total computational power (hash rate).

If an actor gains majority control, they wield significant influence over the consensus process, allowing manipulation of transactions, double-spending, and potential disruption of the blockchain's normal functioning. 


This threat jeopardizes the decentralized and trustless nature of the network, particularly blockchains with lower hash rates. To mitigate this risk, some blockchains adopt alternative consensus mechanisms like proof of stake, tying block creation influence to the amount of cryptocurrency held, thus reducing the viability of a 51% attack. For a 51% attack to take place in a proof-of-stake mechanism, the attacker has to stake the highest volume of coin. A successful attack will degrade the coin’s integrity and cause its value to fall, which also renders his staked coin worthless, making it unrewarding to attack the network.


A 51% attack is, however, very difficult to achieve in the proof-of-work consensus mechanism. For example, Bitcoin's mining difficulty increases every two weeks, or after the addition of new 2016 blocks to its network. 


For an attacker to succeed, he has to use a computer with a hardware capacity that surpasses the combined output of 50% of the total computers on the network. Before he can assemble such a computer, the mining difficulty level goes up. Also, it will cost at least $7.9 billion as of July 2023 to be able to pull this off. Anyone with that type of resource will have other things to worry about outside of hacking the Bitcoin network.


Unless a consortium of present miners gangs up to attack the network, there will likely never be a 51% attack on the most proof-of-work blockchains, especially Bitcoin.


Notable Blockchain Application

1. Shipping:

Blockchain enhances transparency and efficiency in the shipping industry by providing a decentralized and secure way to track the movement of goods. Given that shipping involves numerous actors, including regulators who inspect items before departure and upon arrival, blockchain has significant use cases in this industry. The necessity for goods to ship only after fulfilling specific requirements, such as paying taxes and insurance and undergoing inspections to detect contraband, requires prompt feedback at each clearing stage. Blockchain is the ideal technology to integrate into shipping processes to ensure prompt feedback. Also, smart contracts built on the blockchain automate procedures, thereby reducing delays and minimizing the risk of fraud.


2. E-commerce: 

Blockchain can solve challenges faced by many e-commerce businesses. One prevalent challenge faced by e-commerce businesses is poor logistics management. Blockchain can facilitate smooth and transparent e-commerce transactions by streamlining information management systems, leading to more efficient e-commerce operations. It can also be utilized for supply chain management, tracking product authenticity, and enabling seamless cross-border transactions with reduced fees.


3. Remittance: 

Blockchain technology is revolutionizing the remittance industry by providing faster, more cost-effective, and more secure cross-border money transfers. Unlike traditional methods that involve many intermediaries, blockchain allows users to send and receive funds directly. This not only reduces transaction costs but also makes it a faster and smoother experience. The decentralized nature of blockchain ensures enhanced security as transactions are recorded on a tamper-proof ledger, minimizing the risk of fraud and ensuring the integrity of financial transactions. 


4. Finance

Since it became popular in 2009, blockchain has changed conventional finance. Blockchain powers applications that threaten to replace many traditional financial systems today. Beyond cryptocurrencies, blockchain powers innovations like DeFi and ICOs, revolutionizing financial services. It introduces tamper-proof ledgers, enabling faster, more secure transactions and smart contracts. As blockchain evolves, its impact on finance promises a future marked by inclusivity and transformative efficiency


Future of Blockchain

If blockchain has taught us anything, it is that it fits into almost any industry in our present world. The nature of blockchain makes it suitable to be deployed in just about any industry. Blockchain is essentially a database, meaning it can be integrated into any industry. It is particularly useful for industries where information flow and control are important for optimal performance. Blockchain is very useful for e-commerce and retail businesses, where adequate information management can be the difference between getting customer orders on time or notifying suppliers to restock your dwindling stock. Whatever the case, blockchain is very useful in almost all the industries present today.


The versatility of blockchain goes beyond its roots in digital currencies. While its immediate application was indeed the creation of Bitcoin as a decentralized means of payment, the technology has evolved to offer much more. Blockchain's ability to provide a secure, transparent, and decentralized system for recording and verifying transactions makes it a valuable tool in various sectors. For instance, it can enhance supply chain management, streamline complex financial processes, ensure the authenticity of digital assets, and even revolutionize voting systems. The potential applications are vast, and as the technology matures, you should expect to see even more innovative uses across diverse industries.


Conclusion

By now, you should have realized that blockchain is not just a buzzword but a transformational technology defining the 21st century. From its initial application, Bitcoin, to other varied applications in agriculture, e-commerce, finance, shipping, and beyond, blockchain stands as the next evolution of information and data management systems. As you grasp the fundamentals—the immutable ledger, cryptographic hashes, and consensus mechanisms—you see and appreciate the importance of security to technology. Beyond this, you now understand the four major types of blockchain: the openness of public blockchains, the exclusivity of private blockchains, and the harmonious blend of hybrid and consortium blockchains.


Whether optimizing information flow in e-commerce or transforming supply chain management, blockchain's influence is poised to revolutionize businesses. The journey through blockchain's past and present has illuminated a path toward a future where innovation knows no bounds. As blockchain matures, anticipate a landscape where its applications continue to redefine how industries operate, fostering transparency, security, and decentralized efficiency. Missing out on this transformative wave can be detrimental to any business. CI Cryptosolutions can ensure you don't miss out. It is a Web3 company focused on creating life-changing blockchain and AI applications. Whatever business you run, CI Cryptosolutions will position your business in the face of your customers, leveraging blockchain and the latest AI applications.


Embrace the blockchain revolution; it is a story yet to be fully written and has enough room for co-writers. Be one of them.


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