The Building Blocks of Blockchain

The way we transfer data and money has changed drastically over the past few decades. We no longer rely on face to face interactions now that everything can be done in an instant over a mobile device or desktop. An emerging technology that has, and will continue to, create exponential growth within this area is blockchain. Blockchain, with its remarkable versatility, has the ability to improve the lives of millions.

Blockchain: the future of data sharing and transactions

A blockchain is essentially exactly what it sounds like — a chain of blocks. Each block on a blockchain serves the purpose of a page in a ledger, recording transitions that have occurred on the network. When a transaction occurs, it is sent to the network where the validity of the transaction is confirmed. It is then permanently recorded and stored on a block for everyone to see. All the blocks holding transactions have a hash. A hash is an identifier unique to each block, basically it’s ID on the network.

Each block is connected to each other by carrying the hash of the block before it

This creates the blockchain. Blocks of data all connected to each other. Hashes also protect the blockchain from changes in the data placed on it. When a hash is created, it is specific to the block and the content within it, so if the data inside it were to change, the hash would change as well, meaning it no longer matches the hash on the block after it, alerting everyone on the network that something has gone wrong. This makes the blocks immutable; the block cannot be altered once it has been added to the chain.

Decentralization

Blockchains are decentralized, meaning there is no one entity in control. Every person on the network is called a node, and each node has a copy of the chain and can actively take part in what happens on it. If one node leaves the network, it still exists on every other node still on it. The power lies not with one single person, but rather with the whole community on the network. In order to take control of the entire network, one would need to take control of at least 51% of all the nodes.

Most networks follow a centralized architecture. Banks are an example of centralized institutions. We trust them and they are in charge of keeping everything together. They hold our money and all of the power. A blockchain works the opposite way. There is no one overseeing the things going on and there is much more transparency. There is no one individual that is trusted to hold everything. All the data is spread out amongst everyone.

A real world example of why centralization can be harmful can be seen in the economic crisis in Venezuela. According to the United Nations, more than 3 million people have fled the country since 2015 due to the crisis. Although several factors have contributed to the economic meltdown, the nation’s central bank played a major role. The corrupt banking system enabled the government to finance its own programs with endless waves of money printing — leading to hyperinflation of the local currency, the bolívar. The stark decrease in the value of the currency has led to Venezuelan citizens losing nearly all the value of their life savings stored in the nation’s banks and struggling to pay for their basic needs. According to a study by the UN World Food Programme, roughly one third of the country’s population is food insecure and 7 in 10 people reported being unable to purchase the food they need due to high prices. The country’s government and banking system failed its citizens. They put their trust in them to ensure the safety of their money, but are now paying the price for the government and bank’s mistakes.

This is why a technology like blockchain can prove to be very useful and prevent situations like the one in Venezuela. With blockchain, we do not have to put all of our blind trust in governments and institutions and gives power and control back to the people. Everyone works together for the common good of everybody involved and there is no one entity in control of everyone.

Protecting the network

Blockchain is an emerging technology, and is quite a shift from the centralized systems we have known for a long time. How can we be sure we can trust a network based around other people? Well, blockchains have consensus algorithms that ensure each new block added to the network is the only version of the truth, which is agreed by all the nodes in the network. Essentially making sure that everyone has identical copies of the blockchain and everyone can see what is going on. There are several different consensus algorithms, but 2 of the most widely used are Proof of Work (PoW) and Proof of Stake (PoS).

The Proof of Work algorithm is used to verify transactions and produce new blocks on the blockchain. The process of producing new blocks is called mining, and nodes who do this are called miners. Miners compete against each other to solve a mathematical puzzle before other nodes do in order to mine new blocks and earn a reward. A popular application of this consensus algorithm is in the cryptocurrency Bitcoin. This algorithm has both its pros and cons.

Pros:

  • Pretty effective in protecting against attacks. Solving the mathematical puzzle to verify transactions and mine on the blockchain requires a lot of computational power, so if someone wanted to attack the chain and take control over all of the network, they would need to have 51% of the network. To do that however, a lot of energy and hardware is required, making it difficult. After putting in the investment to acquire and sustain the computational power needed to take 51% of the network, the returns are simply not worth it, in theory — deterring attacks.
  • Objectivity. Proof of Work is able to add objectivity to a system of peers who have their own subjective views and goals. It’s easy for nodes in blockchains that use this algorithm to identify the proper chain to follow without consulting or trusting third parties. Nodes trust the chain with the most miners verifying it — which is an objective and easily identifiable measure.
  • Simplicity. Potentially competing blockchain histories can be reconciled and a single history can be agreed upon quickly using Proof of Work. Nodes that were knocked off of the network can easily come back online and identify the proper chain.

Cons:

  • Energy expenses. The design of Proof of Work is very energy intensive. In order to solve the mathematical puzzle needed to mine blocks a lot of electricity is needed, raising concern about carbon emissions, climate change, and the consumption of natural resources used to generate the energy for PoW mining. Bitcoin’s PoW system uses an estimated 61.76 terawatt-hours (TWh) of electricity per year — approximately 0.28% of total global electricity consumption. By comparison, Switzerland consumes 58.46 TWh per year.
  • Centralization of mining. With the computational power and energy posing a barrier to entry for many people into mining on the blockchain, large industrialized mining operations have begun to rise. Mining farms are large spaces (often warehouses) dedicated solely to mining. They house large amounts of hardware and serve as hubs for mining. Having these large organizations mining pushes away the idea of a democratized mining process, where everyone plays a role and creates a system where a few, powerful groups with big mining operations take control — essentially defeating the purpose of having a decentralized system.
  • There is no real way to punish bad actors. If someone were to attempt to create a fraudulent block, the network is likely to reject it. However, there isn’t a way to punish them for doing so. Nothing stops them from trying again.

The Proof of Stake algorithm on the other hand, has no competition between nodes. The creator of a new block is randomly selected from a pool of users that have staked a certain amount of the cryptocurrency that they have. In Proof of Work, miners are rewarded for their work, but in Proof of Stake there is no reward because there is only one node creating the new block — instead the node receives compensation by taking a fee from every transaction that occurs on their block. The penalty for trying to harm the network while in the position of creating new blocks is the possibility of losing the currency you have put up to stake. DASH cryptocurrency is an example of a system that uses Proof of Stake.

Pros:

  • Less energy consumption and cheaper. Instead of needing to buy separate hardware and use lots of energy, all nodes need to do is stake cryptocurrency they already have. This eliminates the barrier to entry mentioned in Proof of Work and is better for the environment as less electricity is needed. In this system, only one node is doing the work of creating the block, so there are not several different nodes all using high amounts of electricity to compete with each other.
  • There is a legitimate punishment for bad actors. If the block builder is dishonest and creates a fraudulent block for example, they will lose the amount of cryptocurrency they put up for stake. This is an effective deterrent for dishonest activity on the network, as people do not want to lose the crypto they have.

Cons:

  • It is more complicated than Proof of Work and is more difficult to secure. Creating punishments and stakes adds new variables to the algorithm, all of which need to be tested thoroughly. As well, each one poses a security risk if not written correctly.
  • Has the potential of leaning into centralization. There are many things to take into consideration when creating the algorithm for the network. For example, how much should nodes be required to put up as a stake in order to be considered for the position of block builder? How much of the stake should be taken if the block builder does something dishonest? Although having a high required stake and strict punishments prevents attacks, it also means that only a select few people who have lots of money they are able to stake are able to participate, making it harder for the average investor to get involved. Having a select few in power is exactly what blockchain works to eliminate, so having this in place can be seen as counterproductive.

In general, although both of these algorithms differ, they both are created to make sure all updates on the blockchain are approved by all the members of the network and that there is a single truth shared amongst everyone.

Blockchain has the ability to disrupt many different industries

We already know the impact that blockchain has made in the world of finance with the introduction of cryptocurrencies, but the uses of blockchain do not end there. This decentralized technology has the ability to refine healthcare systems around the world, revolutionize the way we vote and improve birth registration in third world countries.

With a technology this powerful, the possibilities are limitless.

In Summary:

  • The way we transfer data and money has changed drastically over the past few decades. Blockchain, with its remarkable versatility, has the ability to improve the lives of millions.
  • A blockchain is essentially exactly what it sounds like — a chain of blocks. Each block on a blockchain serves the purpose of a page in a ledger, recording transitions that have occurred on the network.
  • All the blocks holding transactions have a hash. A hash is an identifier unique to each block, basically it’s ID on the network.
  • Blocks immutable; the block cannot be altered once it has been added to the chain.
  • Blockchains are decentralized, meaning there is no one entity in control. Every person on the network has a copy of the chain and can actively take part in what happens on it.
  • Blockchains have consensus algorithms that ensure each new block added to the network is the only version of the truth, which is agreed by all the nodes in the network. Two of the most widely used are Proof of Work and Proof of Stake.
  • Has the ability to revolutionize many different industries

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Sedak Chuckal

Sedak Chuckal

Innovator at The Knowledge Society