What is Blockchain Technology and how does it related to Crypto?
Blockchain is a new type of technology that is used to create cryptocurrencies.
A blockchain is a fully distributed and decentralized public digital ledger made out of blocks (or records) of transactions managed and verified by a peer-to-peer network. The network of blocks are linked through cryptography, whereby each block contains a record (in cryptographic hash, timestamp, and transaction data) of the previous block. And this forms a chain of blocks - hence, blockchain.
The peer-to-peer network that manages a blockchain collectively adheres acto a specific type of consensus and protocol. This ensures that all transactional records within the blockchain cannot be altered (which requires the consensus of the network majority).
The data stored on a blockchain is not kept in a single location but instead exists in each block of the network simultaneously. Thus, making the blockchain network entirely public, unhackable, and does not carry the risk of having a single point of failure.
Unlike conventional centralized systems - where there is always a middleman or a singular governing authority (i.e., a bank) - blockchain systems have no centralized authority. It is, by definition, the purest form of a peerless and democratic system.
Origins of Blockchain Technology
The basis of blockchain technology is cryptography - a method of using codes and ciphers to protect secrets, data privacy, and sensitive (or classified) information.
The use of cryptography can be traced back to thousands of years and remained largely within the domains of governments until 1970s. One of the most famous incidences in cryptography was when Alan Turing, the founder of computer science, successfully cracked the Enigma cryptographic codes that the Nazi Germans used to send encrypted messages securely to their forces.
The blockchain technology of today was invented by an unknown person or group called Satoshi Nakamoto in 2008 to serve as the public transaction ledger of the cryptocurrency Bitcoin. The identity of Satoshi Nakamoto is unknown. The invention of the blockchain for Bitcoin made it the first digital currency to solve the double-spending problem without the need of a trusted authority or central server.
The Bitcoin design has inspired other applications, and blockchains which are readable by the public are widely used by cryptocurrencies. To date, there are more than 1,500 different types of cryptocurrencies that has real-world use cases that are not limited to only being digital currencies and store of value.
The Real-World Potential and Use Cases of Blockchain
Blockchains are a fairly new technological creation but the potential of its real-world use is near limitless. Although blockchains are more commonly known to be a new way of storing and transfering financial data (e.g. verifying and recording transactions of digital assets like cryptocurrencies), there are actually many more ways that blockchains can be used in multiple industries.
Here is a short list of use cases for blockchains, where some innovative companies have begun putting them in practice:
- Real estate
- Identity solutions
- Equity token offerings
- Marine insurance
- Crypto banking
- Forex transactions
- Bilateral payments
- Food safety
- Repurchase agreements
- Stock exchanges
- Tokenized ownerships
- Licencing and intellectual property
- Medical and patient data
- Land registry
- Power grids
- Peer-to-peer payments
- Automated devices
- Digital forensic evidence
- Business hiring
- Legal agreements
- Law enforcement
- Regulatory compliance
An Example of How Blockchain Works
To help you better understand how blockchain functions in a real-world scenario, here’s an example of the differences between a centralized and decentralized platform for T-shirt online shopping.
- Traditional platform: Centralized establishment (e.g. Amazon, Taobao, Lazada)
Step 1: Buyers place orders and pay the purchase price to the online shopping platform
Step 2: The online shopping platform will notify the seller to deliver the goods after receiving the payment
Step 3: The buyer changes the status of the smart contract after receiving the order.
Step 4: The payment will be automatically transferred to the seller`s account in accordance with the smart contract.
In a centralized system, all processes are centered upon the online shopping platform. If something goes wrong, sellers and buyers can only seek help through the online shopping platform. If there is a major bug in the online shopping platform, resulting in the loss of all transfer records within a period of time, or the server of the online shopping platform is damaged due to a malicious attack, the authenticity of the transfer cannot be confirmed. This is the biggest drawback of centralization - It has a single point of failure and relies too much on center and authority
- Blockchain platform: Based on decentralized establishment
Step 1: After placing an order, the buyer writes the payment into the smart contract of the blockchain (the smart contract exists in all nodes of the blockchain network).
Step 2: The seller obtains the buyer`s order information from the smart contract, delivers the goods to the buyer, and updates the status of the smart contract.
Step 3: After the buyer receives the goods, the status of the smart contract is changed.
Step 4: Smart contracts automatically transfers the payment to the seller`s account.
Note: The blockchain smart contract is an electronic contract that exists in a blockchain network node and consists of a set of protocols defined in digital format. Once a contract is generated, participants can execute the pre-defined protocols and no one has the right to modify it.
Both buyers and sellers have identical transaction records in their books. Even if the online shopping platform’s server is broken, the seller’s book still exists and the buyer’s book still exists. These are all the evidence that this transaction really happened.
In a decentralized e-commerce system, buyers and sellers will also be paying less transactional fees since there are no middle man in their process of buying or selling of products.