Blockchain

How it works, why it is important and Practical Applications

Practical ApplicationsBlockchain Explained

Practical Applications

Industry Sectors using Blockchain

FINANCE

Blockchain technology adoption in the finance sector has been driven by the security and transparency the technology provides along with the potential savings it could deliver companies in both time and money by improving efficiencies. Currently, adoption of the technology in this sector aims to improve existing systems and processes through increased security, resource efficiency and trust.

AGRICULTURE

Companies in the agriculture industry have started to use Blockchain technology to create systems that will record the journey taken by produce through the supply chain by utilising the power of a shared secure ledger. Older agricultural models are also seeing a resurgence, using the Blockchain to improve upon established practices.

ENERGY

Companies in the energy industry have started to combine Blockchain technology with smart metering systems, creating new products and services to a number of industries that have already started to integrate technology systems into everyday practices.

CONSUMER GOODS

(Includes Retail, Wholesale and supply chains)

Among the first industries to embrace the use of Blockchain technology, the retail sector has already discovered several practical applications of recording transactions in a Blockchain system. These include everything from ensuring the authenticity of high-value products such as diamonds and art to locating stolen goods and protecting both customers and sellers from fraudulent transactions.

INSURANCE

Companies have started to use Blockchain technology to create applications for the insurance sector, allowing insurance companies to improve the products they offer, optimise their internal processes, and create new services for their customers.

What is Blockchain

How Blockchain Works

Blockchain is a form of Distributed Ledger Technology(DLT) and is an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way. A blockchain is a continuously growing list of records, called blocks, which are linked and secured using cryptography.  By design, a blockchain is inherently resistant to modification of the data. When used as a distributed ledger, a blockchain is typically managed by a peer-to-peer network collectively adhering to a protocol for inter-node communication and validating new blocks. Once recorded, the data in any given block cannot be altered retroactively without the alteration of all subsequent blocks, which requires collusion of the network majority.

Detailed technical explanation of blockchain

Throughout history, humanity has tried different ways to exchange values and protect buyers and sellers. After coins, paper money, and banking systems, today’s most obvious solution for exchanging value is electronic payments.

Credit card systems, the internet, and mobile technologies were all important innovations that improved the convenience, speed, and efficiency of transactions. However, in the modern business environment these transaction mechanisms have their shortcomings, including limited transaction sizes, the need for third-party validation, increasing transaction costs, and a weak trust-based model. Besides, fraud and cyberattacks are unavoidable, which also leads to increasing costs for payment operations.

To address these challenges, the world needed a new type of payment system, or rather a network, that could establish trust, remove intermediary institutions (letting any two parties transact directly with each other), eliminate fraud, and provide secure and efficient escrow mechanisms to protect payers and payees. This was the conclusion reached by a person (or persons) known by the pseudonym Satoshi Nakamoto over 11 years ago in 2008 and set out in this white paper.

Satoshi Nakamoto described a solution based on cryptocurrency and a peer-to-peer distributed timestamp server to generate computational proof of the chronological order of transactions.

In this article we’ll define all these terms, explain how these things support blockchain technology, and explain what it takes to build a blockchain network.

What’s a Blockchain?

A blockchain is a shared ledger that stores information about transactions in a distributed manner.

Blockchain is a shared ledger

These transactions are performed between people within a blockchain, which is formed by its participants’ computers. These computers provide the computing power to constantly maintain the blockchain (by performing computations and verifying transactions).

Such computers are called nodes, and each node in the network owns a full copy of the blockchain.

How Exactly Does the Blockchain Work?

Technically, a blockchain is a chain of blocks ordered in a network of non-trusted peers. Each block references the previous one and contains data, its own hash, and the hash of the previous block.

Hash example

Block

A unit of data stored inside a block may be represented by any value depending on the type of blockchain. A block can store an amount of money, a share in a company, a digital certificate of ownership, a vote during an election, or any other value.

A block stores encrypted details about the parties whose interaction resulted in the data stored in the block. A cryptocurrency block also contains the sender’s and receiver’s encrypted identifiers. A block for an ecommerce transaction will contain the identifiers of the retailer and consumer, for example.

Each block also has a hash. This hash is a value generated from a string of text using a mathematical function. A hash can be compared to a fingerprint, as each hash is unique. Its role is to identify a block and the block’s contents.

Each hash is unique

Once a block is created, a hash is calculated. Changing something inside the block causes the hash to change. So a hash also indicates changes to a block.

Invalid hash

Also, each block contains a hash of the previous block. For instance, if there are three blocks in a blockchain, block 3 will contain the hash of block 2, and block 2 will contain the hash of block 1.

Each block is connected

If anyone changes the data in a single block, the hash of that particular block changes, but it also makes the whole chain invalid.

Ivalid hash

A hash is a great tool for identifying attempts to change data in blocks. However, a hash algorithm alone is not enough to ensure the security of a blockchain. To mitigate attempts to corrupt the blockchain and to ensure security, blockchain techmology also uses a process called proof-of-work.

Proof-of-Work

Proof-of-work is a process of producing data that’s hard to get but easy to verify. In the context of a blockchain, proof-of-work is about solving mathematical problems. If a problem is successfully solved, then a new block can be added to the blockchain. On average, performing proof-of-work calculations and adding a new block to the chain takes about 10 minutes.

What’s behind the proof-of-work process?

This mechanism can be compared to a game of dice. Let’s say there’s a specific number – nine, for example – that a player needs to roll. Most likely, the player will need several attempts. But sooner or later, he’ll get nine.

Now let’s add more players to the game. Whoever rolls the correct number first wins.

Proof-of-work is like a game of dice

This is effectively how proof-of-work functions. Of course, in a blockchain the problem that needs to be solved is way more difficult than rolling nine in a game of dice, but the concept is the same.

Computers that form the blockchain network race to solve a mathematical problem to receive a reward and be the first to add the next block to the chain.

Mathematical problems in blockchain have to be hard to solve but easy to check in order to prevent cheating.

Together, hashing and the proof-of-work mechanism ensure the security to the whole blockchain network.

Longest Chain

Since a blockchain consists of an enormous number of nodes, each of them is simultaneously performing proof-of-work. Thus, a situation when several nodes manage to complete proof-of-work with a valid result are pretty common. When this happens it’s called a hard fork, which describes exactly what happens to the blockchain – it forks.

Blockchain forks

When new blocks are created and added to one of these forked chains, it becomes the longest and again the only valid chain. Blocks from other forked chains get rejected by blockchain nodes, and all the transactions contained in those blocks are sent for verification again.

Blockchain verification

So far, the longest fork reached is no more than five blocks in a row.

Wallet

Along with hashing and proof-of-work, a blockchain wallet also works to ensure the safety of transactions and prevent fraud. A wallet generates paired public and private keys that further ensure the security of transactions.

A public key can be compared to a postbox. Anyone can put a letter inside of it, but they can’t get that letter back. Only a postal worker who has a private key can open the postbox and get the letter.

This is similar to how keys within a blockchain work. Anyone can send a transaction using a public key to the address of a receiver. This is similar to putting a letter in a postbox. But only the owner of that address who also has the private key can access the value of that transaction.

The process of keys exchange

Distributed Network

Anyone is allowed to join a blockchain peer-to-peer network. When someone joins a network, this person gets a full copy of the blockchain. Distributed storage of data accompanied by effective hashing and proof-of-work mechanisms helps to prevent nearly any fraud.

For instance, in order to add a block containing an invalid hash or invalid data, duplicate an existing block, or perform a fraudulent transaction, an attacker would have to hack the computer of every blockchain participant and slip in the invalid block.

Blockchain is a protected network

However, even if this were possible, none of the nodes would verify such a block. It would just be ignored, as if it never existed in the first place.

Blockchain Implementation

One of the most popular uses of the blockchain is for cryptocurrency. Cryptocurrencies like Bitcoin, Litecoin, and others aren’t issued or controlled by a central authority. Decentralization allows these blockchain currencies to take the first steps toward an alternative financial model with no intermediaries.

Another area revolutionized by the blockchain is trading and making deals. Traditional contracts are being replaced by smart contracts that are unbreakable, eliminating third parties and working for a wide range of applications: employment contracts, wholesale and retails purchases, agreements for buying property, agreements securing intellectual property rights, insurance, and even marriage contracts. We’ll talk about smart contracts in a separate article.

The blockchain can go far beyond cryptocurrencies and smart contracts, however. The blockchain makes it possible to store, track, and transfer data about real estate objects and land, property rights and medical history, commercial transactions and taxes, and more.

The blockchain is capable of disrupting even such monopolistic spheres as energy management, governance, and law enforcement (as we shared in our recent article on how to implement the blockchain in different business spheres).

Final Thoughts

Gradually, blockchain technology is changing the way we trade, opening new opportunities for individuals and businesses and, aside from its applications in financial services, will become the basis for numerous businesses across industries.

We’re pretty sure that in the right hands, nearly any business idea that’s built on technology can benefit from a blockchain.

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Significance of Blockchain

Why Blockchain can be the next paradigm shift.

One of the fundamental elements of our economy is trust, for example, a bank has to trust a customer to pay back a loan or a buyer need to trust the historical record of the vehicle she’s buying.  Until now, buyers had to obtain this information from third-party providers like Credit Bureaus or the DMV.  Besides being a costly and time-consuming exercise, information could also be tampered with. Blockchain technology provides an alternative to overcome all these limitations in the form of frictionless, decentralised and tamperproof information at a very low cost-point. In addition, Blockchain can also accommodate smart contracts, authentication and exchanges.

Beyond the hype

Blockchain, whilst full of promise, is not the silver bullet for every conceivable scenario. The hype surrounding Blockchain is obscuring the actual technical details and costs of what a blockchain can and can’t do.  Because Blockchain, by design, cannot be controlled by any single party, any change to the system can only be achieved with the permission of all users.  This makes events like upgrades, bugfixes, and adding additional functionality very problematic compared to traditional centralised databases.  Blockchains are, by nature, “Distributed Ledger Technology,” and if there is no need to “distribute” the ownership of the database, or if trust amongst users is not a significant issue then you should be using a different databasing structure. A centralized database is much faster, less expensive, easier to maintain and easier to upgrade than a blockchain.

There are however times when you should use a Distributed Ledger Technology like Blockchain

Decision Tree for using Distributed Ledger Technologies like Blockchain

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Practical Applications

Industry Sectors using Blockchain