Blockchain is a term that came into being after the introduction of Bitcoin in 2008. Bitcoin is therefore the first application of blockchain technology. This article introduces the principles of technology, along with the problem it solves. This gives a complete picture of what blockchain is.
What is Blockchain?
The advent of the Internet has brought about a great deal in our society. The way of communicating and sharing information became easier. Sending data to the other side of the world became possible with the click of a button. However, the underlying systems used for payments and value transfer remained the same.
For example, when you make a payment via a website, Paypal connects you to your bank. The amount is then sent to the counterparty’s bank via Paypal. For example, there are already at least three parties involved in such a payment. This is even more so when it comes to international payments! This not only leads to more complex systems, but also to higher transaction costs and longer transaction times. Why isn’t sending money digitally as easy as sending an email?
When you send an email with a photo attached, it is almost immediately received by the other party. The photo that is sent is a copy, but the real photo remains on your computer. For digital money, this would be a very unfavourable situation! Scientists have been thinking for more than two decades about solving this problem, which is also called the double-spending problem.
Various solutions were devised, but were based on central databases. This means that there must be a party, similar to a bank, that maintains the balance sheet of the accounts. This is an unfavorable situation, because as a user you are dependent on this party. In addition, a central database is sensitive to attacks by hackers and other parties.
At the heart of the financial crisis, suspicions of banks were growing. Confidence among citizens declined. Not only because of the way in which the banks work, but also because of the way in which the financial system is organised. This led to the introduction of Bitcoin, a money system based on peer-to-peer technology.
What Problem is Blockchain Solving?
In 2008, an as yet unknown person or organisation published the document that Bitcoin described. This person or organisation has probably remained anonymous because of the earlier projects with digital money based on a central database. They were abolished and the inventors imprisoned, arguing that only the state has the right to create money.
Bitcoin described exactly what blockchain is. It is the first time that the concept has been put on paper. In just under 8 pages Satoshi explains how it is possible to send money to each other on the basis of a decentralized environment. Blockchain is based on various technological components that have existed for some time. That is why it is the smart combination of existing components that makes the blockchain so interesting.
Blockchain as a Peer-to-Peer System
Blockchain is based on peer-to-peer technology. This is a technology previously found in concepts such as BitTorrent and Napster. It allows users to share data with each other without the need for a central party. For example, you can use BitTorrent to download (illegal) films from the people who offer the film. While you’re downloading, the film will also be uploaded to others from your computer. This creates a network of computers that maintain the film.
Blockchain does exactly the same: it maintains a shared database in the network, with the balance sheets of accounts. In this way, all persons in the network know who has what. This makes it difficult to turn it off or hack it, as is the case with a central database. If one of the people in the network decides to allocate more coins to themselves, then other people in the network will reject this change. In fact, they see in all the other copies that the amendment is not correct.
Of course, there have to be transactions to move value from A to B. To do this, the database has a certain structure: blocks. Every x number of transactions or minutes, a new block is added. The blocks are provided with transaction information such as sender, receiver, amount and time. In addition, the block contains a reference to the previous block. In this way, the blocks are linked together and form a chain: the blockchain.
However, it is important that when transactions take place, everyone has exactly the same copy of the database. A consensus mechanism has been devised for this purpose. This ensures that everyone agrees on the current state of the blockchain. The mechanism is designed in such a way that it is possible for any one person in the network to add the new block. Then other users can easily validate this block and add it to their copy. Once the block has been added to the chain, the transactions cannot be changed. The network then starts processing the next block of transactions.
What is Consensus in the Blockchain?
Several consensus mechanisms have been devised in the development of blockchain technology. The original of Satoshi is still the most accepted and bears the name Proof of Work (PoW). In this type of consensus, the people (computers) in the network are busy solving a complex puzzle, based on cryptography. The person who solves the puzzle first may add the new block with transactions. In exchange for the work that has been done, this person receives a fee in the form of coins (e.g. Bitcoins). This has led to the analogy that people work (chopping stone) in order to get new coins (gold), so that they are called miners and the process mining.
The process can be explained in a simplified way with a dice. If, for the previous block, the number 4 has been thrown as a solution, then for the next block the number must be less than 4. When it is possible to throw lower, the finder shares this with the other people in the network. They can easily validate whether this is indeed the case.
In the case of Bitcoin, a new block of transactions must be added approximately every 10 minutes. This means that it may also take longer for the solution to be found. Should this be the case, the software will reduce the level of difficulty. In principle, the level of difficulty is directly related to the number of people in the network. The more people are busy with minuses, the more difficult it becomes to find the solution.
What Can You do With Blockchain?
Bitcoin and cryptocurrencies are only the first applications of blockchain technology. Technology is expected to bring about as much as the Internet has done since the 1990s. At the time, the first application of the Internet was to send e-mails. Now they constantly use social media and trading platforms such as Bol.com, Airbnb and Marktplaats. There are a lot of possibilities that blockchain can help with. We give three examples of potential applications.
Decentralised trading platforms
The platforms as we know them today are essentially an intermediary. For example, one has to pay commission to websites such as Bol.com when selling second-hand goods. Through a decentralised system, these platforms can be taken over by blockchain technology, resulting in little or no cost. This allows you to act one-on-one, without the intervention of the parties. This type of apron is also currently being developed for taxis, household and hotel power generation.
Nowadays, the Internet consists of a number of large parties that have access to data, such as Google and Facebook. The data they have about us forms our digital identity. This data is worth gold for companies to gain insight into their wishes and consumer behaviour. The remarkable thing is: we share this data for free with these companies in exchange for ease of use and contact with friends and family. This also applies to purchases we make online. For example, we must provide Bol.com with data so that they can process an order to our address.
What would it be like if we were once again in charge of our own identity? The blockchain promises to make this possible. In this way, our digital identity on the blockchain can be verified by the government and other bodies. This will allow it to be used for travel, purchase products and more in the future. Companies and governments can then communicate with our identity and request the data. This will verify it, but the data will remain in our possession.
Blockchain for Business
The blockchain can be a solution in various industries. A good example is the logistics chain. A scandal caused a great deal of fuss in China when it turned out that baby powder was poisoned. It was difficult for the chain to see where this came from and which batches were contaminated.
The sharing of data on the origin of a product throughout the entire chain can offer a solution in this respect. This is why Chinese companies are building these platforms. This makes it easy to identify batches from raw material to end product. Because the data is shared by all parties and can no longer be adjusted, all parties can trust this data.
Types of blockchains
We discussed what a blockchain is, but not what species there are. There are three types of blockchains that can be distinguished. These are the public, hybrid and private blockchains. In addition to the rights to these types of blockchains, the type of consensus is also different.
The well-known blockchains at the moment are public: anyone can create an account and execute and view transactions. Examples of this are Bitcoin and Ethereum.
A hybrid blockchain is also called the consortium blockchain. This is a closed environment, where various parties work together to share data and transactions. Examples of this are a group of banks that carry out transactions between themselves or a logistics chain.
The private blockchain is used within companies. For example, information can be shared between departments and branches, with the certainty that the data can be trusted because it cannot be adjusted.
What is blockchain: a summary
Now that we have discussed the basic components of blockchain, we can go back to the essence: what is blockchain? As you have noticed, there is no such thing as one type of blockchain. A blockchain has different applications and forms, but does have a number of basic characteristics. A blockchain can therefore be defined as:
- Blocks of transactions that are connected to each other, forming a chain: the blockchain.
- A network to carry out transactions without the intervention of a third party.
- The trust in data from the past, as it can no longer be adjusted.
- Achieving consensus in order to be able to update a blockchain.
- Three blockchain types: public, hybrid and private.