What is blockchain technology?

With current trends, increasing popularity of cryptocurrencies as an investment asset in the last year will most likely propagate in 2018 as well. Currently there are over 1500 registered cryptocurrencies, with the number growing with each passing day, mainly due to the sudden popularity of initial coin offerings. These events, known by the abbreviation ICO, are a convenient way for a company to find early backers and investors, by offering various tokens and coins in exchange for the investment. However, apart from this new approach to startup funding, cryptocurrencies introduce something that might just change the world as we know it – blockchain technology.

Although some concepts that are considered as predecessors to blockchain technology have been established in the 90s, the first definition and successful implementation of this technology happened way after. In this article, we’re going to give an overview of the core principle of blockchain, its history, applications, possibilities and limitations. Also, we’ll try to give a prediction of its future in solving various issues and achieving mainstream acceptance. But for now, let’s start off by simply giving an answer to the most obvious question that raises – what is blockchain?

What is blockchain actually?

To put it bluntly, blockchain is a distributed database consisted of chunks of information called blocks that are generated after a certain amount of time passes and added to a database. Prior to being added to the chain, each block is verified by dedicated network participants called miners, as to ensure the information contained in the block is correct. Once added, a block can’t be changed nor deleted, and its content becomes publicly visible to everyone. The chronological order of blocks is ensured because each new block contains a hash, a cryptographically generated string of characters that serves as a pointer to the previous block. Therefore, blockchains are immutable by design and, due to the fact that each network participants holds a copy of blockchain that is synced in real-time with each generated block, it doesn’t have a central point of failure. This innovation might prove as ground-breaking for many industries.

Blockchain technology has many other features that makes it interesting for future implementations in various fields. We’ll be talking a lot more about these later on in the article, and now we will give a brief overview of the history of blockchain, how it was conceived, developed and, finally, presented to the world. Keep on reading and learn some interesting facts!

The origin of blockchain

Although it was actually defined and developed some 15 years later, blockchain prototype has its roots in the first exploration of a series of interlinked, cryptographically secured blocks. These researches took place in the early 90s, while the concept of electronic money system dates even from the late 80s. However, up until 2008, no further researches and discoveries have been made regarding the topic. And then, the world was changed completely.

The identity of a man, woman or a group of people hidden by the pseudonym Satoshi Nakamoto remains unknown, but one thing is certain – this mystical figure is responsible for the creation of blockchain technology and the world of cryptocurrencies. Mentioned as a “block chain” in the formal documentation of the world’s first decentralized, self-regulating electronic currency, Bitcoin, it brought a whole new approach to storing and securing data. It featured a concept of storing information containing all Bitcoin transactions in packages called blocks, which are secured using cryptography. The completion of each block, which happens when the total number of transactions fills the defined size, makes room for a new one, and this continues to infinity. Nakamoto also introduced the idea of having one database broadcasted to all network participants, thus nullifying the risk of network collapsing due to the attack on a centralized database. Also, network operates on the principle of distributed consensus, meaning that only information that is verified by participants can be added to the immutable blockchain. All these features combined make blockchain technology unique, new and truly breathtaking, making the possible implementations limitless. Think of anything that requires an ultimately secure database of transactions, and you can be sure that it can profit by implementing blockchain technology.

However, even the technology this advanced has its potential flaws, mainly due to questionable energy sustainability, scalability and potential security threats. The coming sections will deal with both pros and cons of blockchain implementation, and now we’ll be giving a brief overview of how blockchain works. Stick around and learn what’s hidden under the shiny hood!

How blockchain works?

Okay, so now you know what blockchain stands for and how it was created, but you still don’t know just how the system works. Well, we’re going to change that by explaining it to you by using a simple example of creating new block and adding it to the blockchain. Ready? Let’s go!

So, we know that blockchain denotes a decentralized database or, in case of cryptocurrencies more precisely, a distributed ledger of all past transactions stored in an immutable, chronologically sorted chain. A chain is made up of immense number of blocks – a limited size of data that can vary in type, depending on the certain blockchain implementation. For instance, you can store transactions, messages, bills, contracts, various customer data or even run applications. There is a certain amount of time, called block generation time, which denotes the span between two blocks. This is generally a fixed value that is embedded in the source code and cannot be changed, and it ranges from seconds to tens of minutes. Each block gets filled with data until it reaches its predefined maximum (several megabytes in average), and then it gets verified by crucial network participants – miners.

These users are key factors of blockchain’s distributed consensus feature. Miners are network participants that are responsible for creating and verifying new blocks, as well as maintaining network security by running full nodes – local copies of the blockchain database. Depending on the certain blockchain implementation and design, there are several ways of generating blocks, with two methods being used the most – mining and staking. Also called proof of work, mining denotes a certain computational effort that has to be performed in order to obtain new block. This is done by requiring computers to calculate extremely complex hash function in a limited time frame, while also selecting certain data transactions that are to be added to the new block. Basically, all miners, often joined into clusters called mining pools, are competing against each other in order to be the first one to solve the puzzle. Once the puzzle is solved – and the puzzle difficulty is adjusted to meet the current total computing power of miners, so that block generation time is preserved – a new block is generated.

On the other hand, a proof of stake denotes creation of new blocks by users with a certain amount of coins. Apart from the amount of coins, some other features determine the founder of next block, such as the amount of time the coins have been staked. Since staking is much more energy efficient than mining, proof of stake is often seen as the best block generation method, although there are some hybrid methods in existence as well. Nevertheless, the rest of the procedure is pretty much the same –after the selected participants creates a new block, the process repeats indefinitely. Of course, there must be a reason why someone should be interested in investing their time and energy into mining or staking, and the reason is pretty simple – rich rewards. For instance, a reward for creating new block in Bitcoin blockchain is currently 12.5 BTC, which totals to around 150 thousand dollars, and is distributed every 10 minutes. Seems like a great lottery to participate, don’t you think? However, there is a catch, and we’ll explain it later on in the article. And that’s pretty much it – once the new block is created, the reward is paid out, and the whole thing starts over and over and over.

So now you know the key operating principles of blockchain – users exchange data, while miners validate these transactions and form a new block, receiving reward for their effort. Now let’s see what possible blockchain technology applications are in existence. Read on!

Various use cases

Given the fact that blockchain is viewed more as a foundational technology rather than disruptive, it is expected that it can lay foundations for many new advanced technologies. However, mainstream adoption is still pending, due to the fact that the core technology is merely 10 years old. Surely, years will pass before blockchain technology is accepted and implemented by relevant industries, but for now, some implementations have already been made, with many more to come. Let’s take a look at some real-world examples.

One of the most exciting implementations of blockchain technology are so-called smart contracts. These are actually small snippets of code that are partially or completely executed once specific conditions are met. This is done automatically, without any human intervention and can’t be manipulated in any way, since the code is permanently kept on the blockchain database. This feature has been developed and implemented by Ethereum, a popular crypto-asset founded back in 2015. Some other cryptocurrencies also offer the same or very similar functionality, the most notable one being NEO, a Chinese-based smart applications development platform previously known as Antshares. Due to the ease of creating smart contracts, these two platforms are currently most popular due to the growing number of ICOs, new cryptocurrencies emerging on top of the core blockchain almost on a daily basis. Furthermore, blockchain technology can be used to develop peer-to-peer exchange platforms, much like a decentralized eBay without the need of facilitating trading fees, and without any restrictions. The already mentioned initial coin offering might pose as a completely new way of funding startups, much like Kickstarter or Indiegogo platforms. When it comes to governance, blockchain can enable fully transparent and fair voting system through the system of tokens acting as votes, each with the same weight and immutable once when cast. The technology already has some implementations in terms of supply chain tracking and file sharing – the most successful ICO at the moment, Filecoin, that gathered more than 250 million dollars via ICO, is a decentralized file sharing platform.

There are many other possible implementations of this technology that are currently being developed. Virtually, every legit cryptocurrency offers a solution to a certain problem. Transparent tracking of land deeds, creating commission-free exchanges and decentralized investment funds, platforms for artists enabling them to reach listeners without an intermediary, identity management, IoT platforms – you name it. This is the beauty of this technology – its implementation possibilities are limitless, and many industries can profit greatly by implementing it. However, blockchain technology does have some flaws, which we’ll be addressing to in the next paragraph. Keep on reading and learn everything about blockchain pros and cons!

Advantages and disadvantages

We were praising blockchain technology the whole time here, but now we have to look at the bigger picture. No technology is perfect, especially the one that is still fairly new and has a lot of space for improvements. Here, we’ll give an objective overview of key advantages, as well as several disadvantages, in order to give you an unbiased review of blockchain.

The most important feature of blockchain technology, according to a majority of sources and users, is transparency. At any time, anyone can see what is happening on the blockchain, and can browse through the whole transaction history, going all the way to the first, genesis block. Also, a common practice is to license blockchain code for each implementation as an open source, giving everyone the option to modify it at will, thus making foundations for future implementations. These “strays” from the main chain are called forks, and many popular cryptocurrencies have been created by simply forking the basic blockchain and adding some improvements. Furthermore, blockchain is by design incredibly resistant to any data alteration once it has been added to the chain, which involves tremendous effort and acceptance of key network participants. This is the reason why many security-oriented industries are making researches regarding blockchain implementation. Decentralization is yet another key aspect of the technology – by having a copy of the whole database stored locally on each network node, the chances of failing or losing data are greatly reduced. What’s more, this feature enables the existence of true peer-to-peer protocols, thus omitting any third-party mediators. This could significantly change many industries – with Bitcoin, you can exchange wealth without the need of any bank. Next, the fact that the whole network is run, maintained and governed by users themselves is a completely new paradigm. All important decisions require a certain percentage of users accepting it, so there is no chance of someone imposing their ideas to the rest of the community. And finally, blockchain enables faster transactions (limited by the block generation time) and lower transaction fees than conventional online and offline methods. Blockchains are accurate, trusted and tend to simplify processes by saving all data to the single chain.

However, some flaws do exist, and they range in both complexity and severity. Network capacity might be a main one – many cryptocurrencies boast with ability to process tens of thousands of transactions per second on the test network, but once it goes live, performance tends to drop rapidly. Various projects are offering different possible solutions to network congestion problems, but it remains to be seen which approach is the best. Therefore, scalability might pose as the biggest problem to blockchain – the effort of maintaining the same lightning-fast transactions with dozens and with millions of users is something that must be solved prior to true mainstream adoption. Furthermore, some possible security concerns exist, due to the possibility of one or several individuals holding a majority of total supply of coins or tokens. This might give them the opportunity to take control over transaction verification, block generation and other features. However, this attack is mainly theoretical, since it would take a lot of effort, both in terms of money and energy, to execute it. Also, energy consumption for PoW-based blockchains is considered a flaw as well, given the fact that global Bitcoin mining currently uses more energy on a yearly basis than some whole countries. The fact that miners tend to join in pools might increase the chances of mining becoming centralized, as well as to switch to some other chain due to bigger rewards, thus reducing the network stability and security. Although this isn’t the fault of the technology, irreversibility might sometimes pose as a problem, particularly when introducing human error. If you happen to lose your private key, all your underlying tokens and coins are lost with it, since there is no way of retrieving it. So, no undo option, but this is something that is consciously integrated in the source code, so it’s meant to work this way – just keep your private key safe. And finally, politics and regulation might, in the end, become blockchain’s worst enemies. Due to the fact that this technology might effectively replace some government’s procedures, making them obsolete, politicians might use regulatory agencies to limit or completely ban the usage of blockchains. Although it is highly unlikeable to happen, a possibility still exists, particularly due to the fact that cryptocurrencies tend to be featured on newspapers, magazines and TV shows. We will see what the future will bring, but either way, blockchain technology is definitely here to stay.

A bright future for blockchain technology?

Finally, trying to predict what will happen with blockchain and cryptocurrencies in 2, 3 or 15 years is a rather difficult task to perform. Surely, its ingenious design will get some much-needed improvements and new features in the future, opening a way to even broader applications. But it also might serve as a foundation for even better technology that will completely replace it and become implemented into our everyday life. Cryptocurrencies are still a part of a highly unregulated market prone to manipulations and, even though the last year saw some great ROIs and broader acceptance of cryptos, the whole thing might collapse in a matter of days. In times like these, one has to be extremely cautious, since the combination of a new, young tech and volatile market might produce surprising results.

However, we strongly believe that blockchain is the tech of the future, and its time has yet to come. The fact that cryptocurrencies gained increased adoption is fantastic, since the mass media became interested in the underlying tech as well. However, prior to actually getting accepted by key industries in full, some of the already mentioned problems have to be solved. Only then can blockchain technology truly change the world as we know it. And that’s about it when it comes to this topic. We will be covering many other themes related to the world of crypto and blockchain, as well as post reviews of interesting currencies and ICOs, so be sure to follow us in the future as well!