🧐 What are Blockchains?
Originally, blockchain was just the computer science term for how to structure and share data. Today blockchains are hailed the “fifth evolution” of computing.
Fundamentally, a blockchain is a data structure. It is a linked list, or chain, of unique “blocks.” Each block points to the previous one, and is itself a list of transactions. On top of this relatively simple list-of-lists data structure is laid the key innovation that blockchains have given us: a protocol for how blocks are added to the chain without any central authority.
A blockchain is a data structure that makes it possible to create a digital ledger of data and share it among a network of independent parties. There are many different types of blockchains.
- Public blockchains : Public blockchains, such as Bitcoin, are large distributed networks that are run through a native token. They’re open for anyone to participate at any level and have open-source code that their community maintains.
Permissioned blockchains : Permissioned blockchains, such as Ripple, control roles that individuals can play within the network. They’re still large and distributed systems that use a native token. Their core code may or may not be open source.
Private blockchains: Private blockchains tend to be smaller and do not utilize a token. Their membership is closely controlled. These types of blockchains are favored by consortiums that have trusted members and trade confidential information.
All three types of blockchains use cryptography to allow each participant on any given network to manage the ledger in a secure way without the need for a central authority to enforce the rules. The removal of central authority from database structure is one of the most important and powerful aspects of blockchains.
🤨What blockchains do?
A blockchain is a peer-to-peer system with no central authority managing data flow. One of the key ways to removing central control while maintaining data integrity is to have a large distributed network of independent users. This means that the computers that make up the network are in more than one location. These computers are often referred to as full nodes.
To prevent the network from being corrupted, not only are blockchains decentralized but they often also utilize a cryptocurrency. A cryptocurrency is a digital token that has a market value. Cryptocurrencies are traded on exchanges like stocks. Cryptocurrencies work a little differently for each blockchain. Basically, the software pays the hardware to operate. The software is the blockchain protocol. Well-known blockchain protocols include Bitcoin, Ethereum, Ripple, Hyperledger, and Factom. The hardware consists of the full nodes that are securing the data in the network.
⛓The Structure of Blockchains
Blockchains are made up of three core parts:
Block: A list of transactions recorded into a ledger over a given period. The size, period, and triggering event for blocks is different for every blockchain. Not all blockchains are recording and securing a record of the movement of their cryptocurrency as their primary objective. But all blockchain do record the movement of their cryptocurrency or token. Think of the transaction as simply being the recording of data. Assigning a value to it (such as happens in a financial transaction) is used to interpret what that data means.
Chain: A hash that links one block to another, mathematically “chaining” them together. This is one of the most difficult concepts in blockchain to comprehend. It’s also the magic that glues blockchains together and allows them to create mathematical trust. The hash in blockchain is created from the data that was in the previous block. The hash is a fingerprint of this data and locks blocks in order and time.
Network: The network is composed of “full nodes.” Think of them as the computer running an algorithm that is securing the network. Each node contains a complete record of all the transactions that were ever recorded in that blockchain. The nodes are located all over the world and can be operated by anyone. It’s difficult, expensive, and time-consuming to operate a full node, so people don’t do it for free. They’re incentivized to operate a node because they want to earn cryptocurrency. The underlying blockchain algorithm rewards them for their service. The reward is usually a token or cryptocurrency, like Bitcoin.
🔗 Consensus Protocols
Without a central source of truth, the nodes in a blockchain network need a way to come to consensus on the state of the system. Consensus protocols are how this is accomplished, and are an active area of research. A consensus protocol is simply a system of agreement across a blockchain. There are three protocols that we need to cover, and we’ll start with Proof-of-Work, which Ethereum used when they launched their blockchains.
Proof-of-Work When you hear about “mining ether” or “cryptomining,” this terminology is due to the nature of the Proof-of-Work (PoW) protocol. Like a miner in search of gold, the PoW protocol for creating a block requires considerable effort, and the more effort you expend, the more likely you are to “mine a block.” Also similar to miners in search of gold, PoW “mining” is competitive. Each Ethereum block contains a block reward in Ethereum’s currency, known as “ether.” This reward is granted to the miner who successfully adds a valid block to the blockchain before any other miners. The miner succeeds by successively “hashing” the block data in an attempt to find a cryp‐tographic hash that has specific characteristics. The protocol determines the rarity of these “hashes.” This rarity is called the “difficulty,” the number that determines the relative effort that miners have to expend to “mine a block.” Proof-of-Work uses a difficulty variable to maintain a stable block time as miners come and go, adding to or subtracting from the overall mining power (or hashrate) of the network. For example, if the Ethereum network had a cumulative hashrate of 100 tera hashes per second, and a large mining pool went offline, lowering the cumulative hashrate to 90 TH/s, blocks would suddenly take, on average, 10% longer to mine. Ethereum’s protocol adjusts the difficulty to ensure that the correct block time is tar‐ geted. In this case, the protocol would adjust by making finding blocks about 10% easier. This process means that in the event of significant changes in the network’s hashrate, the block times will be affected. Additionally, due to the brute-force nature of the mining process, randomness will be an ever-present source of differences in block times, even if the network hashrate stays constant.
Proof-of-Stake Proof-of-Stake (PoS) has always been on Ethereum’s roadmap. If designed correctly, PoS has significant benefits over PoW. First, there is no need to burn large amounts of electricity to find a valid block. As the respective names suggest, there is no “work” to do, only “stake” to lose. Second, the downside of being a bad actor in a PoS system can be much more severe than in PoW. Block creators stake ether in order to partici‐ pate, and if they are proven to be operating maliciously, that stake can be taken away (“slashed”). In PoW, malicious operators can be ignored, but we can’t take away their hardware. That asset lives to corrupt another day. Finally, there are less economies of scale in PoS. When a PoW miner earns a block reward, they can use that money to achieve non-linear advantages over other miners, such as faster network connectivity. In PoS, while people with more stakes will earn more ether, that advantage is linear. The rich still get richer, but not exponentially so. That said, in PoW in order to obtain currency, you can buy hardware and connect to the network, whereas in PoS you must buy from existing currency holders, which gives newcomers a disadvantage. For the smart contract developer, the behavior of PoS is similar to PoW. We still need to determine when we consider transaction finality, since block creators (called “pro‐ posers” in PoS) can still end up on different forks due to network partitions. Where things will get significantly different is when Ethereum transitions to a sharded blockchain. Under the project name “Serenity,” Ethereum is introducing Proof-of-Stake, sharding, and several other improvements as a way of resolving Ethereum’s fundamental scaling issues. Serenity will also replace the existing EVM with eWASM (Ethereum flavored WebAssembly). None of these initiatives should have a significant effect on the Solid‐ ity language. The one significant new complication will be inter-contract communica‐ tion. Currently, each node has every Ethereum smart contract ever deployed, so it is fairly straightforward for nodes to interact. But once we have a sharded blockchain, contracts will be spread across 1000+ separate blockchains. The protocol for how these contracts will interact is still being developed, but it’s safe to say that smart con‐ tract developers will no longer be able to assume that any arbitrary contract will be synchronously available to them. Furthermore, every Ethereum address will need to have a shard ID associated with it in order to know where its state is stored.
Proof-of-Authority In some situations, it may make sense to use a blockchain while restricting block cre‐ ation to only certain entities. These situations cut against the typical use case of hav‐ ing it be open to the public. This sort of restricted block creator status is provided by the Proof-of-Authority (PoA) protocol. PoA is commonly used for private block‐ chains that are hidden within internal networks. The block creators simply take turns appending the next block at the correct frequency. Due to the round-robin nature of PoA, temporary forks are far less likely. There are many more consensus protocols, but they are beyond the scope of this article. This is an active area of research, so expect to see new consensus protocols emerging for years to come. Regardless of which protocol is used, there is a reward for any node that adds a new block to the blockchain. Block creators receive a block reward as well as the sum of all transaction fees in the block. In Ethereum, transaction fees are referred to as “gas.” We will dig more deeply into the topic of gas later.
🛠 Blockchain Applications
Blockchain applications are built around the idea that network is the arbitrator. This type of system is an unforgiving and blind environment. Computer code becomes law, and rules are executed as they were written and interpreted by the network. Computers don’t have the same social biases and behaviors as humans do. The network can’t interpret intent (at least not yet). Insurance contracts arbitrated on a blockchain have been heavily investigated as a use case built around this idea.
Another interesting thing that blockchains enable is impeccable record keeping also known as Permanent record. They can be used to create a clear timeline of who did what and when. Many industries and regulatory bodies spend countless hours trying to asses this problem. Blockchain-enabled record keeping will relieve some of the burdens that are created when we try to interpret the past.
🎗The Blockchain Life Cycle
Blockchains originated with the creation of Bitcoin. It demonstrated that a group of individuals who had never met could operate online within a system that was desensitized to cheat others that were cooperating on the network. The original Bitcoin network was built to secure the Bitcoin cryptocurrency. It has around 5,000 full nodes and is globally distributed. It’s primarily used to trade Bitcoin and exchange value, but the community saw the potential of doing a lot more with the network. Because of its size and time-tested security, it’s also being used to secure other smaller blockchains and blockchain applications.
The Ethereum network is a second evolution of the blockchain concept. It takes the traditional blockchain structure and adds a programming language that is built inside of it. Like Bitcoin, it has over 5,000 full nodes and is globally distributed. Ethereum is primarily used to trade Ether, make smart contracts, and create decentralized autonomous organizations (DAOs). It’s also being used to secure blockchain applications and smaller blockchains.
The Factom network is the third evolution in blockchain technology. It utilizes a lighter consensus system, incorporates voting, and stores a lot more information. It was built primarily to secure data and system. Factom operates with federated nodes and an unlimited number of auditing nodes. Its networkis small, so it anchors itself into other distributed networks building bridges across the carries blockchains.
🔭Future blockchain applications
Larger and longer-run blockchain projects that are being explored now include government-backed land record systems, identity, and international travel security applications. The possibilities of a blockchain-infused future have excited the imaginations of business people, governments, political groups, and humanitarians across the world. Countries such as the UK, Singapore, and the United Arab Emirates see it as a way to cut cost, create new financial instruments, and keep clean records. They have active investments and initiatives exploring blockchain.
Blockchains have laid a foundation where the need for trust has been taken out of the equation. Where before asking for “trust” was a big deal, with blockchains it’s small. Also, the infrastructure that enforces the rule if that trust is broken can be lighter. Much of society is built on trust and enforcement of rules. The social and economic implications of blockchain applications can be emotionally and politically polarizing because blockchain will change how we structure value-based and socially based transactions.