The Blockchain Technology: The Definitive Guide To Understanding The Backbone of This Innovation

Everywhere, there is an exciting talk about the blockchain and cryptocurrencies, and it is spreading like wildfire. This remarkable technology has intrigued many people, including governments, financial institutions, journalists, artists, and even enthusiasts on social media forums – it is like the 90s all over again when World Wide Web was born, and before the dot.com bubble.  Some critics mostly consider cryptocurrencies to be a bubble, just like the infamous dot.com bubble that rocked the late 1990s. Still, amid this negative vibe, some ardent followers believe in this unique technology.

“Once widely adopted, blockchain will transform the world.” – Wall Street Journal

If you wish to understand cryptocurrencies like bitcoin and other altcoins like Ethereum on a deeper level, the trick is to familiarize yourself with the concepts of the blockchain: what it is; how it works; and the technologies behind it.  That is what this article is all about. I cannot lie to you that this guide will make you an expert of blockchains, but I can guarantee I have covered pretty much what you need to know if you are a not familiar with the topic.

Let us begin.

What is a Blockchain?

We can define the blockchain using many fancy terms, but I believe it is not the definition that matters; instead, it is what the blockchain technology can accomplish. However, it does not hurt to give one: a blockchain is like a global spreadsheet or ledger that records and stores data or transactions that happen within a trustless peer-to-peer (P2P) network.

Don & Alex Tapscott definition of the blockchain.

Don & Alex Tapscott definition of the blockchain.

This distributed ledger records information of any value not just money; assets, identities, title deeds, intellectual property, votes, etc. Data recorded on this digital database has a time-stamp, it follows a chronological order, and it is immutable.  When Satoshi Nakamoto designed the bitcoin protocol, the idea was to enable to parties to transact online without going through a third party like a bank, PayPal or credit card companies like Visa.

Image source: https://financialit.net/blog/blockchain/what-blockchain-isnt

Think about it this way: already we have the Internet, a tool that aids in moving information, now this data needs to be stored somewhere, but instead of saving it in a central location/server where hackers can infiltrate and steal the data, we keep it in a distributed database where it is secure and cannot be altered.


Technologies used in blockchains 

The underlying technology in blockchains revolves around three fields: peer-to-peer networking, asymmetric cryptography, and cryptographic hashing.

Peer-to-peer networking

In a peer-to-peer network, we have a group of computers interlinked together just like the BitTorrent network architecture, such that these computers can exchange data with another, and can do so without going through a central authority. Every computer on this network is referred to as a node. P2P networks are distributed systems in a way, where individual nodes can share computational power one another. Also, every node is a consumer and a supplier at the same time.

Diagram of Bittorent network

Asymmetric cryptography

Asymmetric cryptography is a method used to identify user accounts and verify transactions on the blockchain. It enables transfer of ownership from one account to another.  Through this mechanism, a person can send a message to a specific recipient, such that nobody else can see the message contents other than the intended recipient.

To make this possible, blockchains use digital signatures, to sign and verify transactions.  Digital signatures are just like hand signatures only that they cannot be forged (More on how this works later).

Users are provided with two keys; one is public, the other is private.  Anyone can see the public key; it is just like your home address. Conversely, the private key is a secret address and users are not to share it with anyone. While one key encrypts data, the other key will decrypt it.

So, if a sender encrypts or signs data with a private key, the recipient has to use the corresponding public key to decrypt the data, and vice-versa.  This method allows nodes in the blockchain network verify the authenticity of a transaction, and identify whether the user who authorized the transaction is the rightful owner of the account.

How public key infrastructure works

How public key infrastructure works

Cryptographic Hashing

Hashing is a process of using computer programs known as hash functions to compress a data string of any length into a fixed output: a hash value, which is a combination of alphanumeric characters. In blockchains, cryptographic hashes – which are “unique fingerprints of data” – allow nodes in the P2P network to validate the authenticity of a transaction source, and to validate blocks before they are linked to the existing database. This mechanism of generating a hash value ensures transactions and data written on the blockchain remain unchanged, and it is secure.

An image showing the cryptographic hashing process

An image showing the cryptographic hashing process

This is how it works: someone creates a cryptographic hash for a piece of data, and if anyone wants to confirm the data has not been altered, all they have to do is compute the hash value for that specific data again – if the data has not be changed, the hash values before and after should match.

The image below shows the cryptographic hash for an input of a cat’s picture, and the resulting output. If you change any of the output details, you should get a completely different output.

An Image of how cryptographic hashes algorithms work

An Image of how cryptographic hashes algorithms work

The blockchain uses cryptographic hashes to verify and prove the existence of any data; whether it is transactions, documents or digital assets.


A short history of Blockchain

We may have heard about blockchains after the release of bitcoin code (back in 2009), but the idea of electronic cash was born in the 1980s. Some of the protocols that molded bitcoin (cryptography and Proof of work algorithms) had been theorized and tried many years before this invention.

As an example, Adams Back had developed Hashcash in 1997, an electronic system that leveraged PoW to deal with email spam.  Before Hashcash, David Chaum had invented e-cash, a digital payment that was to enable the exchange of goods and services in e-commerce. However, due to double spending and trust issues, shoppers did not adopt this payment method.

A breakthrough happened in 2009 when a person or a group of people by the alias Satoshi Nakamoto released the source code that described a “peer-to-peer electronic cash”: bitcoin. This invention was one of a kind -- it was the first digital payment system to use a Proof of Work to achieve consensus in a distributed, trustless network.  In the Whitepaper, Nakamoto described the payment method as “an electronic cash system that would allow parties to transact without going through a third party.”

Nakamoto was the first person to mine the first block, also referred to as the Genesis block. After mining the around 1 million bitcoins, Satoshi disappeared without a trace, and up to today, nobody knows his whereabouts, except for the usual speculation.

Satoshi was able to achieve what seemed to have been a challenge throughout the journey of electronic cash: achieving a distributed consensus in a trustless network. Before this innovation, the schemes that existed relied on a centralized trust authority, and there was the problem of disagreement between nodes. The Ethereum blockchain followed soon after the Bitcoin blockchain.


Blockchains Explained

The blockchain encompasses many aspects; you can think of it as a structure that has different layers.  Here are some characteristics unique to the blockchains.

1. Network integrity

Network integrity is one of the blockchain design principles. One may wonder how blockchains maintain integrity in a distributed and trustless network.  Well, in such an environment, blockchains achieve that through consensus mechanism.

To achieve consensus in a trustless network, the first version of the blockchain employed public-key cryptography combined with the technology used in BitTorrent file sharing. By consensus, we mean nodes in the network agreeing about the final state of data.

A consensus mechanism helped solved the double spending problem because the network has to agree on which of the two transactions in a double spend will end up in the distributed ledger. Double spending was a problem that faced digital money and assets because it is easy to replicate digital information. Before blockchains, it was crucial to rely on a trusted third party to avoid this problem.

A classic example of a double-spend is a scenario where let us say Alice has two BTC, but she owes Bob and Sandra two bitcoins each. If Alice pays Bob what she owes, it means she has no more coins to spend. However, at the time she paid Bob, let us assume Alice decides to create another transaction to pay Sandra after she paid Bob.  This creates a double spend situation, and on the blockchain, one of the transactions would be rejected. Only one of the transactions would be confirmed and included in a valid block, which would verify that Alice has spent her digital currency, the two BTC shed had initially.

An image showing how bitcoin handles double spending

An image showing how bitcoin handles double spending

2. Distributed database and ledger

The idea of decentralized systems is not a new concept. It was born in the 1960s, during the introduction of cryptographic signatures.  Unlike traditional databases that are centralized, the blockchain is decentralized, which means it has no single point of control, and that power is distributed to every node.

How distributed database works?

The blockchain is like a spreadsheet or a ledger that registers transactions or valuable information, but this database is shared across a network of computers. We can have thousands or millions of computers from all over the globe join this network. Each node in this network represents a volunteer from anywhere in the globe. Plus, everyone on the distributed network coordinates to achieve a common goal.  Also, every transaction is time-stamped and validated, which means the distributed ledger holds all the transactions ever processed.

In addition, everyone on the network can see the contents of the ledger. If you think about it, the idea is the same thing as a business having a Google Drive spreadsheet or Document and then sharing it with its employees, only that in the case of the blockchain, there is no centralized power, and a hacker has no particular point to attack.

Lastly, this database or ledger can be public, semi-public or private.

A short video about this distributed ledger.

3. Security

In the blockchain network, there is no single point of failure; the network coordinates together to provide confidentiality, authenticity, and non-repudiation. All nodes must use cryptographic encryption.

Think about the problems that face an ordinary web user on the internet: a hacker can infiltrate their device through malware to steal information or use ransomware as bait; their identity and sensitive information can be stolen through phishing sites; they can be victims of cyber-bullying; and, they have to deal with spam.

If you check the statistics on data breaches, the numbers are alarming.  For instance, American citizens experienced the highest number of identity theft by 2016. An estimated 15 million consumers have been victims of identity theft, amounting to over 50 billion in losses.

Number of data breaches and records exposed

Blockchains are secure and hack-proof because they use public key cryptography.  Data breaches and identity theft are not synonymous with the blockchain. Because we can securely trade cryptocurrency on the blockchain, then we can as well use it to store and exchange digital assets and confidential information.

4. Platform for transactions

The blockchain acts an environment for validating any transaction of value; be it money or a digital asset. Transactions are recorded in a block whenever the network reaches consensus, and anyone can confirm the transactions happened.

5. Immutability

Transactions occurring in the blockchain network must be unique and once written and validated, they are immutable, which means the data cannot be changed. If someone attempted to make any changes, they would require massive computing power, just as much computing resources that went into creating the blocks.

6. Cryptocurrency and Token generation

For blockchains to maintain honesty, integrity, and security, the system is coded to generate cryptocurrency or tokens as an incentive that goes to those who maintain and secure the network – that is, those validating transactions and securing the network by expending computing power.

7. Blockchain anonymity

Everyone has a right to privacy. However, with the advancement of the Internet in the past two decades, it has done little to protect that right. Think about all the data companies such as Facebook and Google have harvested from us. Sometimes you are not even aware that these companies have confidential information about you. Governments are even using the Internet to spy on its citizens.

With the blockchain technology, your Identity is not important. You can maintain anonymity or choose your privacy level.  Users on the network are not identified using their real identities; instead, users get pseudonyms identities. For instance, for you to use the bitcoin, you don’t have to provide your data; be it your name, email address, or credit card details.

This means, on the blockchain, you can safeguard your identity and control how you interact with the world. As I mentioned earlier, transactions on the blockchain are public; there is no institution with the mandate to audit the transactions. Still, this does not mean you are irretraceable, but the process of doing it is tedious since you would have to follow a long transaction trail.  

8. Platform for applications

With the innovation in blockchain technology, another breed of decentralized applications is on the rise.  Decentralized applications (DApps), Decentralized Autonomous Applications (DAO), and Decentralized Autonomous Corporations (DAC), all can be built on the blockchain platform.  Also, it supports the development of APIs.

9. Open-source software

Most blockchain source codes are public; anyone can view the code. This means developers can collaborate to improve the core software.


How Does The Blockchain Work?

This section explains how blockchains work, from signing transactions, broadcasting, to block validation.

Signing transactions

Only valid transactions can be broadcasted to the peer-to-peer network.  The blockchain achieves this by using public key infrastructure.  Transaction data is hashed using a hashing algorithm, such as SHA-256, and then this hash value is signed using the sender’s private key to create a digital signature. This process creates a ciphertext that is digitally signed, and the only way to verify the contents of the digitally signed message is to decrypt it using the public key. Once a transaction is signed with a private key, it is ready to be broadcasted on the blockchain network.  Nodes in the network will use the sender’s public key to verify the sender authorized the transaction.

Here is an image showing the process:

How transactions are signed and verified

How transactions are signed and verified

Broadcasting transactions

Once a transaction has been signed with a digital signature, the next step is broadcasting it to the peer-to-peer network.  After transaction broadcasting, the unconfirmed transactions pile up together in a location known as “Mempool,” code for memory pool -- every node has a memory pool residing in their computer that carries all pending transactions waiting to be approved by the network.

The Mempool is of different sizes. Transactions in the memory pool will stay there until a node picks them to include in a block.  Here, a node can choose which transactions to include in the block it is creating. However, one of the transactions should be a coinbase transaction, which is the first transaction a node includes in a block, and miners use it to claim rewards on the blockchain.  A complete block comprises the block size, the block header, and a transaction counter that includes the coinbase transactions and the transactions data.

Nodes in the network have to main jobs:

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    Validate transactions broadcasted in the network through digital signatures.
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    Create blocks through mining to reach consensus, and keep the network secure (block verification).

Verifying transactions

Once a node chooses the transactions they want to list in a block they are creating, the next step is to validate the transactions contained in that specific block.

Nodes follow these steps to verify transactions:

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    They compute the hash output of the transactions.
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    They decrypt the digital signature using the public key (remember, the account that initiated the transaction signed it with a private.
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    If the transaction hash value matches the digital signature value, then the rightful owner of the private initiated the transaction.

When nodes verify transactions, they get incentives in the form of transaction fees.

Adding transactions to the ledger

After verifying the transactions data in a block, the next step is writing the data on the ledger: the blockchain. However, only valid blocks can be added to this data structure, and the blocks have to follow a chronological order. This is where the idea of consensus steps in because the blockchain network has to agree on how it adds transactions to the structure, and in what order.

To add transactions on the blockchain, miners first have to create a valid block header.  Miners begin by creating Merkle tree of all the transactions data contained in a block, and then they compute its hash value, also known as the root hash.

Letters A, B, C, and D represent transactions while H(A), H(B) and so on represent the hash output values for transaction A and B respectively. H(hA|hB) is the hash output for H(A) and H(B)

Letters A, B, C, and D represent transactions while H(A), H(B) and so on represent the hash output values for transaction A and B respectively. H(hA|hB) is the hash output for H(A) and H(B)

After this, miners proceed to create the block header. A block header has these properties: the previous block’s hash, a hash value of the transactions data contained in that specific block (Merkle root hash), the time the block was created (timestamp), a nonce (the secret key that will solve the puzzle), and the difficulty level.  The block’s hash value will be the hash generated when you combine all these elements.

n image showing the contents of a block header, along with transactions data

n image showing the  contents of a block header, along with transactions data.

Block validation (mining)

Block validation involves making miners to commit intensive computing power (Proof of Work) to find a block’s hash value that meets the target, which is determined beforehand. Blocks not validated through proof of work cannot be processed further. Plus, new blocks can only be added to the blockchain once they pass the Proof of Work process.

Usually, miners in the network compete to be the next node to add a valid block to the blockchain. To solve the hash puzzle, they have to find an arbitrary number that is known as the nonce, such that – when a miner calculates the hash value for the combined data of the block header – the output generated is less than a set target value or difficulty level.  This process of trying to find a nonce that meets a set target value is what people refer to mining.

Solving the hash puzzle.

Solving the hash puzzle.

Hash puzzles should have the following properties:

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    Difficult to compute.
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    The costs involved should vary depending on the total hash power of the network.
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    The answer to hash puzzle should be easy to verify.

Miners on the network have to try multiple times before one of them gets a value that meets this property. That is because it cannot be predicted; nodes have to try their luck by trying different variations of the nonce, which involves trial and error.

The process of finding a nonce that meets the defined target value approximates a Poisson process where an outcome for an independent event occurs at expected time intervals.  With the bitcoin blockchain, it takes an average of 10 minutes to find the nonce, which means after every 10 minutes, a miner will solve the hash puzzle and that particular block will be added to the blockchain. With Ethereum, the average block time varies between 10 and 19 seconds.

Solving the unique hash puzzle makes data on the blockchain immutable. If someone wanted to make changes, they would have to renew all the hash references, including the blocks’ headers they want to re-write. Doing so would be costly because of the computational power needed.

Mining helps to achieve three things:

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    To prevent double spending.
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    To create a new digital currency.
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    It protects the network from attacks because of the increased costs that come with proof of work.

The miner who gets to solve the hash puzzle wins the block validation race, and other miners in the network check if the miner got the hash value correct. If other nodes on the network verify that the block is valid, the miner who solved its hash puzzle receives a reward in the form of cryptocurrency. In the case of bitcoin blockchain, a miner is rewarded with 12.5 BTC as of 2018; and for the Ethereum, the reward per block is 5 ETH, as of February 2018.

The newly found hash value will point to the next block to be worked on, and every valid block on the data structure will have a hash value that references its predecessor.  Also, every block on the blockchain data structure has to go through this process, and blocks get added systematically.

As of February, 25th, the bitcoin blockchain size was 158.4 GB while that for Ethereum was 441 GB (as of 22nd February).

Simple Bitcoin Block Chain

A simple explanation of how the blockchain works.

Mining difficulty

At any given time, the computational power miners will use to solve the unique hash puzzle depends on how many miners are connected to the network. It becomes more difficult to find a hash that is below or equal to the set target as the network grows -- as more miners join the blockchain network.

Remember miners have to find a hash value which meets a predetermined target, which involves incrementing the nonce until the target desired is achieved. In bitcoin blockchain, the network adjusts its mining difficulty after every 2016 blocks.

Blockchain consensus mechanisms

I have already mentioned about proof of work consensus algorithm that is used by bitcoin.  With the evolvement of the blockchain, other consensus mechanisms have risen. Let’s define some of them:

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    Proof of Stake.  POS is yet another way a blockchain network can achieve a distributed consensus. In this consensus mechanism, miners follow a deterministic process to create the next block, and the person to do it is chosen depending on their stake (wealth or the number of coins they hold).  Because there are no rewards for creating the next block, miners get compensation via transaction fees. Compared to PoS, the PoW mechanism consumes a lot of resources. Initially, Ethereum is based on PoW, but it is contemplating on switching from PoW to PoS.
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    Proof of Importance. NEM first introduced this consensus mechanism; this protocol considers miner’s balance, their reputation, and the transactions activity to determine who gets to place the next block. With PoS mechanism, those with a higher stake have a better chance of being picked to create the next block compared to those with a less balance. With POI, even miners with a less stake can create a block if they meet the protocol’s criteria.  According to CoinTelegraph, POI is increasing reputation in the blockchain network.
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    Proof of activity. This one combines PoW with PoS.  As usual with proof of work, miners first compete to solve a hash puzzle for that specific block. However, the block to be solved at this stage contains just the block header and the coinbase transaction (there is no transactions data). Miners then switch to PoS where the system randomly selects three stakeholders (based on their coin balance) to sign the block.
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    Proof of capacity. This consensus mechanism requires that nodes dedicate their hard drive space. A miner has a higher chance of creating the next block, the more hard drive space they dedicate.
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    Proof of storage. This scheme requires miners to store a large number of data before mining.
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    Proof of burn. Here, miners do not expend computer resources. Rather, they destroy coins (burn) by sending them to an irretrievable address, such that the coins will remain unspent. A miner gets to mine the next block based on the number of coins they have burnt – the more the number, the higher the chance.


Tiers of the Blockchain

The blockchain can be subdivided into three different layers, namely:

Blockchain 1.0

This represents the very first protocol of the blockchain that bitcoin runs on. It was dedicated to cryptocurrencies. Bitcoin and some altcoins run on blockchain 1.0.

Blockchain 2.0

Blockchain 2.0 was the protocol developed to overcome the limitations of the first bitcoin protocol, blockchain 1.0. Vitalik Buterin, co-founder of Ethereum and bitcoin magazine, was the pioneer of this protocol that includes both cryptocurrencies and smart contracts. His version of the blockchain, Ethereum, uses a different script language from Bitcoin’s protocol.

Blockchain 3.0

Blockchain 3.0 expands beyond the boundaries of offering financial services, to include applications that will revolutionize sectors like arts, media, health and the government.


The future of the distributed ledger & how it will impact change

With the structure of blockchain, it provides a platform for nurturing new opportunities.

The blockchain technology is revolutionizing the way we store and move information. In this section, I believe I am just scratching the surface; blockchains have vast potential.

Smart contracts

A smart contract is a pre-written computer protocol/code that runs on the blockchain network; its purpose is to negotiate contract terms by following laid out rules and regulations, and it does this without an arbitrator. This prewritten code simply represents agreements and transactions, and it automatically executes whenever the set conditions are met.

Furthermore, if the standards described in the agreement are not met, the smart contract cannot execute.  Because smart contracts run on blockchains, they are distributed by nature, and data written is immutable.

An image explaining how smart contracts work.

An image explaining how smart contracts work.

Nick Szabo first came up with the idea of smart contracts back in the early 1990s.  However, the idea did not materialize until the advent of Bitcoin, arguably the first crypto project to utilize this idea. Bitcoin only represents a basic smart contract, but it paved the way for this innovation. Read how smart contracts work on the Ethereum blockchain.

As an example, real estate industry is one area where smart contracts are being used. Traditionally, if you want to buy a home, you have to go through a cumbersome process before you close the deal:  the hustle of finding a reliable agent, home searching, inspection, verification process and the heavy costs that come with lawyers and real estate agents. With the use of smart contracts, we can sideline the middleman, reduce the costs involved, make the process faster, and even alleviate fraud. A Ukrainian developer sold his home for $60,000 using smart contracts on the Ethereum blockchain.

A video explaining smart contracts.

Crowdfunding

In essence, crowdfunding is whereby a group of people pool funds, usually through the internet.

Traditionally, you would need a third party to kick off a project like this over the internet. Individuals who wanted to pull off a crowdfund would have to go through Platforms like Kickstarter that are centralized and the fees charged are high.  

Even so, the blockchain is a game changer; it decentralizes the crowdfunding model. This means crowd funders save more cash because there are no intermediaries. Startups can create their cryptocurrencies using the blockchain technology, and then sell the digital assets (tokens) to interested early investors to generate funds.

Already, a Decentralized Autonomous Organisation (DAO) that is based on Ethereum raised more than $160 million, cash that was anonymously raised by 10,000 people – arguably; it is the largest crowdfunding project in history.  

Voting

In the world of politics, things will also get interesting, a sector the blockchain technology may disrupt soon. Despite evolvement of voting processes with time, we can still see some weaknesses like electoral fraud and lack of transparency. Although there are systems in place to guarantee security and privacy during voting, the same systems have points of vulnerabilities.

I’m sure you have heard about cases of election hacking or manipulation.  For instance, there are allegations that Russian government manipulated the U.S. electoral system in favor of Donald Trump. It is not just the U.S.; electoral crises are common around the globe.

If governments decided to adopt blockchain-based voting systems, electoral fraud would be a thing of the past: we could see the actual number of votes cast; no candidate would be able to manipulate the vote; and, hacking of electoral systems would be an old thing. Because the blockchain guarantees immutability, once a vote is cast, it would not be subject to manipulation.

Also, public key cryptography will guarantee the integrity and authenticity of votes. It would be possible to verify the votes cast because records would be on the blockchain, and they would remain unchanged despite being publicly displayed. Here, a smart contract can be used to track the number of people who have cast their votes, but it would have to be fused with the biometric features of a voter.

The stock markets

The Stock Market can benefit from having a public, distributed ledger. Once stock trading catches up with the blockchain, traders will not need to use the services of an intermediary – custodians, auditors, and clearings will all fall off the chain. More importantly, traders will have a friendly, transparent environment: it would be cost-effective, transactions would be faster, and secure.

The scheme in place right now is lengthy for traders. The tedious process involves going through clearing houses that are centralized, custodians, and brokers. According to this article, an estimated $80 billion was spent on post-trade processes, and a huge chunk of that money went to depositories and agents in the settlement chain.

Australian Stock Exchange, a mainstream financial market player, plans to move to the blockchain. It will be the first Stock Exchange regulator to make this bold move.

Preventing financial crime

Know Your Customer (KYC) and Anti Money Laundering (AML) are two organs that help to fight financial crimes.  Like in the case of KYC, the companies that audit people information are centralized, and this puts our critical data at risk. Apart from that, it takes a long time for a new member to get verified. If you signed up for Binance, you have probably felt the agony of waiting for that verification message from them – some of us are still waiting, for the record.

By moving to the blockchain, we could have a distributed ledger shared among all the financial institutions. All verified customers’ identities would be recorded on this ledger. Furthermore, to enhance transparency, those on the network would use a consensus protocol to update this ledger.

With AML, critical financial information can be stored in a private blockchain, where the data shared would be transparent and immutable.

In this video, Kathryn Haun, a U.S. federal prosecutor, explains how blockchains are helping to solve financial crimes.

Mitigating property fraud

We can digitize property ownership documents like title deeds. Shifting to the blockchain would weed out land brokers who make land buying process expensive. Also, it would be possible to prevent forgery cases. Land scams would be an ancient thing.  A record would exist on the distributed database, showing who owns what property, who is selling and who is dividing – and the data would be tamper-proof and unchangeable once written on the ledger.

Protecting Intellectual property rights

The media sector is yet another industry the blockchain is poised to reform.  Piracy and royalty payments are a nagging issue in the media industry. The Internet has done little to protect content creators like songwriters, movies actors, producers and software developers. Piracy is robbing creative minds in broad daylight. Screenwriters, novelists, musicians, designers have to watch their income stream diminish, as their work gets redistricted to other people via torrent sharing sites.

The blockchain can be a platform that connects consumers in the industry with artists. Creative minds could have more control of their property by using cryptographic encryption to store their work. This means you have to pay to download music, movies, or software files.  Piracy would not be possible because the blockchain would digitally record all files.

An intriguing discussion about how the blockchain can bring transparency in the music industry:

It would be easy to know who owns what because every asset has the owner’s information and it is time-stamped.  You would not be able to pass off someone’s content without the owner’s permission. In short, the blockchain can efficiently manage copyrights transfers and royalty payments.

Other than piracy, there is the issue of royalty payments to artists. Instead of having media agents manage artists’ payments, we could have smart contracts handle this. Already, there is a platform that connects artists with fans, Mycelia, pioneered by Imogen Heap, a British musician and Grammy Award winner.

Internet of Things

You’ve probably heard about IoT.  If you have not, let me try to explain in a simple language: Internet of Things is a network of physical objects, which are internet enabled and use RFID sensory technology to communicate, i.e., exchange data, over the internet. These physical objects or appliances can be cars, refrigerators, smart TVs, microwaves, your home security system, water heating system, thermostat, etc. In IoT, the physical objects can sense and react to events happening around their environment in real time, and then communicate to one another via the internet. Still don’t get it? Think of all the Wi-Fi enabled devices in your house that can be automated to interact with one another to simplify your life.

How the Internet of Things will work

How the Internet of Things will work

For instance, if you have an alarm clock that is IoT-enabled, it can automatically adjust itself to wake you up on time, and even signal your smart coffee pot (if you have one) to prepare coffee. When the weather changes, like during those days when there is a massive downpour in the morning, the alarm could wake you up earlier than usual and suggest to you quicker routes to follow so you do not get to work late. It would show you the distance to cover, how much time the journey will take, and the exact time of arrival.

Watch this video for additional examples

Before the blockchain innovation, we would have a string of objects linked together, but control was from a centralized cloud server, which is prone to hacking. When IoT is integrated with the blockchain, transaction processing will be faster, the costs will reduce, and trust will be enhanced.

Identity Management

Blockchains can benefit governments in many ways.  One of them can be to remedy the problem of identity management on the web. Governments can choose to have digital identities based on the blockchain. If governments decided to use the blockchain to provide services like taxation, pensions or other benefits, a digital identity would ensure that only one ID is used to access all the services it is extending. All crucial documents, such as IDs, marriage certificates, passports, birth certificates and online accounts, could be recorded on the blockchain as a proof of existence, and these records would be immutable.

Also, with identities digitized on the blockchain, users on social networks and forums would have control over their data.  Already, some industry players have put this technology into service.

 

Blockchain FAQ

1. What is Mining?

Mining is the use of heavy computational power to solve hash puzzles, a process that enables validation of blocks and minting new digital coins.


2. What is the major difference between ETH blockchain and BTC blockchain?

Bitcoin’s blockchain deals with digital money while the Ethereum’s blockchain extends beyond this sphere to include programmable contracts.


3. What is hashing?

Hashing is the scientific process of converting an arbitrary data string into a fixed output or value by running the data through a computer algorithm.


4. What is a block?

A block is like a library catalog that contains a list of transactions; other elements contained in a block include the block header, the previous block’s hash, its hash, the nonce and the difficulty level.


5. What is a fork?

A fork happens when there are changes regarding how the network comes to consensus when creating new blocks.  A disagreement among the nodes leads to a split in the blockchain. Also, an update of the software’s source code could lead to a fork.


6. What does Proof of Work mean?

Proof of work is a consensus algorithm that is unique to bitcoin and Ethereum blockchains where nodes in the network have to agree on how they will create and validate the next block, a process that involves solving computational hash puzzles.


7. What is an Address?

An address uniquely identifies a party in a blockchain transaction. Every transaction on the blockchain network has a unique address; for each transaction, users generate a unique address.


8. What is a Transaction?

On the blockchain, a transaction denotes value transfer that happens between two parties, such as when sending bitcoins from your address to another.


Conclusion

Now that we have covered the blockchain basics, it should be easier for you to understand the how bitcoin works and even the technologies behind other crypto projects.  In fact, when you are evaluating your investment options, it is wise to check whether the crypto projects you want to put your money in are built on the foundations of a blockchain. Read our step-by-step guide to cryptocurrency trading.

Who knows, say in 10 to 20 years to come, we could be talking about blockchains the way discuss the Internet today.