What is Blockchain
According to ideatics, A blockchain, originally blockchain, is a growing list of records, called blocks, which are linked using cryptography. Each block contains a cryptographic hash of the previous block, a timestamp, and transaction data.
By design, blockchains are inherently resistant to modification of the data. A blockchain can serve as an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way.
For use as a distributed ledger, a blockchain is typically managed by a peer-to-peer network collectively adhering to a protocol for validating new blocks. Once recorded, information in any given block cannot be altered retroactively without the alteration of all subsequent blocks.
Although blockchain records are not unalterable, blockchains may be considered secure by design and exemplify a distributed computing system with high Byzantine fault tolerance. Decentralized consensus has therefore been claimed with a blockchain.
This makes blockchains potentially suitable for uses such as electronic voting and crowdfunding; permission ledgers make them appropriate for banking use.
Types of Blockchains
There are four main types of blockchain: Public, Private, Consortium, Federated.
Private blockchains such as Hyperledger Fabric allow only permissioned users to join (i.e., known participants). Permissioned (private) Blockchains allow only authenticated nodes to execute commands (validate & confirm) on behalf of users acting like administrators. They eliminate reliance on third-party systems and take away censorship/manipulation threats.
Consortium blockchains were first proposed by R3 in a whitepaper published in October 2015. A consortium blockchain requires a pre-selected set of trusted nodes to participate in the consensus process.
Each node runs an instance of an implementation of a blockchain protocol that tracks transactions within that network. The IBM Hyperledger Project is one example of a consortium blockchain project.
Federated blockchains also require permission access but are otherwise very similar to public blockchain networks.
The primary difference between federated vs. non-federated is that each node must verify every transaction against an agreed-upon rule set maintained on a central ledger on which all participants have copies of that ledger or they will not be able to validate transactions properly.
This allows for consensus validation at scale because there are fewer validators relative to a non-federated system. This means that each node does not need to trust any others except for those in their own chain or federation.
One common use case for federated blockchains is intra-bank payments where multiple financial institutions need to share details of transactions among themselves without relying on third parties like SWIFT.
Because SWIFT maintains centralized ledgers with records of all interbank transfers, using blockchain here would remove redundant record-keeping without adding too much latency since banks can still settle these interbank transfers just as quickly today.
However, because of regulatory requirements around KYC/AML/CFT, settlement speed may slow down depending on how carefully these banks are regulated.
Technically, there are some important differences between pure federated vs. hybrid systems.
First off many people consider a blockchain a pure federated solution if it’s a closed or semi-closed network meaning everyone is trusted so no outside entities interact with its operation directly on-chain.
Secondly, federated blockchains such as Hyperledger operate more like a hub-and-spoke model where transactions flow in through a central node and then get replicated out to all other member nodes.
All interaction between member entities happens through that single point of entry. An advantage of federated blockchains is that you do not need to solve for consensus finality, which makes them easier to deploy and reason about.
Instead, you are trusting peers on your network to follow certain rules defined by smart contracts created on top of it or its underlying infrastructure layer.
Consensus finality is a strong guarantee that a peer-to-peer network provides where each node agrees on all transactions once they are committed.
The downside of not having consensus finality is that two nodes could disagree on what the state of their ledger is and it takes time for these forks to reconcile.
The most notable examples of federated blockchains today are Hyperledger Fabric and Corda, both of which make heavy use of smart contracts written in Java and Kotlin respectively.
Both Hyperledger Fabric and Corda provide additional facilities for creating blockchain-based digital identities as well as managing permissions, isolating confidential data, setting or changing governance policies, etc.
Fabric was a startup that launched in 2015, by the Linux Foundations with contributions by IBM and several other companies. And Corda is an open-source project spearheaded by R3, another blockchain consortium started in 2015.
R3 consists of major banks, brokerages, exchanges, and clearinghouses to leverage distributed ledger technology for global financial markets. It’s not entirely clear what business models either Hyperledger or Corda are pursuing as they aren’t charging individual users to use their code-bases at present.
The main revenue stream seems to be around helping enterprise customers set up enterprise blockchains based on their codebases plus consulting services to help enterprises design their use cases and ensure compliance.
Advantages of Blockchain
There are a number of advantages of blockchain technology.
Some of these include:
- A secure payment method,
- A single source for information,
- Reduced corruption,
- Increased trust in trading partners,
- All transactions are verified (ensuring no one misrepresents their products),
- Reduced administrative costs (no third-party intermediary is required),
- Less need for record-keeping,
- Transparency (the ability to see into every step of production) and more.
It should be noted that despite these advantages not all companies will benefit from blockchain technology. Specifically smaller companies may find the technology too costly while still lacking the necessary return on investment (ROI).
Nonetheless, experts believe blockchain will continue to evolve and grow over time due to its versatility. As such businesses looking towards growth in emerging markets or industries with traditional problems have a good chance of being early adopters.
At least in theory these types of businesses could thrive off their strengths much faster than others because they have less work fixing existing systems which isn't true with other technologies.
In practice, however, larger companies tend to dominate new technology markets because they have deeper pockets when it comes to investing in research and development (R&D).
This means that entrepreneurs working on blockchain projects should think carefully about where exactly they'll take advantage of its strengths versus larger companies that can innovate faster due to greater resources.
Businesses also shouldn't overlook how open-source software can make R&D cheaper as well as its role as a precursor for innovation. For example, Linux was an open-source operating system designed to run computers without any central governing authority but thanks to demand from computer manufacturers ended up building some of today's most commonly used applications including Google Chrome and Facebook Messenger.
Overall it's important for budding innovators to recognize potential challenges and opportunities related to blockchain technology before moving forward with an implementation plan.
Disadvantages of Blockchain
For all its purported benefits, blockchain also has some notable drawbacks. For one thing, if many different parties are each managing their own separate blockchain, there needs to be a system for determining who gets to write which blocks of information.
And that creates something of a chicken-and-egg problem: no company wants to be in charge of writing an entire blockchain without any partners; conversely, no partner wants to join forces unless someone else will take charge.
The result is companies like IBM (one of Hyperledger’s code contributors) saying they’re trying to build blockchain technology rather than applications on top of blockchain technology. It’s easy to imagine how companies could get into competition with one another over whose blockchain runs best—or whether customer transactions should be handled by IBM or Oracle or Microsoft or Cisco or Google.
Indeed, centralization may well become a challenge in enterprise blockchains, just as it did during the early days of e-commerce.
Another drawback of blockchains is that because every node must approve every action before anything happens, consensus mechanisms can slow things down significantly when too many nodes are involved.
But perhaps what limits blockchain growth most at present is simply a lack of familiarity among business leaders. It's still not clear what kind of new business models blockchain will support, though everyone seems quite certain they'll be revolutionary ones.
Can it be Centralized?
Although blockchain can be decentralized, cryptocurrencies are almost always decentralized. You've probably heard about Bitcoin, which is one of many cryptocurrencies that depend on blockchain technology.
Even though you can use Bitcoin to buy things electronically, its primary purpose isn't as a currency; instead, it's meant to be a revolutionary system for trustless payments. Bitcoins are created by mining, or solving complex equations on computers; because mining uses computing power (and electricity), transactions over the network can take longer than credit card purchases. Many inefficiencies remain in how bitcoins are exchanged, however.
These currencies also tend to fluctuate wildly.
Some argue that tokens will not be useful if banks try to integrate them into their existing payment networks because they already have efficient systems in place using fiat money.
What is the Ethereum Virtual Machine?
The Ethereum Virtual Machine (EVM), running on top of a blockchain allows smart contracts—computer programs stored on the blockchain—to be executed autonomously at predetermined moments, or when triggered by certain events.
They also run simultaneously across thousands of computers, meaning they do not require central processing units (CPUs), memory banks, or hard drives.
This makes them highly scalable and reduces operational costs, as these functions are handled by each participating node on a decentralized network instead of through traditional cloud-based services.
In doing so, they preserve decentralization as opposed to centralized systems such as those used in international banking wire transfers or financial databases.
In short, blockchain technology can be utilized to move value from one party to another in a transparent way. In other words, a distributed ledger that no central authority has control over.
There are plenty of legitimate reasons why you might want to transfer value from one person or entity to another, including moving funds from one bank account to another without a financial institution acting as an intermediary.
That's what blockchain can provide: a quick way for two parties to conduct business directly with each other without going through a middleman.