What exactly is Blockchain and how it works

Blockchain technology is a decentralised, distributed ledger system that records transactions across a network of computers. Each transaction, or “block,” is linked together in chronological order, creating a secure and tamper-resistant chain of data. 

PROS

Security

Blockchain uses cryptographic techniques, making it difficult to alter historical records, ensuring data integrity and reducing fraud.

Decentralisation

There is no central authority, leading to increased transparency and resilience against single points of failure.

Transparency

All participants have access to the same information, promoting trust and accountability.

Immutability

Once data is recorded on the blockchain, it cannot be easily altered or deleted.

Efficiency

Simplifies processes by eliminating intermediaries and automating record-keeping.

CONS

Scalability

As the network grows, processing time and storage requirements can become challenging.

Energy Intensive

Some blockchains require significant computing power, leading to high energy consumption.

Lack of Regulation

The decentralised nature of blockchain raises challenges regarding legal and regulatory compliance.

Data Privacy

While transaction details are secure, the public nature of some blockchains raises concerns about user privacy.

Blockchain is useful in scenarios where trust, security, and transparency are critical. Common use cases include cryptocurrency transactions, supply chain management, voting systems, intellectual property protection, and digital identity verification. However, it may not be suitable for every application due to the trade-offs in scalability, energy consumption, and privacy. It’s essential to evaluate the specific requirements of a use case before deciding to adopt blockchain technology.

Let’s break down how blockchain works with a simple example

Decentralised Network

Blockchain operates on a decentralised network of computers (nodes). Each node maintains a copy of the entire blockchain.

Blocks and Transactions

Transactions are grouped into blocks. Each block contains a set of valid transactions and a reference to the previous block in the chain.

Hashing

Each block is assigned a unique cryptographic hash. This hash is a digital fingerprint of the block’s data, ensuring its integrity.

Mining (Consensus Mechanism)

To add a new block to the blockchain, nodes compete to solve a complex mathematical puzzle. The first node to solve it gets to add the new block and is rewarded (e.g., with cryptocurrency).

Proof of Work (PoW)

In many blockchain systems, such as Bitcoin, the mining process uses the Proof of Work algorithm. This requires substantial computational effort, making it difficult for malicious actors to tamper with the blockchain.

Chain of Blocks

Each new block contains the previous block’s hash, creating a chain of blocks. Any change to a previous block would alter its hash, making the entire chain invalid.

Consensus and Validation

Other nodes in the network validate the new block before accepting it. If the block is valid, it’s added to their copy of the blockchain.

Example

Let’s consider a simple example using a fictional blockchain-based voting system.

Voter Registration

Each eligible voter is assigned a unique digital identity on the blockchain.

Casting Votes

When a voter casts their vote, it creates a new transaction on the blockchain. The transaction contains the voter’s identity, the chosen candidate, and a timestamp.

Creating a Block

The network collects several voting transactions and creates a new block, grouping these transactions together.

Mining the Block

Nodes in the network compete to solve the cryptographic puzzle associated with the new block.

Adding the Block

The first node to solve the puzzle adds the new block to the blockchain. It contains the hash of the previous block and all the voting transactions.

Consensus

Other nodes validate the new block to ensure that the transactions are legitimate and the puzzle was correctly solved.

Continued Voting

As more people vote, additional blocks are added to the blockchain, forming a secure, transparent, and immutable record of all the votes.

By using blockchain in this voting system, voters can trust that their votes are securely recorded and cannot be tampered with. The decentralised nature ensures transparency and prevents any single entity from controlling the voting process.

Here is a list of the most common uses of Blockchain technology on the web

  1. Cryptocurrencies: Cryptocurrencies like Bitcoin, Ethereum, and others are decentralised digital currencies that rely on blockchain technology to enable secure and transparent transactions.
  2. Smart Contracts: Platforms like Ethereum allow developers to create and deploy smart contracts, which are self-executing contracts with the terms of the agreement directly written into code. These contracts run on the blockchain and automatically execute when specific conditions are met.
  3. Decentralised Finance (DeFi): DeFi platforms leverage blockchain technology to provide financial services without the need for traditional intermediaries, such as banks. DeFi encompasses applications like decentralised exchanges, lending protocols, yield farming, and more.
  4. Supply Chain Management: Blockchain is used to track and trace products throughout the supply chain, providing transparency and trust to consumers and businesses. Companies use blockchain to ensure the authenticity and provenance of goods.
  5. Voting Systems: Blockchain-based voting systems aim to enhance transparency, security, and verifiability in elections. These systems can potentially reduce fraud and increase public trust in the voting process.
  6. Identity Management: Blockchain can be used to create secure and tamper-resistant digital identity solutions, giving users more control over their personal data and reducing identity theft risks.
  7. Gaming and Non-Fungible Tokens (NFTs): Blockchain technology is utilised in gaming platforms and NFT marketplaces, enabling players to own unique, verifiable in-game assets that can be bought, sold, and traded.
  8. Intellectual Property Protection: Blockchain can be used to timestamp and verify the ownership and authenticity of intellectual property, such as art, music, and other digital assets.
  9. Healthcare: Blockchain applications in healthcare aim to secure patient data, streamline medical record sharing, and ensure data integrity while maintaining patient privacy.
  10. Real Estate: Blockchain can facilitate property transactions by providing an immutable record of ownership history and reducing paperwork and transaction time.
  11. Energy Trading: Blockchain is used to create peer-to-peer energy trading platforms, where individuals and businesses can buy and sell renewable energy directly from each other.
  12. Charity and Donations: Blockchain-based donation platforms enhance transparency in charitable donations, allowing donors to track how their contributions are used.

In short, I suggest using blockchain when you have specific use cases that benefit from its unique features. 

Here are some scenarios where blockchain is recommended

1. Decentralisation: When you need a decentralised and trustless network where no single entity controls the data or transactions.

2. Immutability: When data integrity and tamper resistance are crucial, as blockchain records are difficult to alter once they’re confirmed and added to the chain.

3. Transparency: When you require transparent and auditable transactions, blockchain’s public ledger can provide an immutable record of all activities.

4. Security: When you need a secure system, as blockchain’s cryptographic techniques enhance data protection and authentication.

5. Intermediary Elimination: When you want to eliminate intermediaries or middlemen in transactions, reducing costs and increasing efficiency.

6. Smart Contracts: When you can benefit from self-executing smart contracts that automatically execute predefined conditions when met.

7. Tokenization: When you need to create and manage digital assets or tokens representing ownership, rights, or other forms of value.

However, there are cases where using blockchain might not be the best choice

1. Performance and Scalability: Blockchain networks can be slower and less scalable than traditional databases, making them unsuitable for high-frequency or large-scale applications.

2. Data Privacy: Blockchain’s inherent transparency can be a disadvantage when sensitive data needs to be kept private.

3. Regulatory Compliance: Certain industries and applications might have stringent regulatory requirements that are challenging to address with blockchain technology.

4. Centralization Requirements: If central authority or control is essential for your use case, a blockchain’s decentralised nature may not align with your needs.

5. Cost: Implementing and maintaining a blockchain network can be expensive, especially for applications that don’t require its specific features.

In sum, carefully evaluate your specific requirements, and consider whether the benefits of decentralisation, immutability, and transparency outweigh the potential drawbacks of performance, scalability, and privacy concerns when deciding whether to use blockchain or not.

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Bob Mazzei
Bob Mazzei

AI Consultant, IT Engineer

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