Blockchain 101: What is Blockchain Technology?

It has transcended different sectors, from health care to finance, from gaming to social interactions. It has also created a myriad of opportunities for investors, job seekers, designers, regular users and companies in these affected industries.

However, one begs to ask, what is blockchain technology? A blockchain is described as a highly secured decentralized digital ledger that aids businesses, users and entities to transfer ownership of assets from one party to another, recording information and storing data.

Here’s a detailed guide explaining everything you need to know about the technology and how it works. 

Components of a blockchain network

A blockchain network is a communally structured chain of data that comprises a list of records called blocks. These blocks are linked using cryptography and each block has a cryptographic hash of the previous block, transaction data and a timestamp.

A timestamp is simply the exact time the transaction took place and was finalized. Cryptography, on the other hand, aids in securing the ledger or the blocks in the system.

It is a safety measure with the transaction data merely represented as Merkel Trees with leaves representing the data nodes.

Since each block contains some information about the previous block, a chain of blocks is formed and additional blocks simply reinforce the ones before it. This kind of structure restricts the modification of data since data recorded in one block cannot be altered without altering the other blocks.

Digital assets and safety

For the last two decades, ordinary citizens have had a fallout with their banks due to trust issues and the safety of their assets and fiat money.

Now, imagine a case in point where you can send money to another person without going through the bank. You can have your digital assets in the form of a digital wallet that is not tied to any bank account.

This definitely creates a sense of security and improves the trust level of an individual towards the system. That is what the blockchain network was designed for.

In the same manner that the internet made emails work for the corporate world, blockchain will inadvertently do much better across all systems. It is like the birth of the internet in the early 1990s.

The history of blockchain

The blockchain system was first proposed by David Chaum in 1982 in a dissertation labeled “Computer Systems Establishment, Maintained and Trusted by Mutually Suspicious Groups.”

Stuart Haber and Scott Stornetta later on in 1991 decided to advance the works of the cryptographer and formulated a system that prevented tampering with timestamps on documents.

In 1992, Merkel trees were added to the system design by David Bayer and Scott Stornetta. Merkel trees contributed to the improvement and the overall efficiency of the system as several documents could be collected into a single block through a document certificate hash.

And then Satoshi Nakamoto brought blockchain technology to life in 2008.

Satoshi Nakamoto created a hash-like method that allowed blocks to be timestamped without requiring a signed authorization from a trusted source.

He further introduced a difficulty tool that stabilized the rate of adding blocks to the chain. In 2009, the design was put to the test through the introduction of the blockchain.

The chain of blocks served as a decentralized open ledger for the digital currency. As of August 2014, the blockchain ledger contained records of all transactions that were done in the network with a total storage of 20 GB (gigabytes).

There has been a steady rise ever since then with the blockchain technology growing to a whopping 100 GB in size since January 2017.

Blockchain is a chain of blocks, the term was coined as a single word in 2016 but it was originally a two-character phrase in Satoshi Nakamoto’s original paper.

Since blockchain technology is the technology behind the chain of blocks, it cannot be owned by anyone, but users can use it to make transactions within the systems and data can be easily accessed and verified.

How does blockchain technology work?

At its core, the blockchain platform allows users to transact and store information in a decentralized system of governance. But how does it really work?

A transaction is first requested and authenticated by the network and a new block to represent the transaction is created. The new block is then sent to every participant (node) within the network and the participants are given the chance to validate the new block and transaction.

As a result of the proof-of-work system, the participants receive a reward. The new block is added to the blockchain and the update is spread across the network.

The transaction is now complete. The blockchains are also streamlined through smart programs that are activated in the vent of actualized predetermined conditions.

What are Smart Programs?

Smart programs refer to lines of code that represent an agreement between two participants in the blockchain network. They can be used to process transactions without requiring the need of a trusted third party or intermediary.

The distributed ledger technology system is decentralized, cross-examined and data encrypted hence tampering with information or theft of data cannot occur.

For a successful hack, all blocks need to be penetrated within the system making it difficult for potential malicious hackers to steal information.

Types of blockchain Technologies

There are four different types of blockchains which are; public, private, hybrid or consortium and sidechain blockchain systems.

A sidechain is a type of blockchain system that moves parallel to the main chain and allows users to transfer ownership of digital assets between two different blockchain networks and this can be linked to blockchain systems like the Liquid Network.

Private blockchains and public blockchains

A private blockchain is a restricted blockchain technology where permissions are granted to any individual who wants to join the system.

A system administrator gives the permission hence making them a centralized front such as a hyper ledger.

A public blockchain, on the other hand, is not permission restricted, and power is given to the users making them a decentralized governing unit.

The people who validate these transactions are called miners and are able to receive awards for their tasks.

Examples of public blockchain technology include the Bitcoin blockchain and the Ethereum blockchain.

Consortiums are a blend of both the public blockchain network and the private blockchain network with both centralized and decentralized features. Examples of hybrid blockchain systems are R3, Dragonchain and Energy Web Foundation.

Structure of the blockchain network

Each chain consists of three components; blocks, miners and nodes.

Blocks represent clusters of data in the form of nonces and hashes that act as chain links. Nonces are 32-bit whole numbers that are regenerated when a block is created in the system.

Hashes are 256-bit numbers linked to the nonce. Hashes are used as identification symbols or features within the system. After the generation of a hash, the block is signed and the nonce and hash are permanently bound to the block, making it secure. 

Nodes are described as key participants or devices that participate in the blockchain networks. When a new participant joins the network, the node is given a copy of the chain.

The participant’s actions must be approved by the network in order to make any changes to the assigned chain as a whole.

When a participant forms a new block, the block is sent to all other participants in the network. The other participants then confirm that the block has not been tampered with and come to a consensus.

This consensus is a communal agreement that acts as a framework of blockchain security or in other terms; cryptographic security.

Miners are tasked with the obligation of changing a blockchain’s data, creating new blocks through a consensus by finding the right nonce-hash configuration for every single block. Each block has a unique nonce-hash configuration hence there are loads of possible nonce-hash configurations that must be mined successfully in order to change the block.

Hard fork

A hard fork is a change in rules that guarantees the validation of new blocks is based on a new set of rules than the current set of rules. All participants are required to work with the new rules by upgrading their software.

In the event that there is a conflicting use in both old and new rules in transactions within the network, a split can occur. 

The NXT community in 2014 was advised to consider a hard fork that would have resulted in a rollback of the entire blockchain records as it sought to mitigate the impacts of the $ 50 million losses in their own crypto exchange.

In 2017, Bitcoin resulted in a split creating Bitcoin Cash due to a disagreement on how to improve the speed of transacting in order to accommodate the high demand for crypto.

Data mining

Mining is the process of changing the structural identification and data of blocks within the network.

It is a power-consuming process that requires high-level analytical and mathematical skills. Successful mining means that miners get a great reward afterward.

The average time it takes for the network to generate a new block in the blockchain networks is called block time, which can be a short span of five seconds.

In the world of cryptocurrency, this is where the transaction time is determined. Shorter block times equals faster rates of transactions within the network. The average block time is about 10-12 minutes for the Bitcoin blockchain while that of the Ethereum blockchain stands at an average of 14 seconds per transaction.

Participation in the blockchain network

Blockchain network nodes or participants are highly encouraged to embrace the technology by engaging in mining, trading, or development of systems that will enable a decentralized network of system delivery.

For those who have not yet embraced blockchain technology, there are several avenues that one can invest in blockchain networks.

Participants can buy cryptocurrencies and other digital assets in the decentralized systems that make up the crypto exchange or can build a startup that propels the blockchain network movement through blockchain infrastructural support or the establishment of digital ledgers in different sectors of the economy.

Features of a blockchain network

Blockchain Decentralization

Decentralization in layman’s terms means dedicating the power to make decisions to the very least ranked participants in the hierarchy.

In this particular scenario, a decentralization blockchain platform gives power to the people and takes the mantle of leadership and economic decision making from companies, banks and financial institutions to the common user. Blockchain eliminates all these intermediaries.

Centralized platforms give power to a central entity and this control of the network can lead to malicious intent, tampering with specific blockchain records at will, allowing double-spending and creating a sense of distrust in the system by consumers.

In a decentralized network, data storage is carried out on a peer to peer network thus eliminating a number of risks such as theft of data and manipulation of certain aspects of the network.

Blockchain security methods include the use of public-key cryptography. A public key is a random and long string of numbers that act as an address in the network. It can be described as a password that guarantees each participant access to their digital assets or a means to transact and interact with other participants within the Blockchain platform.

The data that is gathered and stored in the blockchain is protected from the corruptible acts of theft and tampering. Every participant is guaranteed a copy of the block and the ability to view data on transactions within the blockchain network.

Through computational trust and massive replication of the database, the quality of data within the blockchain platform is assured. Peer-to-peer blockchain networks do not possess centralized points of vulnerability hence crackers and computer hackers cannot exploit the system making them less susceptible to systems failure in the long run.

No user is trusted more than the other and transactions are broadcasted in the digital ledger using the software.

Blockchains use different time stamping mechanisms such as proof-of-work to create serial numbers for all changes in the system. A consensus method such as proof-of-stake is also used to serialize changes and as a proof of agreement between participants.

However, the growth of a decentralized blockchain is at risk of centralization because a lot of computational infrastructures is required to process the larger amounts of data making it more expensive.

Transparency

Smart contracts are contracts that can be fully or partially executed without social interaction. The main goal of a smart contract is automated escrow which guides the blockchain database through a line of codes in order to determine and seal a digital agreement without consulting a third party.

Through the use of smart contracts, the system can do contracting on its own without tampering with outside sources or any nodes within the system.

According to the International Monetary Fund (IMF), in a discussion in 2018, the use of smart contracts in the blockchain-enabled systems would reduce friction between entities or participants.

 In turn, creating a mutual trust in the system and reducing the moral hazards and optimizing the use of smart contracts in general.

The process of transactions

The financial infrastructure is grounded on a digital distributed ledger that aids in data handling.

Traditionally, traders relied on books of accounts such as ledgers to track the transactions of goods bought, sold and traded in various markets.

With advancements in technology, diversification of ledgers became prioritized coupled with an integrated outlook.

Balance sheets and identity documents were incorporated into the ledgers. All along, ledgers have remained under the control of one system, a centralized management system.

With the advancement in ledgers from books to digitized systems, transactions are no longer stored in one place. Multiple parties can access and share control over the same ledger.

In terms of policy, the characteristics of blockchain technology that are set to advance different sectors of the public and private domains need to be considered.

In blockchain technology, a decentralized P2P (Peer-to-Peer) network of interlinked computers is tasked with processing, validating, and relaying all the entry data. This will allow for easy exploration by multiple parties that have access to the same distributed ledger.

With blockchain operating in the internet space, an entity with a blockchain node can explore the transactional data.

Bitcoin vs. Blockchain

For Bitcoin, a decentralized P2P (Peer-to-Peer) network of interlinked computers is tasked with processing, validating and relaying all the entry data. This allows for easy exploration by multiple parties that have access to the same ledger.

In payments on the Bitcoin blockchain, each party is required to have a Bitcoin account on the trade exchange and a private wallet outside the exchange.

Then the steps for transacting are as follows.

1. Choose whether or not to buy some Bitcoin through a debit or credit card, Mobile Money platform or through the Bank.
2. If the vendor accepts payment through cryptocurrencies, simply visit their Bitcoin address and place it in a field within your wallet, allocate the amount of Bitcoin you need to pay and make the payment.

On the other hand, blockchain technology can provide lucrative investments and there are a number of ways to start investing in the blockchain.

Being a transparent ledger design system for compiling data on transactions, payments and tracking of digital assets, blockchain can also be used to track sales records for businesses whether big business or startups.

The technology can provide a backway for businesses to manage their deliverables, clients’ data, sales, transaction data and financial tools.

Blockchain can be used to detect counterfeit goods by classifying products and issuing marks of identification to documents, shipments, services, and storage records that cannot be forged or altered.

Blockchain vs. banks

Many financial institutions have expressed interests in using decentralized ledgers in banking and credit unions by creating private blockchain networks. Banks are highly interested in blockchain technology as it speeds up the process of monetary transactions.

Blockchain is now the new backbone of the financial industry infrastructural front that is geared towards streamlining the service delivery and the mechanics of lending and obtaining credit for both users and financial institutions.

Banks such as Berenberg bank in Germany, have criticized the idea of using Blockchain technology and have labeled it as a financial security concern.

On the other hand, UBS bank has crafted a journey for blockchain adoption by creating a research lab for studying blockchain technology systems.

This is meant to establish a baseline that the systems can be used to reduce the financial costs and increase the efficiency of doing business.

The introduction of Initial Coin Offerings (ICOs) as a new digital asset is courtesy of blockchain technology. The ICOs now called Security Token Offerings (STOs) or Digital Security Offerings (DSOs) can be secured privately or on a public blockchain and regulated exchange platforms.

STOs are used to tokenize traditional assets such as shares of a company and intellectual property such as patents, art, individual products, or real estate. Several companies have joined the band of issuing compliant tokens such as public and private STOs.

How to invest in blockchain technology?

1. Users can invest in blockchain technology by buying company shares for companies that are involved in the Blockchain arena.
   These companies include Walmart, IBM, Siemens and VISA. Through the stock exchange markets, users can buy company shares through an online broker or through the brokerage department of your bank.
2. Cryptocurrencies are also a way of investing as they are classified as digital assets and can be traded on exchange platforms.
   Users can buy crypto directly through decentralized finance (DeFi) exchanges. Investing in crypto exchange-traded funds (ETFs) is also a way to cash in.
3. Mining companies also let investors in by offering an equity stake in their companies or through the pooling of funds to create a mining pool that investors can earn from when crypto is mined and traded.

Pros and cons of blockchain

Pros of blockchain technology

• Blockchain technology boosts the trust of users as it is immutable and automates transactions through a consensus agreement where a third party is not relied upon to verify the nature of any block or transaction. Thereby limiting human interference to a bare minimum.
• Immutable transaction records in a blockchain system cannot be hacked or tampered with as each block possesses a cryptographic key that is unique to every other block in the network. 
• No single party maintains the entire network as the system is completely decentralized whereby central banks, governments, and individuals cannot willingly alter the systems.
• It is a peer-to-peer system that allows users to send money to other entities at a cheaper cost as compared to the conventional methods of money transfer.
• No intermediaries between peers hence transparency is highly encouraged as participants can view their source code and transaction history.
• Blockchain technology also creates a universal banking system that can be relied upon by all entities and protects people’s digital assets from malicious hackers and theft-related cases.

Cons of blockchain technology

• Blockchain technology poses a huge environmental impact as it consumes a lot of electricity as compared to the maximum intake of a small European country.
  Although there are studies that show blockchain and Bitcoin use far less energy as compared to traditional systems of financial banking, the issue remains a subject of debate.
• The use of seed phrases – a list of words that guarantee you access to recover your digital assets in the digital wallets –  is a risky affair.
  If one loses his seed phrase, there is no recourse as seed phrases cannot be changed. Seed phrases are like a password to your digital wallet and blockchain systems do not have an integrated solution for recovering seed phrases. Once lost, your digital assets are lost forever.
• The focus on decentralization of blockchain-enabled systems also proves to negate the journey of scalability which is primarily the root cause of speed inefficiency as witnessed in Bitcoin and Ethereum exchange platforms.
• False narratives that relate blockchain technology to fraudulent and malicious activities through the use of cryptocurrencies have also slowed down the adoption of the technology, especially in the financial sector.

How are blockchains used?

There are several cases of blockchain implementation in different sectors of the economy from finance to gaming, from health to education, community outreach to social welfare, and trading to governance.

The main area of focus has been the financial sector with the emergence of cryptocurrencies, exchange platforms, wallets, storage facilities, trading tokens, and many more innovations that have rocked up the financial arena.

The design for blockchain technology, an open decentralized ledger, has matured from a proof of concept in 2016 to a realized objective. Amid the arrival of the Bitcoin bubble as a digital asset, many businesses and tech startups were created to propel the new technological revolution in the 21st century.

As of 2016, many business entities were testing and gauging the effectiveness of cryptocurrencies such as Bitcoin by implementing blockchain technology in their businesses.

By 2019, around $ 2.9 billion was invested in the development and implementation of Blockchain technology, an 89% increase from 2018.

According to a report by the International Data Corp, over $ 12.4 billion was used in blockchain investment as of March 2022. Blockchain is set to generate an annual turnover of more than $ 3 trillion by 2030.

Also, the individual use of blockchain by users has increased tremendously since 2006 and as of 2020, there were more than 40 million blockchain wallets compared to 14 million in 2018.

Supply chain management

By 2018, trading giants Walmart and IBM were already testing a Blockchain-based system to enable supply chain management and monitoring for spinach and lettuce where all its participants were administered by Walmart and were hosted in the IBM Cloud.

For precious commodities such as gemstones, gold, diamond, and other precious metals, blockchain technology has been deployed in a bid to ensure tracking of origins is made easy.

Everledger, in 2016, partnered with the IBM Blockchain-based tracking system to trace the origin of diamonds that were ethically excavated. This led to the formation of a diamond trading supply chain system called Tracr which was initiated by the Diamond Trading Company in 2019.

Distributors, customers, and fashion brands in the fashion industry will now be able to transact and interact freely as the induction of blockchain technology into the systems has made it easier to trade. This move will ensure the Sustainability of the Industry as Trust is achieved.

Domain names

Efforts have been ongoing to introduce domain names through the blockchain ecosystem. Domain names can be administered, registered, and controlled through a private key that allows for the uncensorship of censorable websites.

This means that the registrar’s ability to suppress websites based on fraud and malicious intent will be revoked.

A key example is a cryptocurrency, NameCoin which was a result of the Bitcoin Fork in 2011. The cryptocurrency now supports a top-level domain (TLD) dubbed “.bit”.

Although sanctioned by ICANN, Name coin was dropped by OpenNIC citing malware and potential legal cases as 28 websites out of 120,000 registered domain names were subject to fraud.

Other TLD examples such as “.luxe” and “.kred” also offer an alternative option for transferring cryptocurrency as compared to the normal crypto wallets.

General uses

Being that the blockchain platform is transparent for compiling data on transactions, payments, and tracking of digital assets, the blockchain platform can also be used to track sales records for businesses whether big businesses or Startups.

The technology can provide a backway for businesses to manage their deliverables, clients’ data, sales, transaction data, and financial tools.

Blockchain can be used to detect counterfeit goods by classifying products and issuing marks of identification to documents, shipments, services, and storage records that cannot be forged or altered.

Cryptocurrencies

Blockchain technology created a space for the formation of digital assets. Cryptocurrencies are digital assets that are bought, sold, and traded in an exchange platform that is designed and governed by a blockchain-enabled ledger.

Cryptocurrencies led to the emergence of the crypto market, and the introduction of Bitcoin and bitcoin mining and Ethereum, and other digital assets.  

Facebook, in May 2018, promised its fans and users that it would open a new blockchain group to enhance user experience, and boost social interactions, work, and financial transactions through blockchain technology.

Silk Road, the criminal entity whose digital assets were seized by the US Federal government, used cryptocurrencies for illicit transactions.

Although there are mixed policy engagements about the adoption of crypto in different countries, the underlying force behind these decisions has been the growth of blockchain technology.

Africa has become the benchmark of crypto and blockchain technology adoption as more and more countries integrate the technology into their systems.

From the high ranks of government to the central banks down to the community level such as the Community Inclusion Currencies project in remote areas of Kenya, blockchain technology has dominated the African market.

Several governments through their respective central banks have issued a national digital currency promise to their citizens as part of embracing crypto.

Gaming

Gamers play a vital role in the entertainment industry as they are a proverbial income-generating source for most gaming companies such as EASports and Ooredoo.

Blockchain technology will revolutionize the gaming world to a whole new level. Currently, cryptocurrencies and non-fungible tokens (NFTs) have been used in video games for monetization.

Gamers can now play to earn in new digital avenues such as the hyped Metaverse which incorporates virtual reality objects called avatars that enable users to transcend the virtual world.

Most live stream games offer in-game customization options that players can earn or trade with other participants in the game using a digital in-game currency. Gamers can buy players such as in FIFA games or trade weapons for currency such as in GTA (Grand Theft Auto) and Mortal Kombat.

Some games also allow the trading of real-world currency with virtual objects in the game. Although this may be termed illegal in several countries, it still provides a clue on how trading and earning can be beneficial both to the gamer and the gaming platform involved.

The first game to integrate Blockchain technology into its gaming software was Crypto kitties in 2017. Players would purchase non-fungible tokens using Ethereum with each NFT traded for a virtual pet that could breed others to create offspring.

The game took about 30% of all Ethereum transactions in 2017 leading to scalability problems in Ethereum. Recently, the famous EA Sports program FIFA 22 was set to launch a blockchain-enabled platform that would allow users to view players’ contests for the FIFA 22 Champions league Cup.

Although games still focus on the traditional aspect of gameplay, the incorporation of blockchain technology is set to increase the appeal to most players.

However, this poses challenges such as high risks to investments, low predictability in results, and poor predictive analytics.

Gaming and finance (GameFi) can certainly be a game-changer for all stakeholders involved. Valve, in 2021, blocked the use of blockchain-based gaming apps that relied on non-fungible tokens claiming that they did not offer any real-world value.

However, the media and gaming institutions still hold tightly to the process of incorporating blockchain technology in games as a way of boosting the user experience.

Is blockchain safe?

Blockchain analysis is the process of understanding and accessing the flow of transactions and data within the Blockchain network.

With the popularity of cryptocurrencies such as Bitcoin and Ethereum, Dogecoin, and Litecoin gaining traction, an analysis of the flow of crypto, crypto exchanges and transactions are vital for ensuring openness and reliability of the technology.

The reason for the analysis craze is the fact that blockchain-enabled cryptocurrencies are being peddled as avenues that enable illicit transactions of drugs, illegal weapons and money laundering.

Blockchain companies now provide tracking services that enable banks, companies, crypto exchanges, law enforcement, and governments to be more informed of what is being transacted in the crypto market and the crypto-fiat exchange.

The big question lies in the publicity of the blockchain data while still maintaining the privacy card on hold for user transaction history either in the blockchain systems or with regards to cryptocurrency.

Blockchain standardization has also been a key discussion in blockchain analysis. Many nations are now issuing blockchain standards through National standard bodies and Open standard bodies.

According to the Society for Worldwide Interbank Financial Telecommunication (SWIFT), more than 50 countries globally are in the process of standardizing blockchain technology systems together with external liaisons such as the European Commission, International Communication Union and the United Nations Economic Commission for Europe.

Why is blockchain becoming popular?

One of the greatest game-changers in the financial playing field is the application of a digital payment platform.

Blockchain DATs (Decentralized Autonomous Trusts) and DAOs (Decentralized Autonomous Organizations) will eliminate the middlemen and shell corporations hence ensuring direct project funding to communities and NGOs minimizing corruption.

Blockchain-based tools aid in efficient project implementation through systems of tracking expenditure transparently.

For public spending and governance, the partner country is in full control of the funded projects, and systems are set to track and explore the payment and transactional data.

What next in blockchain technology?

With the economic and technological development agenda in place, the world is strongly pivoting towards the 4th Industrial Revolution.

The World Economic Forum (2019) through a survey, suggested that about 10-12% of the world’s GDP will be under Blockchain management systems as of 2027.

Through the integration of Blockchain technology, global spending is expected to rise to nearly 14 billion by 2023.

Blockchain is keen to foster growth and innovation while providing access to infrastructural development in emerging markets through decentralization. Blockchain provides a credible platform for global transactions.