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Let’s gear up for the next game changer – Blockchain!

You have probably heard of Bitcoin and Blockchain unless you have been living under a rock. They are, after all, keywords of the year, and they have now become fashionable, and media favorites. Even those who have never “mined” a cryptocurrency or have only a rudimentary idea of how it operates are talking about it. In my life, non-technical friends outnumber technical friends. They have been asking me for weeks, insisting that I teach them about this new vocabulary. I am sure there are tens of thousands of others who share this sentiment. Thus it is time to build something that everyone can point other lost souls to - that is the purpose of this blog - written in plain English that any regular internet user can understand.

Let us first define a block and how it is chained before delving deeper into Blockchain.

 

What is a “block”?

Assume that all transactions are recorded on paper, with 25 lines per sheet. The community will "verify" the transactions on this current page once a sheet has been filled up (25 transactions). It is validated by group consensus if the majority of the community agrees that the 25 transactions are all the same. The page is added to a stack of previously validated sheets once it has been validated. Because once a sheet is certified, it cannot be modified by joining the sheets together, each sheet on the stack can be assumed to be trustworthy. This process is called forming a block.

 

How are blocks “chained” together?

We embed information from the previous sheet of paper into a new, freshly approved sheet to link our sheets together. Our piece of paper is equal to a block in Blockchain. Chaining is the process of integrating a prior block of information into the present block of information. As a result, the word Blockchain was coined.

Today, all data in a block is processed through a specific procedure called a "cryptographic hash" to link them together. Cryptographic hashes generate a one-of-a-kind output for a given input. As a result, each block's hash will always be unique depending on the inputs as shown in figure 1.

 

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Figure 1

 

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Figure 2

 

To connect or chain data blocks together, the current block's header provides the hash of the previous verified block (Figure 2). Changing the contents on any block in a Blockchain will produce a completely different hash, which will not match the hash in the next block header (Figure 3), resulting in the Blockchain being broken and all blocks linked to the modification, being invalidated. This gives Blockchain its immutability (inability to be changed) and makes it very resistant to censorship.

 

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Figure 3

 

What is Blockchain?

The ‘anonymous’ Satoshi Nakamoto came up with the concept of blockchain, which he documented in a whitepaper. The concepts discussed in this whitepaper led to the creation of Bitcoin, the world's first and largest Blockchain. At its core, Blockchain is a record-keeping system that can track the movement of monetary wealth in the form of "tokens" or "coins." Bitcoin and other cryptocurrencies like Ether, LiteCoin, and Monero are instances of this at the moment. By offering an unchangeable digital ledger that is widely distributed and peer-validated, blockchains remain an effective enabling platform for cryptocurrencies.

Because each of the above-mentioned cryptocurrencies has its Blockchain, they cannot be exchanged directly. It is vital to remember that a Blockchain does not require a currency, and numerous intriguing and compelling use cases do not necessitate the usage of specific money, coin, or token. In essence, blockchain is a ledger that serves as a record of asset ownership, independent of the type of asset. A Blockchain can also store nearly any sort of data that is defined by the Blockchain's particular storage rules. This record-keeping system can keep track of both monetary and non-monetary transactions of significance. This includes things like transferring ownership, updating a medical record, capturing a training certification, and documenting crucial single-party statements.

The usage of Smart Contracts, which are nothing more than software programmed events, can make Blockchain an event tracking system, where announcements indicate events and events can be actionable.

Blockchain may also be used as a workflow platform by assigning rules to occurrences using Smart Contracts. For a client app to communicate with a Smart Contract, the user, or the application from which the user is invoking the contract functionality must know the contract's public address.

Ethereum and Hyperledger Fabric are two of the most developed and frequently utilised Blockchain systems. Although Ethereum and Hyperledger Fabric were both released in 2015, their out-of-the-box functionality differs vastly from each other. ("out-of-the-box" solutions are require minimum code as there are already blocks of advanced functionalities for you to choose from and merge to obtain the solution). For the construction of Smart Contracts and native tokenisation, Ethereum comes with an open, public, permissionless blockchain and a Turing complete programming language called Solidity out of the box. Hyperledger Fabric comes with a closed, private, permissioned blockchain out of the box, as well as Turing complete programming language support in Go, JAVA, and JavaScript for Smart Contract developments.

 

Blockchain Consensus

In Blockchain, all transactions are recorded in blocks. Before a block can be added to the chain of previously validated blocks, it must first be validated by group consensus. There are a variety of Blockchain consensus techniques, however regardless of the type of consensus utilised, every transaction data on a chained block is considered to be trustworthy, and the chained data has not been altered owing to group consensus data validation. There are two main consensus mechanisms named, Proof of Work and Proof of Stake.

  • Proof of Work (PoW) Consensus

Byzantine Fault Tolerance was achieved in Bitcoin via a Proof of Work validation system. When a block of data is full, each node competes to solve a guessing game problem to validate the block of data using Proof of Work consensus. Because this is a non-computational problem, the most efficient solution is to make random guesses. Miners are nodes that must estimate the "nonce" to successfully validate a block. All block data, as well as the current guess (nonce), is sent through a cryptographic hash; if the result matches the current level of "difficulty," the miner has guessed correctly. The network adjusts the difficulty to match the load.

A nonce is a piece of random data that is mixed with block data to produce a hash output that matches the Blockchain's current difficulty level. Any miner who believes they have the proper answer will inform the rest of the community. Miners will use the nonce with their block data and try to get a result which fits the difficulty setting to validate the solution. The transactions on the winner's block are judged right if 51% or more of the miners agree with the proposed nonce, and the miner with the correct answer is paid (usually the reward is given in platform tokens). Any nodes that lack the right block data will reconcile by copying the validated block from nearby nodes. Proof of Work consensus offers a game theory incentive for each node to act precisely and honestly; dishonest players will incur real-world costs in guessing the nonce for a 0% chance of receiving a payout.

  • Proof of Stake (PoS) Consensus

Proof of Stake is a newer Blockchain consensus technique that has been proposed as a replacement for Proof of Work to address the scalability and cost issues that PoW has. Because Proof of Stake eliminates the guessing game in block validation, mining no longer necessitates sophisticated and specialised gear, requiring less energy for processing.

To validate transactions, Proof of Stake consensus uses a mechanism in which "Validator" nodes individually donate or pay a stake. When it is time for collective consensus, everyone who wants to take part puts money at a stake. A random node is chosen, and all other participants are shown the hash of that node's block contents. The validity of the block transactions is staked by all other nodes. If the proposed block is approved by the majority, the random node gets rewarded, as are any people who bet on that node. If a majority of nodes disagree, the random node loses their stake, receives no reward, and a new node is chosen at random to share the block data. Only the mechanics of how it is enforced are changed, but the game theory motivation for honesty and accuracy remains.

The main difference with the consensus is that there is no processing done during this; instead, only wagering is done, and any device, regardless of the computing power, can wager. The “Nothing at Stake” dilemma, in which a validator node authorises all transactions on both sides of a ledger following a hard fork, is one potential vulnerability of Proof of Stake.

 

Proof of Work vs Proof of Stake

 

Proof of Work

Proof of Stake

Work for a monetary incentive

Make a safe wager (stake) in exchange for a reward.

Transaction speed is slow

Quick transaction times

Extremely high energy usage

Low usage of energy

Hardware was purchased using new capital

Staking funds were purchased with new capital