Banking and financial institutions as we see them today have existed for several decades. Before them were merchants who controlled finances and monopolised the majority trade. The world was introduced to digital currency, Bitcoin in 2008. This new concept of Blockchain technology conceived by Satoshi Nakamoto came about from technological breakthroughs. This progression from traditional financial systems to new technological innovation heralded society’s need to move away from centralised methods to decentralised processes. Today, blockchain technology has impacted every industry from startups to big players. Everyday companies are coming up with new proof of concepts using blockchain technology, with the industry set to transform even further.

What defines blockchain technology?

Blockchain at its core is a peer-to-peer distributed ledger system that is cryptographically secure, transparent, immutable, and can be updated only via consensus or agreement among peers.

Feature Image by MoonX depicting basics of Blockchain as a beginner

In basic terms, blockchain is a coming together of blocks that store digital transaction information while being linked to one another. As a distributed database (or ledger) not residing in the same place, it is autonomous while being linked. It maintains and monitors a steadily increasing list of ordered records, known as blocks. Each block has a timestamp and a link to the previous block but not monitored by a central agency. This revolutionary technology enables peers to exchange values using transactions, without an arbitrator.

While individual players in a distributed ledger system are called nodes, each of them can send and receive messages to and from each other. A block is made up of transactions and its size is variable depending on the type and design of the blockchain in use. A reference to previous block is also included in the block unless it’s a genesis block (the very first block in the blockchain). Attributes of a block constitutes of block header, pointers to previous blocks, time stamp, nonce, transaction counter, transactions and more.

Information to be updated, must have nodes adhere to a consensus protocol. Consensus is a process of agreement between distributing nodes on a final state of data. There are various requirements that nodes must meet to provide desired results in consensus mechanism:

1. Agreement: All nodes decide on the same value

2. Termination: All nodes terminate execution of the consensus process and eventually reach a decision

3. Validity: The value agreed upon by all nodes must be the same as the initial value proposed by at least one honest node

4. Fault tolerant: the consensus algorithm should be able to run in the presence of faulty malicious nodes

5. Integrity: Nodes make decisions only once in a single consensus cycle

Blockchain Elements

Besides the blocks themselves, there are several elements that run during the process. These include;

1. Senders and recipients addresses: An address is a public key or derived from a public key that can be reused by the same user. These are unique identifiers.

2. Transaction: A transaction represents a transfer of value from one address to another.

3. Block: Composed of multiple transactions w.r.t a address.

4. Scripting: Transaction scripts are predefined sets of commands for nodes to transfer tokens from one address to another.

5. Smart Contracts: These programs run on top of the blockchain and encapsulate the business logic to be executed when certain conditions are met.

6. Node: Defined as an individual player in a distributed ledger system, where each node can send and receive messages to and from each other

Types of Blockchain

1. Public blockchains

a. Open to the public and anyone can participate as a node in the decision-making process.

b. These ledgers are not owned by anyone and are publicly open for anyone to participate in.

c. All users of this permission-less ledger maintain a copy of the ledger on their local nodes

2. Private blockchains

a. They are private and are open only to a group of individuals

b. A ledger is shared only among a group

3. Semi-private blockchains

a. Part of the blockchain is private and part of it is public.

b. The private part is controlled by a group of individuals

c. The public part is open for participation by anyone.

4. Sidechains

a. Coins can be moved from one blockchain to another and moved back.

b. Common uses include the creation of new altcoins (alternative cryptocurrencies) whereby coins are burnt as a proof of adequate stake.

5. Permissioned ledger

a. Participants of the network are known and already trusted.

b. Permissioned ledgers do not need to use a distributed consensus mechanism, instead an agreement protocol can be used

c. There is also no requirement for a permissioned blockchain to be private as it can be a public blockchain but with regulated access control.

6. Distributed ledger

a. This ledger is distributed among its participants and spread across multiple sites or organizations.

b. This type can either be private or public.

c. The records are stored contiguously instead of sorted into blocks. This concept is used in Ripple.

7. Shared ledger

This is generic term that is used to describe any application or database that is shared by the public or a consortium.

8. Tokenized blockchains

These blockchains are standard blockchains that generate cryptocurrency as a result of a consensus process via mining or via initial distribution.

The above image is cited from MLSDev

What are the benefits of Blockchain?

Blockchain technology is revolutionary, and have many benefits that are relevant compared to old financial processes.

1. There is no need to rely upon a third party to validate and protect transactions

2. Distributed trust and authority of data between a decentralized group of individuals

3. Changing of data once written to a blockchain is extremely difficult to change which makes it immutable.

4. Even if nodes become inactive or inaccessible the network as a whole will continue to work with data availability.

5. All information on a blockchain are cryptographically secured

Blockchain is the future of digital value transactions and will challenge the existing businesses models. The longterm benefits include better efficiency, more savings, increased safety and better transparency that makes it truly one-of-a-kind.

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