A Newbie’s Take on Understanding the Blockchain in 2021.
I wrote from a newbie’s perspective in How Cryptocurrency Wallet Works. It’s an interesting read, even if I do say so myself. Here is another one on the Blockchain in 2021.
Understanding the Blockchain in 2021
Blockchain is a data structure that uses a distributed and decentralized approach that starts with creating a record of transactions (referred to by some as a digital ledger) and sharing it amongst independent users. Blockchain took the driver’s seat and relegated the age-old process of using third-party intermediaries to the backseat, or, in most cases, rendered them redundant. The co-founder of Ethereum, Vitalik Buterin, captures a critical factor in blockchain when he says, “Whereas most technologies tend to automate workers on the periphery doing menial tasks, blockchains automate away from the center. Instead of putting the taxi driver out of a job, blockchain puts Uber out of a job and lets the taxi drivers work with the customer directly.” The removal of a bank from the processing of transactions while giving each person direct access to the other without compromising security and trust is another example. Here, this innovation opens us to a world of endless possibilities that the introduction of Bitcoin happened to popularize. Its reach and benefits extend beyond the financial sector. Underestimating the many problems it is poised to solve will no longer be the case for you after this detailed breakdown. We’d look at its history, types, and how it works, amongst others.
History of Block Chain
Dr. Scott Stornetta, the co-inventor of blockchain, while working at Xerox, realized that records of all data would become digital in the future. This realization made him quite worried when he heard about an alteration carried out on an important biological result where the published result was different from the one in the lab books. This brought home the reality that digital records can also be subjected to the same. To arrest this, digital data had to have the foolproof ability to not be changed in its final form — the process of becoming immutable. So, in 1994, after he had come to work at Bells Lab, he co-founded Surety, a spin-off of Bells Lab, which, according to the World Crypto Index, would become the first commercial blockchain provider.
Satoshi Nakamoto, the inventor of Bitcoin, acknowledges the role played by Stornetta and Stuart Haber in laying the crucial foundation of all blockchain technology today. Stornetta’s limitations as a theorist were complemented by the expertise of Haber, who was a cryptographer. In underscoring how many blockchains meant to him and solving his perceived problem, Stornetta says “he had spent longer thinking about blockchain than anyone else on the planet.”
In Forbes, the article titled Blockchain Was Born 20 Years Before Bitcoin, published in 2020, helps us narrow the date of the beginning of both. Also, it suggests a link between the two, which is, in reality, true. Blockchain technology is the network on which Bitcoin transactions operate.
What the Bitcoin Experiment Taught Us About the Blockchain
El Salvador, a country in Central America that is quite small and densely populated of the seven countries that make this up, in June 2021, decided to switch to the use of Bitcoin as a legal tender, a move considered controversial. In this case, this move was not made for the sake of the spotlight controversy offers or to appear more evolved than the rest of the world. Undoubtedly, the backstory will confirm that it was thought to be in the best interest of the country.
The legislative implementation of Bitcoin as a legal tender was in a bid to maximize the value of the remittances they receive. Remittances make up the bulk of the country’s economic strength, with 1.5 million of its 6.4 million people living abroad. Economic growth in El Salvador makes it seem like they are constantly in deep waters. A triple blow of having a large trade deficit, a high unemployment rate, and generally poor economic growth shadows the economy. The country’s first currency switch was when it made the US dollars its legal tender to save them the substantial fees in remittances they received. After failing to do what was expected — contributing to economic prosperity — for over two decades, it became expedient to follow the ray of hope offered by Bitcoin.
As previously expressed, blockchain offers a whole new world of possibilities for the financial sector. Measuring the benefits and gains in eliminating the need for bank fees and other bank restrictions against the risk this might pose and the resultant implementation of Bitcoin as a legal tender means it won on a grand scale.
After examining El Salvador’s reason for carrying out the bitcoin experiment, we will be picking the positives, which are:
a. Bitcoin and its blockchain technology hold great promise for consideration in economic growth with respect to remittances, as in this case.
b. The question might no longer be whether more developing countries would choose to adopt it, but when they would.
c. The prospects of the blockchain for the non-financial sector of the country will also be one of its greatest selling points in winning the adoption argument in countries as challenged as El Salvador.
d. Relying on third-party verification would never cost less and would limit the freedom to carry out a huge number of transactions without unnecessary red tape (lots of paperwork and mentally and physically demanding procedures).
e. Blockchain technology is, as technology goes, an improving one and will have more to offer as the years go by. Already, we are experiencing the disruption it is creating. So, instead of governments resisting it, understanding it would better serve them.
HOW THE BLOCKCHAIN WORKS
Rajesh Kandaswamy and David Furlonger, in outlining the long-term and transformational promise of the Blockchain for business and society in their Blockchain-Based Transformation report, make predictions about the Blockchain. They believe that by 2022, companies that are innovation-inclined will adopt its use. Also, at least one of these companies would be worth $10 million by virtue of this in the same year. History might be kind to them, as this projection is not just speculative but a result of available research data. Backed by other projections, we’d pay close attention to the unfolding of it all.
A graphic representation of one of such projections from the blockchain market on the MarketandMarkets website is shown below.
Several banks failed during the global recession that rocked the world economy in 2008. Trust in banks took a hard hit and sparked a lack of confidence in the solvency of banks among investors. The scale of this downturn was unpredictable, which would relate to the pace with which the inventor of Bitcoin continued. Already in its formative stage in 2007, Bitcoin wouldn’t lay claim to being the answer to the crisis, but it could, as it has been, be described as a symptom of it. When the whitepaper for it entered the public space, there was already a full meltdown. Instinctively, people without an understanding of how much work it takes to create a decentralized digital currency like that would make the previously mentioned assumption. It is, therefore, safe to say that it was only a matter of time before the need for Bitcoin was underlined by the happenings of 2008. Conclusively, in following these projections made by crypto experts, we are not looking at speculations built based on hope, but one that is linked to the unraveling of the foreshadowed crisis. It is therefore imperative that we gain a firm grasp of basic Bitcoin and the technology — the blockchain — that powers its operations. We will be focusing on the bitcoin blockchain. Although there are blockchain technologies for ethereum and other cryptocurrencies, we’d use bitcoin to exemplify how the blockchain works. Moreover, Bitcoin is said to have popularized the blockchain; it just feels right to navigate from this angle, you’d agree?
Firstly, we’d be looking at how the bitcoin blockchain is used in the exchange of value using a P2P network in such a way that a third party or central custody isn’t necessary.
With the introduction of bitcoin by Satoshi, who describes it as a “peer-to-peer electronic cash system” structured to “allow for online payments to be sent directly from one party to another without going through a financial institution,” intermediaries became expendable. A peer-to-peer (P2P) network enables the sharing of data or assets from one user to another without requiring central control or authority. It’s like communication. Let’s imagine a situation where a young man pays a visit to his friend in prison. There is a transparent demarcation that separates the prisoner and a visitor from communicating directly. A telephone is used to relay all the information needed from one end to the other. That telephone can be seen as the server, while the young man and his friends are peers. Once the prisoner is freed or brought into a room to sit face-to-face with his friend without the demarcation and telephone, he is communicating directly with third-party interference or control. The first diagram shows a peer-to-peer network, while the second one shows its comparison with a third-party server-run network.
The Link Between Bitcoin, Blockchain, and Peer-to-Peer(P2P)
Operating on a decentralized communication model, P2P uses the nodes (units of data structure) that store and share files with other nodes. The nodes are equal in rank and independence. The peer-to-peer network is a feature of bitcoin. The bitcoin blockchain is popular for being “one of the largest and most powerful blockchains in the world,” according to Tiana Laurence in her book Blockchain for Dummies. Since blockchain is a data structure that keeps records of digital transactions that can be shared with independent users, while bitcoin is a decentralized digital currency run on a peer-to-peer network, the network allows bitcoin to be transferred from one user to another without a middleman or third party like a bank doing the verification. Records of every bitcoin transaction are recorded on the blockchain. Only peers or users of the network get access to it, and via the blockchain, they can attest to the full-cycle transaction. So long as bitcoin continues to exist, the blockchain will hold this digital record.
The technology that powers Bitcoin transactions; the Blockchain.
For the blockchain, before any record is added to it, it has to be verified by independent users in the network. As the diagram explicitly states, a cryptocurrency can be the reason a transaction is initiated. In our case, bitcoin is the cryptocurrency in question.
Types of Blockchain
There are mainly two types of blockchain. There are public and private blockchains. However, some variations do not fall under the categories of public and private blockchains, and they have been tagged as consortium and hybrid blockchains. Altogether, we have only named four types of blockchain; this does not mean there are only four. More types, like the permissioned blockchain, also exist. In this section, the public, private, and permissioned blockchains will be explained following the network model and usage type.
To achieve full decentralization, the public blockchain is completely open. It uses a large distributed ledger and allows anyone access to verify or add data, which is possible through the use of open-source code. Bitcoin and Ethereum operate on this type of blockchain. The network relies on accessibility and anonymity and is run through a native token. Below is a diagram to emphasize the features explained.
The private blockchain allows for fewer independent participants. Accessibility and the ability to verify transactions on the blockchain are restricted to these few participants. It has an authorization paradigm where senior administrators and members can authorize access to users. It is controlled. On the private blockchain, we have a centralized blockchain. While the public blockchain is decentralized due to its distributed and public accessibility, the private blockchain centers access and control on selected individuals or organizations. For full control, companies use this type of blockchain. A few of the pros include swift consensus being reached due to fewer users, transactions being performed faster, and compliance with the agreed requirements being fully adhered to.
In the diagram displayed above to show the private blockchain, the locks indicate controlled access, while at the center lies the authority figure(s).
Like the public blockchain, the permissioned blockchain also embodies the large distribution and use of native token features. Yet, within the network, users are assigned roles to play. The roles are controlled, hence the one differing feature. A digital invitation is issued to accepted participants. We could say this regulation provides more security and control. The enterprise blockchain is an example of a permissioned network. It is a good fit for corporations as it aids in making the scaling of business processes more efficient.
Bitcoin Smart Contract
Before we talk about bitcoin smart contracts, we’ll first have a general view of what smart contracts imply in the blockchain network. The smart contract is a digital agreement that runs on the blockchain and is carried out between independent users. These independent users’ transactions in the smart contract are processed by the blockchain and stored on the public blockchain. In respect to this, transactions are only carried out when the conditions contained in the contract are met by the parties involved. Another way to describe this is that two parties, the buyer and seller, have their terms of agreement written in codes in a “self-executing contract.”
Our knowledge of smart cards already tells us that this is a digital contract. The bitcoin blockchain stores and executes the contracts on the network. As is the preserve of the blockchain, this contract remains immutable (unchanged) and secure.
As an attribute of bitcoin smart contracts, it performs multiple functions. Its system is programmed to stop the progress of tokens by freezing or even confiscating them, plainly targeted at enforcing contract adherence. A few of the functions include managing the agreement in the contract and being an automatic trigger for applications to send and receive data. Although the automatic trigger is possible only with the private key of the smart contract holder, Care has to be taken in writing this contract, as once it is recorded on the blockchain, it cannot be reversed, and as humans, we are bound to make mistakes.
Blockchain and wallets
Wallets are containers that hold the keys that give the holder full control of their cryptocurrency. The wallet holds the keys that grant the holder of cryptocurrency access to carry out transactions and claim ownership. It is a secure storage place for these keys. Contained in the wallet are the seed key, the private key, and the public key. In the wallet, the seed key starts the process of key generation, from which the private key emerges, and then the public key. For memorization and an easy-to-recall purpose, the seed key is modified into a seed phrase. With the seed key or phrase, which can also be called the master key, a wallet holder can transfer the details of one wallet to another compatible wallet. Also, other keys can be regenerated if lost by using them. The private key is your digital signature. Losing it would mean losing access to your cryptocurrency.
BLOCKCHAIN FORK
On Wikipedia, these three scenarios create a fork:
a. There are two ongoing paths on the blockchain spurred by a disagreement.
b. A protocol change occurs
c. When a solution to a problem happens simultaneously, this will create the same block height in the blockchain.
The blockchain is the arrangement of blocks in order of occurrence, with a new block containing information about the previous one. The linking of these blocks has a chain-like structure. A picture of how the arrangement of a chain intertwines Blocks are stored for information at the time they are carried out on the blockchain. According to an article about block height on CoinMarketCap, block height “is a measure of the number of blocks that have been created on the blockchain before the block in question.” This would lead to a fork when there is no consensus as to how a transaction should occur between independent parties. When they proceed to get the problem fixed at the same time, different blocks occur at the same height. Another angle to this is that because a blockchain is a decentralized data structure, a fork is likely to occur. Recalling the third scenario, the author of Mastering Bitcoin, Andreas M., writes, “A fork occurs whenever two candidate blocks are competing to form the blockchain.” Proof of work (PoW), which is used to validate transactions, is contained in these differing blocks, and this is why the blockchain will accept them when they arrive. The block with the most proof of work will start the long chain going towards forming one block when the problem is resolved.
Blockchain Interactions (Cross-chain Functionality)
Blockchains interact, which means that they communicate with each other in unique ways. Using the cross-chain functionality, we’d be examining these interactions. For this interaction to take place, the cross-chain has to be present to facilitate it. The cross-chain is the facilitator of reciprocal communication (interoperability) between two relatively independent blockchains.
Hopefully, I’ll complete these and post them soon.
Uses of Blockchain
a. In finance
b. In the supply chain
c. In governance
WEBSITES REF:
Stornetta’s Bio https://www.worldcryptoindex.com/creators/w-scott-stornetta/
Bell & Stornetta’s link: https://www.forbes.com/sites/vipinbharathan/2020/06/01/the-blockchain-was-born-20-years-before-bitcoin/?sh=9eb7dc55d71e
Blockchain: https://en.wikipedia.org/wiki/Blockchain
Blockchain solution proffered https://blog.aicpa.org/2018/02/blockchain-was-made-to-solve-1-problem-heres-what-that-is.html#sthash.9l8scaAN.ULEYXPGS.dpbs
https://www.huffpost.com/entry/blockchain---the-key-to-p_b_10537540
https://www.ibm.com/topics/benefits-of-blockchain
https://www.ibm.com/topics/what-is-blockchain
https://www.reply.com/solidsoft-reply/en/content/blockchain-an-overview
Bitcoin Experiment and Blockchain :
https://www.internationalaffairs.org.au/australianoutlook/el-salvadors-bitcoin-experiment/
