What is Blockchain?
1. What is Blockchain?
Blockchain is a type of distributed ledger or database that is shared among the nodes of a computer network. The main features of Blockchain include:
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Block Storage: Data is stored in blocks that are linked together through cryptography.
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Decentralization: No single entity or person controls the entire data; instead, control is shared collectively among all users and nodes.
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Immutability: Once data is recorded in a block, it cannot be altered or tampered with; the only point that requires trust is the time of data entry by the user or program.
Since the introduction of Bitcoin in 2009, Blockchain has found widespread use in various fields, including cryptocurrencies, decentralized finance (DeFi) applications, non-fungible tokens (NFTs), and smart contracts.
2. Key Points of Blockchain
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Shared Database: Compared to traditional databases, data in Blockchain is stored in blocks and linked together via cryptography.
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Expansive Data Storage: While Blockchain is most commonly used to record transactions, a variety of data types can be stored on it.
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Decentralization: Particularly in Bitcoin, no individual or group has complete control, and all users collectively participate in data control.
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Immutability: Data is permanently stored once recorded; for example, Bitcoin transactions are irreversible and visible to all.
3. How Does Blockchain Work?
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Data Structuring: Blockchain consists of programs called scripts that perform tasks like inputting, accessing, and storing information.
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Distribution of Versions: Multiple copies of Blockchain are stored on different computers, and all of them must be consistent to ensure the data is valid.
Example: Bitcoin Blockchain
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Transactions are stored in a file around 4 MB in size (block).
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Once the block is full, data is hashed using a cryptographic function to create a "block header hash."
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The hash is added to the next block, forming a chain of blocks.
4. Blockchain Transaction Process
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Initiating a Transaction: The user initiates a transaction using a cryptocurrency wallet.
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Sending to Mempool: The transaction is sent to the memory pool (mempool) and queued for miners to select.
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Block Creation and Mining: Once the transaction enters a block and the block is filled, the block is closed, and the mining process begins.
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Proof of Work (PoW): This process requires heavy computation and is the reason for high energy consumption in the Bitcoin network.
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Final Confirmation: After the block is closed, the transaction is completed, but to ensure certainty, several subsequent blocks must also be verified (approximately 1 hour in Bitcoin).
Note: In other blockchains, like Ethereum, different consensus mechanisms, such as Proof-of-Stake, are used, which consume less time and cost.
5. Decentralization in Blockchain
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Data Distribution: Blockchain data is distributed among multiple nodes, meaning each node holds a copy of the entire ledger.
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Redundancy: This distribution creates redundancy, and any changes to one node are identified and rejected by comparing it with others.
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High Security: Due to distribution and cryptography, tampering with data becomes extremely difficult.
6. Transparency in Blockchain
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Public Access: Most public blockchains, such as Ethereum, are open-source, and anyone can view transaction records.
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Blockchain Explorers: Tools like Blockchain Explorers allow users to view live transactions.
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Cryptography of Data: While records are public, users' personal information is encrypted and protected through cryptography.
7. Is Blockchain Secure?
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Linear Storage: New blocks are added linearly and chronologically to the chain.
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Proof of Immutability: Any change to the data of a block alters its hash, making the subsequent chain invalid.
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51% Attacks: In large blockchains like Bitcoin, a 51% attack would require an extremely high amount of computational power, which is nearly impossible.
Note: No system is 100% secure, but high levels of security are achieved through distribution and cryptography.
8. Bitcoin vs Blockchain
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History: The idea of Blockchain was introduced in 1991 by Stuart Haber and Scott Stornetta.
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Bitcoin, introduced by Satoshi Nakamoto in 2009, was the first practical application of Blockchain.
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Bitcoin: Uses Blockchain as a method for transparent transaction recording.
In Bitcoin's whitepaper, Satoshi Nakamoto introduced it as a peer-to-peer electronic payment system. -
Other Applications: Blockchain can be used to record various data types, such as transactions, voting, ownership documents, and more.
9. How Blockchain is Used
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General Applications:
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Cryptocurrencies: Bitcoin and other digital currencies use Blockchain as infrastructure.
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Commercial Brands: Companies like Walmart, Pfizer, AIG, Siemens, and Unilever use Blockchain for experimental implementation.
Example: IBM's Food Trust project tracks the journey of food products from origin to destination.
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Applications in Industries:
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Banking and Finance: Blockchain can process transactions in minutes or seconds, overcoming the limitations of traditional banking hours.
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Currency: Blockchain facilitates cross-border cryptocurrency transactions.
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Healthcare: Healthcare providers can securely store medical records on Blockchain.
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Property Documents: Blockchain can speed up the traditionally slow and inefficient process of registering property ownership.
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Smart Contracts: Automatically execute contracts based on predefined conditions.
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Supply Chain: Suppliers can register the authenticity of raw materials and benefit from labels like "organic," "local," or "fair trade."
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Voting: Blockchain can reduce fraud and increase voter participation.
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10. Advantages and Disadvantages of Blockchain
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Advantages:
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Greater Accuracy: Transactions are verified by thousands of computers, reducing human error.
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Cost Reduction: Elimination of intermediaries such as banks or notaries.
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Decentralization: Information is distributed across the network, not stored in one central location.
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Security and Confidentiality: Transactions are encrypted, and once verified, they cannot be altered.
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Transparency: Code and transaction records are publicly accessible.
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Access for All: Even people without bank accounts can benefit from Blockchain.
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Disadvantages:
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High Technology Costs: Especially in Proof-of-Work systems that consume a lot of energy.
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Slow Transaction Speed: Some networks, like Bitcoin, can process only a limited number of transactions per second.
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Use in Illegal Activities: Relative anonymity may lead to misuse by criminals.
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Ambiguous Regulations: Blockchain regulations differ across jurisdictions and can be unclear.
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Data Storage Limits: As Blockchain grows, the need for storage increases exponentially.
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11. Permissioned vs. Permissionless Blockchain Platforms
Blockchain technology has become a versatile and efficient tool across industries. Understanding the different types of Blockchain is essential for selecting the right solution based on specific needs.
There are two main types: Permissioned Blockchain and Permissionless Blockchain. These concepts define the governance structure and access controls of a Blockchain.
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Permissioned Blockchain: Access to network participation is restricted. Network managers control who can join, view data, and participate in consensus processes.
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Permissionless Blockchain: Known for free and unrestricted participation.
Four common types of Blockchain:
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Public (Open)
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Private
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Hybrid
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Consortium
Increasingly, many Blockchain classifications fall under either permissioned or permissionless categories. However, the dynamic nature of the Web3 ecosystem causes some ambiguity in Blockchain categorization.
For example, "Permissioned" can include private, consortium, and in some cases, hybrid types, but these are not entirely interchangeable terms. Similarly, "Permissionless" is commonly used for public Blockchains but is not synonymous with them. Ultimately, the precise categorization depends on the Blockchain's design and implementation.
In 2024, there are at least four prominent types of Blockchain: Public, Private, Hybrid, and Consortium.
Public Blockchains
Key Features:
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Decentralized, democratic, and transparent
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Supports a wide range of applications
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Enhances interoperability
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Suitable for cryptocurrencies, tokenized assets trading, crowdfunding, and open-source projects
Examples and Platforms: Ethereum, Bitcoin, Solana
Public Blockchains are the primary fields of community engagement in the blockchain world. They are decentralized and open, meaning anyone can join. Public Blockchains benefit from broad participation— the more participation there is, the higher the security.
However, Public Blockchains face challenges. Their transaction speed is often relatively low, and they have scalability limitations. Due to their high transparency, they may not be suitable for sensitive business transactions.
Use Cases: Digital asset exchange, crowdfunding, public fundraising, or working on open-source projects.
Private Blockchains
Key Features:
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Limited participation
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Greater privacy and higher control
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Centralized and potentially at higher risk for manipulation
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Suitable for specific internal organizational applications
Examples and Platforms: Hyperledger Fabric, MultiChain
Private Blockchains are restricted to a selected group of participants. These blockchains are often controlled by a single entity or organization (in direct contrast with the decentralized feature of public blockchains).
Private Blockchains offer multiple advantages, such as higher privacy, greater control, and faster transaction processing speed. However, being centralized and controlled by a single entity can make them more vulnerable to internal risks like fraud or manipulation.
Use Cases: Internal applications like logistics, accounting, payroll, and record-keeping of sensitive data.
Hybrid Blockchains
Key Features:
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Selective transparency and customizable access levels
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Balance between decentralization and control
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Can be complex in terms of governance and management
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Suitable for selective data sharing in regulated industries
Examples and Platforms: XinFin, IBM Blockchain Platform
Hybrid Blockchains combine elements of both public and private blockchains. They can be customized to allow different access levels, thus creating a balance between the decentralized nature of public blockchains and the control of private blockchains. This flexibility makes them an attractive option for businesses seeking the best of both types of blockchains.
However, managing both public and private aspects simultaneously can be complex and costly. Designing protocols and governance strategies compatible with the hybrid nature is also a significant challenge.
Use Cases: Businesses that need selective data sharing. For example, a financial or healthcare organization might use a hybrid blockchain to keep some data publicly auditable while maintaining the confidentiality of customer or patient information.
Consortium Blockchains
Key Features:
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Between centralized and decentralized models
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Shared costs and risks
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Coordination between organizations can create complexity
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Suitable for collaborative processes
Example and Platform: Corda by R3
Consortium Blockchains are a specific type of permissioned blockchain where a group of organizations jointly controls and governs the network. Each member of the consortium typically has equal decision-making rights. Compared to private blockchains, which are controlled by a single entity, this model creates more trust and security through collective involvement.
However, Consortium Blockchains face unique challenges. Managing consensus and governance among multiple organizations requires significant coordination and often compromise. Differences in goals and strategies between consortium members may lead to conflicts or inefficiencies.
Use Cases: Secure data sharing, logistics management, and supply chain management.
Considerations When Choosing a Blockchain
When deciding which type of blockchain technology to use within a company, priorities and key objectives should first be identified:
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Is public transparency more important than private confidentiality?
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How will the blockchain integrate with existing infrastructure?
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What are the scalability needs for the business in the future?
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What is the organization’s long-term vision regarding tokenized and digital assets?
The regulatory environment is another key consideration when evaluating blockchain technology. Certain industries may require compliance with regulatory standards and data protection laws. A blockchain infrastructure that complies with regulations and has a clear approach to compliance across various jurisdictions can provide valuable guidance in choosing suitable solutions.
Understanding the evolving blockchain landscape goes beyond a technical exercise— it is a strategic necessity that can significantly impact a company’s digital strategy. The key is finding an experienced, trusted, and scalable partner to guide you through this journey.
Conclusion
Despite its many practical applications, blockchain— especially thanks to Bitcoin and other cryptocurrencies— has gained significant attention among investors and businesses. This technology can make the operations of companies and governments more accurate, efficient, secure, and cost-effective while reducing the need for intermediaries.
Today, we are witnessing the rise of non-fungible tokens (NFTs) and the tokenization of assets, and we are likely to see a combination of blockchain, tokens, and AI in business and consumer solutions in the future.
