In this article, we will talk about blockchain technology in very basic terms. There are a lot of sources that talk about blockchain and ledgers, about how decentralized currencies have the power of changing the future, about how “the ship has sailed” on becoming rich with Bitcoin, and how the word “trust” has gained power again. But what do all these actually mean?
It’s no surprise that the word “blockchain” made a fuss in the past years and it has become more and more fascinating to people all around the world. And not only that, but the blockchain is already disrupting the financial system. So it’s time to look at it responsibly.
First things first: what is a blockchain?
As the name says it pretty obviously, a blockchain is a chain of blocks.
Each block contains 3 things: a bunch of data, the hash of the block, and the hash of the previous block.
The data stored on the block can be almost anything, depending on the type of the blockchain. If we talk about money, we’re talking about transaction records, but it can be any other type of data: pictures, links, information about a specific topic. For the sake of the article, we will focus on the history of transactions. It can store the following details: the sender, the amount of the transaction, and the receiver of the amount. For example, Anna sends 100 dollars to Alex. This is only one of all the transactions on that list. You can also check the topic of the smart contracts, as they are also part of this data that can be stored on the blockchain. Transactions are exchanges of coins based on some conditions that make them storable on the blockchain.
Ok, getting back to the other elements of a block, let’s move on to the hash. The hash is actually an encrypted digital fingerprint. This means it’s unique, just like a fingerprint. It’s calculated as soon as the block it’s created, and if there are modifications to this block, the hash will change.
The third element, which is the hash of the previous block, creates the chain of blocks that’s making the blockchain secure.
Let’s say that we have 10 blocks in the chain: each block has a hash and the hash of the previous block. The only block which doesn’t have a hash of the previous block it’s, of course, the first-ever created block, which it's called the “Genesis Block”.
Well, if the hash of a block has been changed after it was validated by everyone, all of the following blocks will become invalid. And this is because they no longer store a valid hash of the previous blocks.
All computers in the network have to allow the changes before they occur, therefore we can say it’s consensus-based permission.
So, the new block in the link is stamped in order to establish a chronological order, and the hashing process proves that the block is qualified to be added to the chain. Each new block is identified and validated by its hash which was established taking into account data from previous blocks. It’s an unbroken chain - a blockchain - which leads all the way back to its very first block.
OK, things start to make sense, but what exactly does a blockchain do?
Well, the answer is complex, but not hard to understand.
Blockchain is a distributed ledger that’s open to everyone and that can record transactions between two parties in an efficient, verifiable, and permanent way, without a third-party intermediary.
At its most basic technological level, a blockchain is a recording of the facts and is time-stamping things so that it would be impossible to backdate or to temper with them. Therefore, blockchain is a ledger that confirms a few things:
What about trust?
Blockchain is a new kind of database, which is shared across a number of participants. Updates are added to this database. Always at the end of it and not through the old data. This means that once the data is there, it cannot be erased or modified anyhow. All changes are simply captured as new blocks. This characteristic is called immutability.
Thus, it’s impossible for someone to erase an earlier block without attempting to destroy all the following blocks. But as all of the following blocks were already validated by everyone, the attempt is impossible. So this is important because blockchain is time-stamping things in a way that cannot be manipulated or tampered with.
Another paramount thing is that blockchain technology is bulletproof when it comes to manipulation in transactions. With its attribute of distributing the records to all the members of the network to be verified, it's impossible to tamper with the data because too many people have a copy of the original.
This is what we call decentralization. This means that no one can be evil and mess with everyone’s money. It’s a database with no central authority governance.
Each participant on this network holds, at the same time, an identical copy of the blockchain database on their computer. Therefore, the digital record and signature of the transactions are identified, validated, stored, and then shared with everyone. So blockchain keeps track of all changes, like an accounting ledger, but a superior one: a distributed ledger.
Blockchains use a decentralized network to facilitate the transaction between parties. This means that, unlike the banks which take custody conducting payments, the blockchain transfers money without a third party as a middleman. This is also called The Trust Protocol. Because the platform itself is based on the trust concept.
So if Anna wants to send 100 dollars to Alex, there is no financial institution through which the money will be transferred. There is no need for an intermediary, or a third party such as lawyers, banks, brokers, and so on. This is the huge potential that blockchain has.
What’s the catch with Bitcoin?
To understand Bitcoin as it is today, we need to talk a bit about the history of the internet and computers.
Back in the ‘80s, there were many problems with privacy, security, and inclusion on the Internet. It was that period in time when the algorithms that support modern cryptocurrency appeared for the first time.
Almost 2 decades later, the computer scientist and blockchain pioneer Nick Szabo developed Bit Gold, the predecessor of Bitcoin, a proto-cryptocurrency that was never implemented but had a lot in common with Bitcoin’s features regarding transactions and decentralized networks. It also operated on a proof of work algorithm which involves computer power in solving cryptographic puzzles.
And then the world was disrupted with the 9-page white paper sent by the mysterious Satoshi Nakamoto in October 2008, describing the disruptive technology - Bitcoin: A Peer-to-Peer Electronic Cash System.
He outlined a new peer-to-peer electronic cash system using a cryptocurrency called Bitcoin - which gained tremendous fame and widespread traction. We can undoubtedly say that Bitcoin defined and highlighted the importance of blockchain.
But...there is more than one "but". Bitcoin is scarce and has limitations. One of the most important problems is scalability. And more than this, the competition for “mining” the few millions of Bitcoin left to be claimed is harder and harder. Because it requires knowledge, expensive equipment, and electricity. All in all inaccessible or unaffordable for most of the world.
Thus, from a sustainability perspective, Bitcoin is not a winner. The massive energy consumption for mining Bitcoin cannot be fixed with renewable energy. This is the reason why alternative cryptocurrencies - like Elrond - were needed.
Elrond uses a more evolved mechanism, the proof of stake. This doesn’t require the enormous computing power and energy required by Bitcoin. We truly believe in this sustainable ecosystem and highly scalable public blockchain. It's the future!
The Elrond ecosystem brings a great improvement in the blockchain speed, scale, and user experience. The Elrond blockchain can sustain up to 15000 transactions per second, which is like the speed of light compared to Bitcoin’s capacity of 7 transactions per second.
Moreover, Elrond is highly scalable, enabling many parallel transactions processing, and also operates on a secure and efficient proof of stake.
We’ll talk more about it in a future article.
One thing is for sure: blockchain will disrupt the financial system and the economy greatly. The blockchain revolution is centered on individual autonomy and human capitalism. We will be able to re-engineer deep structures of innovation and it will be a major paradigm shift. When and how? We will dig deeper into this in our next articles.
Our mission and responsibility is to work on sharing our knowledge and to create together a clear understanding of what this digital disruption means.