The complete guide to blockchain and what it could mean for your business

Welcome to “The ABCs of Blockchain: How It Works and Why It Matters.” This guide will break down blockchain in simple terms, starting with the basics such as “What is Blockchain?” and moving on to how it works. We’ll also discuss the pros and cons of blockchain, and explore its safety. 

Further, we’ll take a closer look at how cryptocurrencies connect with blockchain and examine the different types of blockchain networks available. Finally, we’ll settle the score on Bitcoin vs. Blockchain. 

Whether you’re a beginner or already knowledgeable in this tech field, this post is your ultimate guide to understanding why blockchain is crucial in our digital world. Let’s dive in!

What is Blockchain?

Blockchain is a decentralised and distributed digital ledger technology that enables secure and transparent record-keeping of transactions across a network of computers. Using cryptographic hashing and decentralisation, this technology makes the history of digital assets unalterable. 

It was originally developed as the underlying technology for Bitcoin, but its applications extend far beyond cryptocurrencies. Its decentralised and secure nature has led to widespread interest and exploration of its potential uses in various industries like healthcare, supply chain, education, etc. 

How Does a Blockchain Work?

The fundamental idea behind blockchain is to create a tamper-resistant and verifiable record of transactions by storing them in a chain of blocks. 

Each block contains a list of transactions and a reference to the previous block, forming a chronological and unalterable chain. 

Let’s take the example of Google Docs to understand blockchain technology. When a document is created and shared with a group of people, the document is distributed among those people not transferred.

This creates a decentralised distribution chain in which everyone has simultaneous access to the document.

All changes done to the document are recorded in real-time, making changes completely transparent within the shared group. 

Of course, blockchain technology is more complex than a Google Doc, but the analogy is useful because it illustrates three key concepts in the technology:

1. Blocks

Every chain has multiple blocks and each block has 3 basic elements:

• The data in the block.
• A 32-bit whole number is called a nonce. The nonce is generated randomly when a block is created, which then generates a block header hash. 
• The hash is a 256-bit number wedded to the nonce. It must start with a huge number of zeroes (i.e., be extremely small).

When the first block of a chain is created, a nonce generates the cryptographic hash. The data in the block is considered signed and forever tied to the nonce and hash unless it is mined.

2. Miners

Mining is the process by which miners add new blocks to the chain.

Every block in a blockchain has its unique nonce and hash, but it also refers to the hash of the previous block in the chain, making mining a block difficult, especially on large chains. Miners use specialised software to solve the incredibly complex math problem of generating an accepted hash.

As the nonce is only 32 bits long and the hash is 256 bits long, there are approximately 4 billion nonce-hash combinations that must be mined before the correct one is found.

When this occurs, miners are to have found the “golden nonce” and their block is added to the chain. 

If you want to make a change to any block earlier in the chain, you have to do a re-mining of all the blocks that come after.

This is why it’s extremely difficult to manipulate blockchain technologies.

Think of it as “safety in math” since finding golden nonces requires an enormous amount of time and computing power.

When a block is successfully mined, the change is accepted by all of the nodes on the network, and the miner is rewarded financially.

3. Nodes

One of the most important concepts of blockchain technology is decentralisation.

Computers and companies cannot own a chain. Instead, it is a distributed ledger across the nodes connected to the chain.

A node can be any type of electronic device that keeps a copy of the blockchain and keeps the network running.

Each node has its copy of the blockchain, and the network must algorithmically approve each newly mined block to update, trust, and validate the chain. Since blockchains are transparent, every action in the ledger can be easily checked and viewed.

Each participant is given a unique alphanumeric identification number that shows their transactions.

Combining public information with a system of checks and balances helps the blockchain maintain its integrity and creates trust among users.

Essentially, blockchains can be thought of as the scalability of trust via technology.

Pros & Cons of Blockchain

Blockchain offers many benefits for companies but it also has some drawbacks which you should consider while implementing. Let’s now look at the major pros and cons of blockchain. 

The Pros:

• Decentralisation: Blockchain operates on a decentralised network, reducing the reliance on a central authority and mitigating single points of failure.
• Security: The use of cryptographic techniques, decentralisation, and consensus mechanisms enhances the security of online transactions.
• Transparency: The blockchain ledger is shared across a network of computers ensuring a high level of transparency among users.
• Global Accessibility: Blockchain facilitates global access to data and transactions, making it useful for cross-border payments & transactions.
• Traceability: It is easy to track transactions in a blockchain as information is organised in chronological order and every data block has an alphanumeric code linked to the preceding block. 

The Cons:

• Scalability: Some blockchain networks face scalability issues while handling a large number of transactions quickly and efficiently
• Energy consumption: Proof of Work (PoW) consensus mechanisms, used by some blockchains, require significant computational power, resulting in high energy consumption. 
• Irreversibility of Transactions: While immutability is a strength, it can also be a con, as transactions cannot be easily reversed in case of errors or fraud.
• Human Error & Security flaws: Despite the strong security features of blockchain, the use of this technology can still be vulnerable to human errors, hacking, and other security breaches.
• Lack of Regulations: The lack of clear regulations for blockchain can lead to uncertainty and potential legal challenges.

Is Blockchain secure?

Blockchain is generally considered secure, as it uses a combination of cryptographic techniques, decentralisation, and consensus mechanisms. However, like any technology, it is not completely immune to risks and vulnerabilities. Despite these security features, there are some potential concerns and challenges for blockchain. 

In a Proof of Work system, a 51% attack occurs when an entity gains control of more than half of the network’s mining power. This could potentially allow the attacker to control the consensus process.

It’s important to note that the security of a blockchain depends not only on the technology itself but also on the implementation, governance, and specific use cases. 

Ongoing R&D aims to address challenges and enhance the security of blockchain systems. Organisations and users should stay informed about best practices and continuously evaluate and update security measures.

Cryptocurrencies and Blockchain Technology

The most well-known (and maybe most controversial) use of blockchain is cryptocurrency.

Cryptocurrencies are digital currencies, like Bitcoin, Ethereum, or Litecoin, that can be used to buy goods and services.

It is a digital form of cash that can be used to buy anything from your food to a property.

Bitcoins, Blockchain, Cryptocurrencies & ICO’s – Next Generation Digital Currencies

Unlike cash, crypto uses blockchain to act as both a public ledger and an enhanced cryptographic security system, so online transactions are always recorded and secured.

To date, there are approximately 6,700 cryptocurrencies in the international market, which have a total marketplace cap of around $1.6 trillion, with Bitcoin holding a majority of the value. These tokens have emerged as exceptionally popular over the last few years, with one Bitcoin equaling $60,000.

Here is why cryptocurrencies are becoming more and more popular nowadays:

• Blockchain’s security makes theft much harder since each cryptocurrency has its irrefutable identifiable number that is attached to one owner.
• Crypto reduces the need for individualised currencies and central banks. Cryptocurrency can be sent to anyone and anywhere in the world without the need for currency exchange or without interference from central banks.
• Cryptocurrencies can make people rich – Speculators have been driving up the price of crypto, especially Bitcoin, helping some early adopters to become billionaires. 
• More and more large corporations are coming around to the idea of a blockchain-based digital currency for payments.

Types of Blockchain Networks:

Public blockchain networks

• A public blockchain is one in which anyone can join and participate in, such as Bitcoin. Drawbacks might include substantial computational power required, little or no privacy for transactions, and weak security.
• These are important considerations for enterprise use cases of blockchain.

Private blockchain networks

• A private blockchain network is a decentralised peer-to-peer network similar to a public blockchain network. 
• However, one organisation governs the network, controlling who is allowed to participate, executing a consensus protocol, and maintaining the shared ledger.
• Depending on the use case, this can increase trust and confidence between participants.
• A private blockchain can be run behind a corporate firewall and even hosted on-premises.

Permissioned blockchain networks

• Businesses that set up a private blockchain will generally set up a permissioned blockchain network.
• Public blockchain networks can also be permissioned.
• This puts restrictions on who is allowed to participate in the network and in what transactions.
• Participants need to obtain an invitation or permission to join.

Bitcoin vs Blockchain

Here is a brief comparison of Bitcoin and blockchain:

Conclusion

We hope that this guide to blockchain and related topics was insightful for you. The careers in the blockchain industry are soaring day by day and now is a great time to consider learning more about blockchain. 

At EBS, our latest and most up-to-date course on this emerging field is the Online MBA in Artificial Intelligence & Blockchain. For further details about this program and admission eligibility, please get in touch with one of our academic advisers.