Understand Blockchain and Smart Contracts (1/2)

So… What is the Blockchain?

Blockchain is a technology and architecture based on a distributed ledger, that allows various users to save information (data, transactions, contracts, etc) in blocks that are linked together, achieving a high degree of security and integrity.

Why is Blockchain so secure?

Hash Calculation

Proof of Work

Distributed property of the blockchain

The process of mining

What are the main advantages that blockchain offers?

  • Immutability: As said before, the structure in a blockchain is append-only, meaning that you cannot alter or delete data or blocks.
  • Security: It is extremely secure due to the use of cryptographic hash functions, the PoW protocol and the consensus algorithm.
  • Decentralization: It does not have a centralized architecture; each participant keeps a copy of the blockchain. Because of that, data that is lost in a node is easily recoverable.
  • Trustless: The blockchain technology allows for verification without having to be dependent on third-parties.
  • Transparency: The data present in the blocks is observable. The individuals who are provided authority can view the block’s information.
  • Traceability: Each block can be tracked along the chain to its point of origin. Usually, the blocks are time stamped and recorded in chronological order.

What can blockchain be used for?

  • Cryptocurrencies and payment processing: The main use case for blockchain is the one you probably already know of, that is cryptocurrencies. Currencies like Bitcoin, Ethereum, Ripple, Litecoin, etc, all use the blockchain technology to function. But that is far from being the only application that blockchain has.
  • Data sharing: Cryptocurrency IOTA launched, a few years ago, their Data Marketplace, demonstrating that blockchain could be used as a marketplace to share or sell data.
  • Supply chain and logistics monitoring: By using blockchain, businesses should be able to quickly detect inefficiencies within their supply chains, as well as locate items in real time. Furthermore, it would allow businesses, and possibly even consumers, to view how products performed from a quality-control perspective.
  • Voting mechanism: A blockchain solution would combine the best of both worlds, providing not only the transparency necessary to see all the votes and to detect if something has changed on the network, but also immutability (i.e. unchanging nature of the blockchain).
  • Medical recordkeeping: In addition to storing patient records, the patient, who possesses the key to access these digital records, would be in control of who gains access to that data, thus strengthening patient privacy.
  • Property title transfers: In order to buy or sell land, a house, a car, etc, you will need to transfer or receive a title. Blockchain can store titles on its network, providing a transparent view of this transfer and presenting a clear picture of legal ownership.

Challenges that blockchain faces

  • Energy consumption and computational power: The computational power required for a blockchain to operate can be quite expensive. According to this article, “the Bitcoin blockchain harnesses anywhere between 10 and 100 times as much computing power as all of Google’s serving farms put together”.
  • Scalability: Big issue. Because of this, Bitcoin payments still take somewhere around 10 minutes to 1 hour. In order for blockchain to compete with payment networks and achieve adoption by FinTech companies, it must find a way to boost scalability and throughput, and address latency problems. For example, Bitcoin can only process 3.3 to 7 transactions per second, whereas Visa’s VisaNet on average processes 1,700 transactions per second.
  • Limited interoperability: Another challenge is the lack of interoperability between the large number of blockchain networks. Various projects are using blockchain platforms with different protocols and algorithms, and the lack of universal standards makes it difficult to communicate between networks.

Conclusion

References

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Eduardo Ribeiro

Eduardo Ribeiro

MSc Software Engineering Student from Porto, Portugal.