Blockchain Technology – Features, Types and Benefits

A Short History of the Blockchain Technology

When an unknown scientist under the pseudonym Satoshi Nakamoto published his white paper about Bitcoin – a “purely peer-to-peer version of electronic cash”– in 2008, it was not the cryptocurrency itself but its underlying mechanism, known today as the blockchain, that was considered revolutionary.  But overall awareness of the blockchain technology remained rather limited, as Bitcoin itself was not yet widely known.

Starting in the year 2012, increasing activity surrounding Bitcoin could be observed, as the cryptocurrency’s market capitalization grew and start-ups in the field of payments and coin wallets started to emerge. But still, Bitcoin and the underlying blockchain remained subject to a general scepticism, being associated mainly with the financing of rather sketchy online activities and other misconceptions. Nonetheless, by the year 2014, over 80 uses of blockchains had been reported. Slowly, the initial scepticism gave way to the increasing efforts of tech enthusiasts around the world who, under the keyword Blockchain 2.0, explored uses of the blockchain technology outside the domain of cryptocurrencies. By detaching the enabling technology from its initial exclusive use for cryptocurrencies, blockchain became a possible application for any situation in which validation of trust, proof of ownership, or a record of an event are required.

What the Blockchain Is?

In its essence, a blockchain is a shared – or distributed – database capable of processing and recording all transactions taking place within a network on a peer-to-peer basis, eliminating the traditional need for a third party to record and verify single transactions, and creating an immutable transaction history.

While the blockchain has been first introduced as the technological foundation of the cryptocurrency Bitcoin, significant efforts have since been put into the development of alternative blockchain protocols, such as Ethereum or Ripple. And while certain differences exist between these protocols, all blockchains share certain key characteristics.

First of all, a blockchain is distributed, meaning it is being stored on all devices connected to the network simultaneously. It thus distributes information evenly to all parties, i.e. every network participant has visibility over the entire database. As such, a blockchain can be described as a system of “collective book keeping”, capable of establishing a network for value exchange that is, as opposed to the centralized network structures that are currently mainly used within the global economy, not dependent upon the supervision by a trusted intermediary and, thus, allows for direct peer-to-peer communication.

Moreover, consensus mechanisms are at the heart of every blockchain, and while many different consensus mechanisms have been developed over time, they always serve the same purpose. In simplified terms, consensus mechanisms comprise a set of rules and procedures that allow the system as a whole to agree on which transactions are valid and will be executed, thus establishing a single version of the truth across the network.

A blockchain furthermore assigns a cryptographic identity to each member of the network. Every network participant possesses a public key, which is essentially his or her address that is visible to every other network member, as well as a private key that is used to digitally sign each transaction commissioned by this party. Cryptographic mechanisms make it practically impossible to decrypt the identity of a transacting party based on a public key. This mechanism allows for pseudonymity of network participants while, at the same time, keeping the transaction history visible to everyone.

The fourth important characteristic of a blockchain is its immutability. Due to the blockchain’s architectural design – linking each new block of transaction data to the existing history of the entire network – the content of any of the previous blocks in the chain cannot be changed without the rest of the network noticing and, thus, rejecting such an attempt to tamper with the transaction history.

And lastly, as a digital system, a blockchain is programmable, meaning users may embed a certain computational logic within the network. This allows for the automated execution of transactions or other actions based on the occurrence of predefined trigger events.

Besides these overarching common features, many differences can exist between blockchain protocols – most prominently regarding which consensus mechanism they employ and regarding the question who is granted access to the blockchain network. The following chapter will first provide a basic description of the block creation process on the Bitcoin blockchain, after which an overview of two of the most prominent examples of consensus mechanisms will be given. Finally, possible differences in terms of accessibility of the respective network will be presented.

Read More: How the Blockchain Works?

Types of Blockchains

In addition to the respective consensus mechanism that they employ, blockchain networks can also differ in terms of their accessibility for potential users. It has by now become common practice to distinguish between three main types of blockchains: public, private and consortium blockchains.

1. Public Blockchains

public, or unpermissioned, blockchain is, as its name suggests, accessible by any willing participant around the world. As soon as a node has accessed the network, it can engage in transactions and take part in the validation and consensus process. In general, public blockchains can be “considered to be fully decentralized” and are consequently fully transparent and open networks. To this day, the Bitcoin blockchain is probably still the most well-known example of a public blockchain, as anyone is free to participate if he or she can run the required software.

2. Private Blockchains

On a fully private, or permissioned, blockchain, the participation of nodes requires a central authority’s permission. This gatekeeper enacts control over who is allowed to engage in transactions, to validate transactions and to gain insight into the transaction history within the network.

As such, a private blockchain relies on the interposition of a central middleman. Since the core feature of the original Bitcoin blockchain was the abolishment of such a central authority, blockchain enthusiasts are having heated discussions over whether such a setup does or does not defeat the essential purpose of a blockchain. But, a private blockchain offers the benefit of being able to process transactions more efficiently and, thus, quicker than an unpermissioned blockchain. Furthermore, the central authority can make quick changes to the blockchain’s parameters, a functionality that may be crucial in certain fields of application, such as national land registries. Moreover, transactions on a private blockchain are cheaper than on a public blockchain, as they needn’t be verified by thousands of nodes, but only a few participating nodes.

3. Consortium Blockchains

consortium blockchain differs from a public blockchain in the sense that a certain consortium of network participants decides over which node is allowed to approve which transactions, while the read access may lie anywhere on the spectrum from entirely public to private and will depend on the ultimate goal of the respective blockchain. Thus, a consortium blockchain may be considered ‘partially decentralized’.

This type of blockchain offers especially interesting possibilities to organisational users as a means of collaboration, as it offers the same benefits of private blockchains – for example transaction efficiency and privacy – while distributing power between multiple network participants.

Benefits of a Blockchain

After having provided an overview of the blockchain technology in the previous paragraphs, a question that remains unanswered is which benefits the implementation of a blockchain architecture offers over traditional, centralized network and database structures.

As has been described earlier, blockchains allow for the disintermediation of transaction processing systems, thus enabling trustless, direct peer-to-peer transactions between parties. As such, a blockchain offers certain key advantages of traditional network structures that rely on intermediation by a trusted third party.

First and foremost, blockchains possess the potential to increase the speed at which transactions are carried out. By establishing direct peer-to-peer connections between network participants, the overall transaction processing time can be significantly cut by not having to transact through central third parties anymore.

Furthermore, blockchains bear the promise to reduce the overall cost inherent to a transaction processing system, as disintermediation also eliminates the cost associated with having to work through an intermediary. But a blockchain also allows for cost savings via the simplification of business processes and the automation of certain tasks. Network participants are furthermore able to mutualise the infrastructure cost of a blockchain network., as all nodes provide the required computing power and data storage capacity.

Moreover, the distributed character of a blockchain enables all nodes to gain full insight into the transaction history within the network. In an age where certain actors within business ecosystems have gained a competitive edge by building on information asymmetries, this increase in transparency can boost competition by levelling the playing field regarding the symmetrical distribution of information within industries. It can furthermore increase efficiencies by reducing the need for risk-hedging, thus allowing for more pricing accuracy and making regulatory compliance easier. In addition, it is not unreasonable to believe that organisations will be rewarded for such an increase in transparency with higher trust by stakeholders.

In addition to establishing more transparency, a blockchain can furthermore enhance the overall data quality within a network. Organisations today often still rely on outdated legacy systems and processes to manage and repair unclear, inaccurate reference data. A blockchain can solve this issue by removing the need to reconcile multiple copies of data. This eliminates potential discrepancies between separate databases and greatly enhances overall data accuracy and quality.

One of the key selling points of the blockchain technology is furthermore the security it offers due to its distributed nature and its inherent consensus mechanism that make it virtually tamper-proof. As there is no central party with controlling power over the network, a blockchain’s history cannot be changed without overwriting it on all nodes connected to the network simultaneously. This would require an attacker to possess at least 51 per cent of the computing power of the entire network – rendering every hacking attempt uneconomical. Furthermore, due to the distributed nature of the blockchain, there is no “central point of failure”, as is the case in centralized networks that rely on an intermediary, thus greatly increasing the resilience of the overall network.

Overall, the blockchain offers certain key advantages over traditional, centralized databases and transaction systems. But this does not mean that blockchain technology is fit to replace centralised systems in every scenario. In the current blockchain hype, many use cases of blockchain appear to be a “solution searching for a problem”.

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