The term blockchain can elicit reactions ranging from a blank stare (from the majority of the general public) to evangelical fervour (from over-enthusiastic early adopters). But most people who know a bit about the technology detect a pungent whiff of hype, leavened with the suspicion that, when the dust settles, it may have a significant role to play as a component of digital transformation.
The best-known example of blockchain technology in action is the leading cryptocurrency Bitcoin, but there are many more use cases — think of blockchain as the ‘operating system’ upon which different ‘applications’ (such as Bitcoin) can run. So, what is a blockchain?
At heart, a blockchain is a special kind of database in which ‘blocks’ of sequential and immutable data pertaining to virtual or physical assets are linked via cryptographic hashes and distributed as an ever-growing ‘chain’ among multiple peer-to-peer ‘nodes’. Additions to the blockchain can only be made after validation by a majority of nodes using a consensus mechanism, the two main ones being Proof of Work (PoW) and Proof of Stake (PoS), after which the new blocks are distributed to all nodes. At the moment, PoW is the most common consensus mechanism, the best-known example being Bitcoin mining by solving cryptographic puzzles. However, PoS is less costly in terms of computing resources and electricity, and can deliver faster throughput.
A blockchain is therefore a cryptographically secure distributed ledger in which each node has a verified, up-to-date and immutable history of all transactions that have ever taken place among participants that do not necessarily need to trust one another. Validated transactions cannot be altered or tampered with, and can only be reversed by a subsequent transaction.
There are two broad types of blockchain networks: ‘permissionless’, which anyone can join; and ‘permissioned’, in which participants are authenticated by whoever is running it. The latter can be further divided into ‘private’ and ‘community’ blockchain networks — a single enterprise versus a group of companies involved in a particular business process, for example. In permissionless blockchains, like those underpinning Bitcoin or Ethereum, more reliance is placed on consensus mechanisms to confirm identities and validate transactions.
Business rules that govern what happens to assets during transactions are known as smart contracts, which form a link between decentralized applications (or dApps) and the blockchain itself. Ethereum is the leading example of a smart contract-based blockchain system. The linkage of virtual or physical assets to digital tokens is called tokenisation, while the process of raising funds by offering a new cryptocurrency or token in exchange for traditional currency, or an existing cryptocurrency like Bitcoin, is called an Initial Coin Offering or ICO.
Image Credit: Zdnet
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