Blockchain basics anyone should know

You have probably heard of Bitcoin, the digital currency, which had this immense hype on the financial market especially in December of 2017 with a maximum of over 19.000 USD per Bitcoin. Besides this however many people don’t know much about this topic. What makes these digital currencies so special, is the technology they’re based on, the so called Blockchain. In this article I’m going to explain to you in a clear and easy way the fundamentals of this modern technology and why it’s relevant for our future.

Photo by André François McKenzie on Unsplash

First of all there are two important words, that need to be explained:

  • Consensus: The general agreement, about what’s true and what’s wrong.
  • Decentralization: Something is spread out on many people and not only depending on one single instance. Everybody contributes his part to the consensus. For example companies, like Google or Amazon save our data centralized and therefore they could easily change data and change the consensus. In a decentralized application however, everybody safes a part of the general data, which makes it difficult to alter something secretly.

You may have noticed, while reading these two definitions, that this sound very democratic and that’s in fact one of the main benefits of a blockchain. Now to the main definition:

A blockchain is a database, which contains files from the users of this application, for example transaction data on a Bitcoin blockchain. All members safe the data and update it in certain time periods. These updates are blocks of information, that are directly connected (chained) to the last bit of information of the previous block. The more blocks are on top of another and the more people use the blockchain, the safer it becomes. Given that every person is equal and has access to the information of a file, errors can easily be detected.    

Of course this is a rather simple definition, that doesn’t cover everything, but it contains the main idea. The most common mechanism to create consensus is the “Proof of Work (PoW)”. A member (miner) has to do a calculation with his computer to return the original information of a random hash. A hash is a decrypted code (Sha256) of a special information, that’s going to be saved on the blockchain. This means, evidence is needed to do an updated. Otherwise unlimited amount of information whether it’s correct or false, could be created. Another important aspect of the blockchain technology is decryption. Keys are the tool to decrypt data on a blockchain with certain hashing algorithms, like the just mentioned Sha256, a very secure code with 2^256 possibilities. With a private key data can be decrypted, which only owners of this private key can read, or it can be used to create information, that is readable for users with a public key. Advantage is, that it’s difficult to attack and it’s possible to act anonymous on a blockchain, because nobody knows, who has access to the private key.

However enough with the theoretical stuff for now and let’s look at the benefits and weaknesses of this technology as well as some possible applications, besides the well know crypto currencies.  

Pro:

  1. Consensus can only be created by the community
  2. No 3rd party is needed for communication and data exchange
  3. Immutability
  4. Transparency (anybody can see the update history)
  5. Anonymity (no private information is needed)
  6. Reliability (because there are many replications, no central server can get attacked)

Contra:

  1. Waste of resources (a lot of computing power is needed to create consensus)
  2. Costs (transaction fees, backup money, etc. for data creation)
  3. Limited Performance (updates need time, a blockchain is just as fast as the slowest member)
  4. Rigidity (Because of general disagreements it’s difficult to get the acceptance of the majority to integrate upgrades)
Photo by Erol Ahmed on Unsplash

Elections:

In many countries around the world people speak about election fraud or show mistrust towards the implementation of their democratic system. These days elections are still analogous, because the danger of a digital error is too high risk. With a blockchain people could use a private key anonymously to decrypt their votes, so that others can’t see for whom they are voting for, while still maintaining the transparency in the end. Therefore election fraud isn’t possible, because it’s impossible to change blocks secretly. Moreover anybody could vote from their home or smartphone if they have an internet connection.

Medicine:

Nowadays, when we go to a new doctor, the same questions about personal data, vaccination records, etc. appear repeatedly. Furthermore you have to do the same check ups again, just because they don’t have your old health records. Although wouldn’t it be easier to save them digitally to have access to them every time you are going to another doctor? What keeps us from doing this is data privacy. If this medical data gets hacked however and into the hands of companies and insurances, it can harm you. On a blockchain this privacy can be ensured by creating a private key and by saving this data anonymously. To get to this data, hackers would have to attack every single private / public key pair of all users of the blockchain, because there is no central server. This would be way to expensive and is therefore very unlikely to happen. The patient on the other hand could decrypt his data once he is at the doctor and have all his records on hand. A problem thereby is, that it’s not sure what do to once the patient is heavily injured or unconscious. Furthermore the data capacities on a blockchain are limited, whereas the medical records need a lot of storage.

Trusteeship:

If you don’t trust another person to pay in return for a product, normally a third party is consulted to guarantee the collection of the money on one side as well as the product on the other side. A smart contract on a blockchain however, which can even handle more complex contracts like real estate, could replace this third party. The full community would then guarantee the right execution of the purchase contract.  

Self driving cars:

Finally to another modern and future relevant technology – Self driving cars. Even if this will still take some more years to develop it is important to think about the safety of this technology right know. On a centralized server that is connected to thousands of cars around the country or the world, errors or server attacks could be fatal. Therefore it is necessary to build this technology on a system, that is almost unhackable. The blockchain would be a perfect solution. As soon as there are enough cars with this technology, wrongdoings or individual errors could be spotted in this huge crowd behaviour. That way safety measures could take over and pull these cars out of the traffic to avoid crashes. Furthermore the cars could easily communicate among each other and improve the technology.

Photo by Denys Nevozhai on Unsplash

Even though there are many other ways to use a blockchain, the general idea and the importance for our modern society should be clear by now. I hope this article helped you to get a glimpse into this topic and I really encourage you to inform yourself more about it. Like the internet in the past, many people are sceptical about this technology nowadays, however it will develop and spread into many areas of our lives in the future. That’s why we should start dealing with it right now.

One greate book recommendation is Blockchain 2.0 by Dr. Julian Hosp. This book gave me a first insight into this technology and even helped me with this article.

Featured image by Paweł Czerwiński on Unsplash

One thought on “Blockchain basics anyone should know

  1. Really good work! Interesting article about a complicated theme! Would like to read more about stuff like this!

    Like

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