An introduction to Blockchain
Our world is digitalising at a rapid pace. Nowadays, we interact through an increasing number and variety of online services. Within this new reality, sensitive data is exchanged between a growing list of 3rd-party vendors, including internet giants such as Google and Facebook. Consumers and companies have put their trust in these intermediaries, who, as a result, have gained immense power and control.
Privacy, cybersecurity, and trust
In response to growing privacy concerns and cybersecurity threats, governments and privacy authorities are redistributing data ownership and control to ensure a uniform and harmonised level of personal data protection. New privacy regulations such as the European Union’s GDPR demand a more diligent approach to privacy, but regulations alone do not provide full protection in today’s globalised and interconnected world. Like our reexamination of privacy, this new playing field requires us to rethink how we approach ‘trust’ in our digital world.
The rise of blockchain
One of the key pinnacles of this transformation is a technology called blockchain. Blockchain has become famous with the rise of cryptocurrencies, but the technology can be applied across a wide variety of business processes. Uniquely, blockchain allows for so-called ‘trustless’ collaboration where trust is embedded into the systems that we use to interact with one another.
In this article, we’ll explain the unique attributes of public blockchain networks while also touching upon some commonly heard constraints. We won’t go too much into detail as to how the underlying technology works (more info on how blockchains work).
What is a ‘blockchain’?
A blockchain is a distributed network of computer servers (‘nodes’), each maintaining an identical copy of the same database (the ‘blockchain ledger’). Contrary to a traditional database, a blockchain is immutable, meaning it is virtually impossible to modify or delete data previously stored on the blockchain.
Blockchains and decentralisation
Blockchain technology is often proposed as a tool for decentralising systems and processes. But why does this matter? To understand the value of decentralisation we should first address its definition. Vitalik Buterin, the founder of Ethereum, defines three types of decentralisation to explain how blockchain works: “Blockchains are politically decentralised (no one controls them) and architecturally decentralised (no infrastructural central point of failure), but they are logically centralised (there is one commonly agreed state, and the system behaves like a single computer).
This explanation underlines the complexity of decentralisation as a concept and also touches upon some of the unique attributes of blockchain. Architectural decentralisation, for example, ensures a blockchain network is less likely to fail and better protected against (cyber)attacks. It also makes it near impossible for malicious actors to corrupt or manipulate the data stored on the blockchain.
So now we’ve briefly covered how blockchains and decentralisation are tied together. Let’s dive into some of the advantages and disadvantages of public blockchain networks.
Blockchain advantages
Below is an overview of some of the benefits offered by the unique attributes of blockchain technology.
Distributed
Distributed networks have several advantages over traditional client-server networks. For example, blockchains have proved to be highly resistant to malicious attacks, cybersecurity threats, and technical failures since a distributed network of computer nodes — often ranging in the thousands — are tasked with keeping the network secure and available. This means that there’s no single point of failure: if one node goes offline the status of the network remains unaffected.
Trustless
Blockchains can remove the need for trusted third-party intermediaries. To illustrate, cryptocurrency payments can be transmitted ‘peer-to-peer’ without the need for a bank or payment provider to record and validate those transactions. It facilitates a revolutionary shift from trust-based to so-called ‘trustless’ collaboration where trust is embedded into the systems that we use to interact with one another.
Immutable
One of the hallmarks of blockchain is its immutability. A blockchain ledger provides an immutable time-ordered (‘timestamped’) history of records. It thereby functions as an indisputable audit trail that can be verified by all network participants. These records can relate to any type of data transaction — from payments to data related to business processes, identities, and credentials. Some therefore refer to blockchains as a ‘single source of truth’, since blockchains can prove that data was present at a certain point in time and has not been altered since.
Blockchain disadvantages
Having covered some of the strengths of this technology, we’ll now touch upon some commonly heard constraints.
Privacy
The public and immutable nature of blockchains makes the technology susceptible to potential privacy breaches (anything stored on a public blockchain ledger cannot be removed and is viewable to anyone with an internet connection). This means that personally identifiable information (PII) should never be stored on the blockchain, not even in encrypted form.
PII and other types of sensitive information can however still be stored on blockchain through a process called hashing (see description below).
🔎 Hashing explained: Hashing has been around for over three decades and underpins various crucial processes such as password verification and electronic signatures. Contrary to encryption (a two-way function that enables both the encryption and decryption of data), hashing is a one-way function that transforms data into irreversible fixed-length hash codes. Hash codes are unique for each data object — the same data input will always generate the same hash code — and, when applied appropriately, there is no way to ‘reverse engineer’ a hash code back to its original data input. Hashing therefore provides a privacy-preserving means to establish records of sensitive data on a public blockchain ledger, where hash codes can be used to verify the authenticity of data. This verification can be achieved by ‘re-hashing’ a given data input and comparing the resulting hash code with the associated hash code previously stored and timestamped on the blockchain. A common analogy to a hash code is the fingerprint. A fingerprint is unique to each person and with the fingerprint alone you won’t be able to reverse engineer someone’s identity. However, if you would ask the exact same person to make a fingerprint again, you will find out that these are a match.
Scalability
Scalability refers to a blockchain’s ability to serve increasing demand. At the time of writing, traditional database solutions are generally more ‘scalable’ in terms of transaction speed, size (the amount of data that can be transferred in a single transaction), and throughput (the maximum amount of data transactions that can be processed per second). To improve the scalability of blockchains, developers are now looking for ways to improve ‘on-chain’ performance while also building ‘off-chain’ solutions that streamline the processing of incoming transactions (incl. side-chains and payment channels).
Energy consumption
Bitcoin has become somewhat notorious for its high energy consumption and carbon footprint. This is because the security of the Bitcoin network is reliant on a so-called consensus algorithm (Proof of Work) that requires vast amounts of computational power to operate. Contrary to popular belief, not all blockchains depend on highly energy-intensive consensus algorithms. There are many alternatives that consume considerably less energy and there’s also a growing body of initiatives that focus on reducing the carbon footprint and climate impact of energy-intensive blockchains by using renewable energy sources.
