What is a blockchain? – Defendant
Over the past decade, blockchain has become integrated into everyday regional languages. For a good reason – thanks to Bitcoin, blockchain technology has been applied to a myriad of industries.
After proving itself with Bitcoin, blockchain could become the core technology behind many central bank digital currencies (CBDCs). So the question is, what is so innovative about blockchain technology?
Blockchain solves any problem?
At a basic level, blockchain is nothing more than a kind of database. Every time someone accesses an online account, such as Twitter, Google or Facebook, they link to a database. The term refers to the fact that each database is a set of information, organized in a logical order.
Databases make it easy to manage and update sets of information. What sets Blockchain apart as a database technology?
- Blockchain is a distributed database. A computer – node – performs identical copying on a network. Therefore, if a copy of a node is compromised in any way, the redundancy of the blockchain network ensures that it will continue.
- Sync nodes to update database. If some nodes return an incorrect record that does not match the rest of the nodes (51%), the record is discarded.
- Blockchain builds databases in a chronological order. Since each data block is time-stamped, it creates a chain. It has the effect of creating immutability. If tempered with a specific data block, there will be a new chain branch, effectively creating a false database that is discarded by the network.
- The attached data blocks are encrypted individually by hashing method. Simply put, hashing converts a value into a string of characters of a certain length. Using the same formula that creates hashes, any data of arbitrary size is then converted into a fixed-size data set. Therefore, hashing is effective not only for verifying data, but also for storing it in a way that does not reveal the actual input.
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In light of these key features, blockchain is a decentralized, distributed, unchanging and secure database, commonly called DLT – distributed laser technology. Depending on how such a ledger is set up, we have different blockchains that serve different purposes.
How is a blockchain network secured?
The best starting point would be to consider how cloud computing works. In particular, one of the most popular workspace environments is Google Docs / Sheets. When such a document is created, the promoter gives users the right to share.
Instead, they can modify the document, making every change visible to those who were given the right to share. Therefore, Google is accessing and modifying a distributed data chain working in Doc / Sheet. Satoshi Nakamoto, the pseudonym maker, is the promoter of Bitcoin’s blockchain, the most popular cryptocurrency that once reached the T 1T market cap.
Instead of giving individual users the right to share, Bitcoin creator Satoshi Nakamoto has made the network public and open source. Using script programming language, Bitcoin is nothing more than a smart deal that records that BTC tokens have been spent or purchased.
What prevents someone from tweaking smart deals so that spent tokens can be reclaimed?
What prevents someone from tweaking smart deals so that spent tokens can be reclaimed? This problem is known as double-cost, and all the blockchain features fall into its solution. If we look at the analogy above again, a Google Doc user can only manipulate data sets. The data chain will be updated to all other users, presenting false data as true. Needless to say, it is impossible to create an effective cryptocurrency with such a loose system.
Blockchain tackles this memorandum issue in a revolutionary way:
- Each data block in the chain consists of three components: the transaction data itself, a 32-bit nuns number that is created randomly when the block is created and the aforesaid hash.
- When a data block is time-stamped, it is signed by the generated nuns number, bound, and converted into a cryptographic hash.
- Network participants who create blockchain copy create these blocks, a process called mining. Since not every block is stamped with a hash, in addition to mentioning the previous block in the chain, mining becomes a complex task.
The power of mining
Mining was designed to create a barrier to intentional tampering. In particular, miners employ special software that solves mathematical problems, so they can find a nuance that creates a hash that is adopted as the next block in the chain.
Nons itself is a 32-bit randomly generated number, while the encrypting hash is a 256-bit function. This translates into a huge 4B potential non-hash combo that will be dug up before finding the right block. Once such nuns are found, they are added to the chain as a verified block after reaching consent from the majority node.
For all this work, the miner receives an award in the form of the network’s native cryptocurrency. In the case of Bitcoin, it will be BTC. This type of reward system represents the cornerstone of decentralization because network participants are instinctively … encouraged to participate.
In short, the computational power required to complete this excavation process creates a barrier that makes it virtually impossible to manage blockchain networks. After all, this is why Bitcoin makes headlines about its power usage, compared to a country in general. According to Digiconomist, the Bitcoin network currently uses 204 TWh as an annual cost, comparable to a country the size of Thailand.
However, this type of power consumption only applies to proof-of-work (PoW) blockchains where the work translates to the use of electricity required to solve cryptographic math, which contributes to the total hash rate (TH / s) of the network presented as mine hashpower.
In contrast, the proof-of-stack (PoS) blockchain uses economic stacking of native tokens to achieve the same goal. For this reason, miners are called legitimate in the PoS network.
For example, once Ethereum is converted from PoW to PoS, its power consumption will be reduced by 99.95%, according to the Ethereum Foundation.
Types of blockchain
The primary deviation point for blockchains is whether they are unlicensed or permitted, which should not be confused with private vs. public. This difference is closely related to the number of blockchain network verification nodes. They have fewer nodes because there are permission barriers to restrict access to permitted blockchains. As a result, such blockchains are highly concentrated. Conversely, they are usually faster because fewer nodes verify data blocks. That said, approved blockchains can also be universal.
One such public / approved hybrid blockchain is Ripple. Ripple (XRP), network participants (nodes) are allowed to maintain the network by Ripple, Coil, and XRP Laser Foundation. Together, they create unique node lists (UNLs) based on node loyalty levels. The latter revolves primarily around the past performance and verifiable identity of the node.
Currently, the Ripple blockchain network runs on 35 trusted nodes. For comparison, the two top cryptocurrencies, Bitcoin (BTC) and Ethereum (ETH) run on significantly more decentralized networks, at 15,539 and 6,089 nodes, respectively.
All in all, blockchains can be public, private, hybrid, and federated (consortium-controlled), based on initial licensed / unlicensed criteria.
Can any data be recorded in blockchain?
Bitcoin (BTC) has popularized blockchain technology using peer-to-peer (P2P) digital money. Since Bitcoin was designed for a limited supply of 21M coins, it is not sensitive to inflationary energy. Similarly, since it operates on a decentralized network, no central bank will be able to interfere with its financing like the Federal Reserve dollar.
Stablecoin
However, any data can benefit from the immutability, security and decentralization of blockchain. The dollar itself can be tokenized in the form of stablecoins. This type of cryptocurrency eliminates instability from the equation when providing a global payment network comparable to Visa Preferences, but faster and cheaper.
The most prominent blockchain payment networks that emphasize stablecoin are Terra and Tron. Stablecoin maintains their peg in dollars in a variety of ways. Some parallel them with cash reserves in the ratio 1: 1, such as USD Coin (USDC). Terra UST Stablecoin uses an algorithmic parallelism system, where the native LUNA cryptocurrency is burned (removed from circulation) to buy UST if the peg goes above 1: 1.
In contrast, when the peg goes below the 1: 1 dollar peg, the UST token to buy LUNA is burned. Regular or algorithmic, stablecoins represent a frictionless 24/7 payment system. The central bank is trying to capture the digital currency (CBDC), but the central banks will have full control, removing financial secrecy in the process.
Source of wealth
Outside of the payment system, blockchain networks can be used to verify the source of resources. For example, an artwork can be tokenized as an NFT with a smart contract – a non-fungible token. The same thing applies with audio, e-books, videos and even real estate deals. In the case, CityDAO is using blockchain to tokenize real-world land plots in Wyoming to manage land development and ownership.
Similarly, blockchain networks can emerge in the supply chain. For example, Walmart is using hyperlaser fabric, an approved blockchain, to establish the searchability of consumer products. Therefore, if some food item goes foul, it can be returned to its source along with all the handlers along the way.
Smart deal
The biggest blockchain usage comes from its embedded smart contract. These are executed contracts that trigger when the conditions are met, saved in the blockchain. Although all blockchain networks employ smart contracts, Ethereum needed to make it easier to deploy them as dApps – decentralized applications.
When dApps integrates with the integrity / security of the blockchain, a complete financial infrastructure can be rebuilt in a decentralized manner:
- Market without market maker – Uniswap, Sushiswap, Balancer
- Banking without Banking – Anchor, Av, Compound, Curve
- Auction house without auctioneer – OpenSea, Rarible, SuperRare
Currently, more than B 200B worth of crypto assets are locked across the Smart Contract platform. They provide services from decentralized exchanges (DEXes) and lend to NFT marketplaces and insurance, such as Nexus Mutual.
Voting
In the end, even the vote itself can be tokenized. Perhaps, this will be the most powerful way to secure the election. If a person’s identity is linked to their wallet address, which has already been verified by the KYC / AML rules, then voting for them will be a simple matter that cannot be tampered with.
Of course, this would be best done on public and highly decentralized networks such as Ethereum. Voting records can then be anonymous, transparent, unalterable, searchable and auditable. Effectively, as Bitcoin has proven that it solves the double-cost problem, the same can be done with double-voting. After all, they are both accounting units.
Should all blockchain databases be replaced?
In conclusion, what is a blockchain good for? Should companies use this as a default data management solution? To answer this, we need to keep in mind that the key feature of blockchain is the data redundancy resulting from decentralization. Once we understand this, we can measure the balance between long-term record storage and its cost-effectiveness.
In the case of blockchain smart contracts, if the traditional setup doorman / intermediary is either incompetent or very expensive, then it is time to replace it with a smart contract platform. For example, TUI Group Travel Company has implemented blockchain smart agreements to connect customers directly with hotel service providers, effectively replacing the booking system.
After all, if it is important for records to contain all the historical information, there is no better way than to create a time-stamped and unnecessary data chain, a blockchain.
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