Blockchain: what is it and how does this technology work?
- what is blockchain
- Blockchain and cryptocurrencies
- Why is blockchain so secure?
- Types of blockchain (public, private, federated and hybrid)
- public blockchain
- private blockchain
- Federated Blockchain
- hybrid blockchain
- What is a DLT and how is it different from blockchain
- Blockchain wallet: what is it
- Blockchain attacks
- What uses are given to blockchain technology?
what is blockchain
Blockchain (or chain of blocks) is a technology to record changes over time in a non-destructive way that became known for its use around cryptocurrencies, but its scope goes beyond them. This technology is used like a scribe’s book, where each event or modification of the data is written as a new block of a chain and in this way there is a settled, certified record and its integrity and availability are guaranteed. If this content is also encrypted, it guarantees confidentiality. This unique and unalterable registry is distributed in several nodes of a decentralized network where each block of the chain stores information of that block, of valid transactions, and its relationship with the previous and next block.
Although, as we said, the use of blockchain is strongly associated with cryptocurrencies, this technology can be used for other types of digital assets, such as NFTs, smart contracts, tokens, etc. In addition, in recent years, blockchain-based solutions have had a very important growth, being adopted by industries such as finance to improve the security and efficiency of existing products and services, as well as by the food industry and the supply chain for the product tracking or in the scientific community for documentation management.
Going back, blockchain technology allows transactions to be recorded and an asset to be tracked within the network without the need for intermediaries, since the thousands or millions of nodes that make up the network (distributed teams) are the ones in charge of verifying and validating those transactions that take place. will be recorded in a new block that is added to the chain.
As we will see later in the “types of blockchain networks” section, there are private, public, federated and hybrid networks. Depending on the characteristics of each project or sector, each organization will choose the one that best suits its needs among the different types of blockchain. Although public blockchains, such as Bitcoin or Ethereum, are the most popular, many companies have become interested in the use of private blockchains to protect sensitive information. In this sense, there are companies offering blockchain as a service (BaaS, for its acronym in English), which allows other organizations to create and use applications based on blockchain through a cloud infrastructure. For example, the Ethereum blockchain as a service offered by Microsoft and ConsenSys on Azure, or the Hyperledger Cello project .
Blockchain and cryptocurrencies
There are different types of cryptocurrencies. Each of them are used in a similar way to traditional money, since they serve to transfer value or as a means of exchange. While some people often refer to cryptocurrency as a synonym for token, there are some differences. On the one hand, a cryptocurrency is created within its own native blockchain network—the native currency of the Ethereum blockchain is ETH—while tokens are created using existing blockchain protocols.
In the case of cryptocurrencies, we can think of blockchain as the accounting book where each transaction is recorded. Its operation can be complex to understand if we delve into the internal details of its implementation, but the basic idea is easy to follow.
In each block is stored:
- a number of valid records or transactions,
- information regarding that block,
- its link with the previous block and the next block through the hash of each block ─a unique code that would be like the fingerprint of the block.
Therefore, each block has a specific and immovable place within the chain, since each block contains information (hash) of the previous block. The complete chain is stored in each node of the network that makes up the blockchain, so an exact copy of the chain is stored in all the nodes that participate in the network.
As new records are created, they are first verified and validated by network nodes and then added to a new block that is linked to the chain.
Why is blockchain so secure?
Being a distributed technology, where each network node stores an exact copy of the chain, the availability of information is guaranteed at all times. In the event that an attacker wants to cause a denial of service, he should disable all the nodes on the network, since it is enough for at least one to be operational for the information to be available.
On the other hand, as it is a consensual registry, where all the nodes contain the same information, it is almost impossible to alter it, ensuring its integrity. If an attacker wanted to modify the information in the blockchain, he would have to modify the entire chain in at least 51% of the nodes.
Lastly, since each block is mathematically linked to the next block, once a new one is added to the chain, it becomes unalterable. If a block is modified, its relationship with the chain is broken. This means that all the information recorded in the blocks is immutable and perpetual.
In this way, blockchain technology allows us to store information that can never be lost, modified or deleted.
In addition, each node of the network uses certificates and digital signatures to verify the information and validate the transactions and data stored in the blockchain, which ensures the authenticity of said information.
In this way, we can think of blockchain as a scribe. A means to certify and validate any type of information. A reliable, decentralized registry, resistant to data manipulation, and where everything is recorded.
Today we are used to centralized models. We give all our information to companies like Google or Facebook to manage it, we send all our messages through the Telegram or WhatsApp servers so that they take care of sending them or we spend fortunes on notaries and institutions so that they certify and keep our deeds or important documents.
In blockchain the data is distributed in all the nodes of the network. Since there is no central node, everyone participates equally, storing and validating all the information. It is a very powerful tool to communicate and store information reliably; a decentralized model where the information is ours, since we do not depend on a company that provides the service.
Types of blockchain (public, private, federated and hybrid)
There are four types of blockchain technology: public, private, federated, and hybrid. They differ from each other mainly by the possibilities of network administration.
In the case of public blockchain, they are fully decentralized systems that anyone can join to become part of the network just by downloading an app. No participant in this network has more rights than the others. When it comes to validating transactions, public blockchains work through consensus protocols. For this, the participants are randomly chosen to carry out this validation process. Some networks pay for this work with cryptocurrencies once the process is accepted. Examples of public blockchains are Bitcoin, Ethereum or Litecoin. In most cases, public blockchains have a cryptocurrency associated with them.
Private blockchains, as the name implies, offer greater privacy, making them ideal for internal use by an organization. One of their main characteristics is that the network is controlled by an organization that has authority over the rest in the network and that is the one who decides permissions, which makes them centralized. Private blockchains are faster due to fewer participants compared to public ones, so they are also more energy efficient. It is worth clarifying that private blockchains offer the same functionalities as public blockchains in terms of transparency, trust and security. This means that an institution, such as a bank, can create its own blockchain and control which transactions are added to the chain.
It is worth mentioning that there are different types of blockchain platforms that are based on the use of private blockchains. Several of the major digital platform providers use their own versions of blockchain technology, such as Ripple, Corda or Hyperledger Fabric.
In the case of the federated blockchain, there are several organizations with influence over the network and not just one, as is the case with the private one. It stands out from this type of blockchain that they are fast and that, although they are not open to the public, they maintain a decentralized nature. This is so since they are managed by more than one organization through pre-established nodes of all the organizations that are part of the network. Just like private and public, the federated blockchain offers transparency, privacy, and efficiency. Some examples of federated blockchains are the IBM Food Trust , R3 , or the Energy Web Foundation .
It is usually defined as a combination between public and private blockchain, since they are usually used by organizations that do not want a 100% private or 100% public blockchain, but rather a combination of both. In this sense, hybrid blockchains allow part of the data stored in the block chain to be public and others to be private. Network members can decide who can participate and which transactions are public. An advantage of the hybrid blockchain is that it is not affected by 51% attacks. Hybrid blockchain example is XDC .
What is a DLT and how is it different from blockchain
Sometimes the term DLT (from English, distributed ledger technology) is mistakenly used as a synonym for blockchain, because blockchain is a type of DLT that uses cryptography and algorithms to create, verify and add data structures and is one of the implementations most representative of distributed ledger technology.
When speaking of distributed registry technology or DLT, reference is made to a technology that works through a network of peers (peer-to-peer or P2P) in which different decentralized storage devices (servers or computers) are used that make up the network of records, called nodes, in which information related to asset transactions is stored. These data, once stored, are unalterable. Like any P2P network, information exchanges are carried out directly without the need for a centralized system. Each of those nodes contain the same data records (or a portion of them) and are shared across this distributed network of decentralized nodes using a consensus algorithm that validates transactions.
In this way, DLT technology allows changes to one of the records to be reflected throughout the network and for all members to have an exact copy of the entire record.
DLT technology is attractive to organizations as it is a record-keeping system that ensures immutability, trust, and transparency between participants. In summary, any DLT-based system is capable of storing, registering and exchanging assets among network members in a consensual manner and without the need for a central authority. As in the case of blockchain technology, there are different types of DLT that differ from each other by the possibilities of network administration.
Both blockchain and DLT technology have their advantages and disadvantages and it will be up to the project to know which system is better for records management. Likewise, both offer a secure system that is difficult to break.
One of the most popular DLTs is Corda from the company R3.
Blockchain wallet: what is it
A blockchain wallet (or blockchain-based wallet) is a technology that allows users to manage different types of crypto assets in a network. These wallets are used to safely store, send, receive and exchange crypto assets thanks to the use of blockchain technology. There are a large number of blockchain-based wallets, such as Coinbase, MetaMask or even the one from the Blockchain company.
It is worth mentioning that there are different types of cryptocurrency wallets and ways to store these assets. On the one hand, there are wallet applications (software wallets), physical devices (hardware wallets) and there are Exchanges that, in addition to offering other services, are an alternative for storing crypto assets. The risk of exchanges is that they can be victims of cybercriminals seeking access to private keys and customer funds.
By creating an account in these wallets, the user generates a unique address (public key) associated with a blockchain network, be it Bitcoin or Ethereum. A wallet address is also associated with a private key, similar to a password, which is generated when creating a new account and will allow us to carry out transactions. In addition, this address or account is associated with a secret recovery phrase or seed phrase, in English called seed phrase, which is generated automatically and is made up of a sequence of between 12 and 24 words that will allow us to access the wallet. The seed phrase is used to generate the private keys and is essential when the user loses access to their phone or device, as this seed phrase will allow them to recover their wallet. Having said that,
In some of these wallets you can buy cryptocurrencies. On the other hand, some solutions, such as the Trust Wallet decentralized wallet, work as a bridge between different blockchains. Something similar with Metamask, a wallet available as an app or browser extension that connects with other blockchain-based decentralized apps to buy, store, send, and exchange tokens. In the case of NFTs, buying and selling these assets requires a blockchain wallet that supports ERC standards, such as ERC-721 and ERC-1155.