Blockchain Simplified for Beginners

Blockchain. Bitcoin. Cryptocurrency. For the past decade, these words have been floating in the public consciousness as the keys to amassing immense wealth. Here’s a quick intro to blockchain if you’re late to the party



by

Rida Jaleel

Published: Tue 16 Aug 2022, 9:20 PM

Last updated: Tue 30 Aug 2022, 11:14 AM

Slated to change the world by transforming the realm of currency and record-keeping, Blockchain seems to be the new guy on the ‘block’ people can’t stop talking about.

But did you know that this Digital Ledger Technology (DLT) that could possibly revolutionise how we make transactions online was founded by a mysterious genius that is yet to come to the public to claim his invention? Wait, we’re getting ahead of ourselves.

What is Blockchain?

Before we take a deep dive into blockchain’s dramatic backstory, let’s first understand the foundation of the concept.

A blockchain essentially signifies a new way of recording digital information on the interweb in the form of records or ‘blocks’ that are linked to one another. These blocks have irreversible data and time stamps on them and, like regular chains, improve in strength with the addition of more links or blocks. It is near impossible to change the data recorded on a single block — it would require you to alter the entire chain — and is therefore regarded as extremely unchangeable and secure by design. The higher the number of blocks or nodes, the harder it is to manipulate or modify them.

Even though the rudimentary idea of a blockchain was introduced as early as 1981 by American scientist and cryptographer David Lee Chaum, it was brought to fruition by a person or a group of persons who used the blockchain technology to create a ledger to record the transactions of a digital cryptocurrency called Bitcoin in October 2008. This person(s) is, pseudonymously (or in actuality), referred to as Satoshi Nakamoto and, more than a decade after Bitcoin was born, crypto-enthusiasts continue to pay homage to this ideological figurehead and leader.

But who is Satoshi Nakamoto? Wouldn’t someone who had helmed something so transformative and brilliant want to come to the limelight and accept the adulation (and criticism) that the world would shower them with? Interestingly enough, after releasing the Bitcoin White Paper — a protocol that documents the idea and arguments for Bitcoin — the enigmatic mastermind seemed to disappear off the plane of existence altogether. Despite currently owning over $46 billion, nobody knows if Satoshi is even alive.

Types of Blockchains

There are four different types of blockchains used for four different purposes. While public blockchains are permissionless, open blockchains that anyone with a device and an internet connection is authorised to log on to, private blockchains are more exclusive as only members selected by the organisations can join these networks.

Bitcoin and Ethereum, both platforms that grew wildly popular in the last decade or so, are both permissionless blockchains that you or I can be part of. Consortium blockchains are those that are owned by more than one organisation. Hybrid blockchains are those that are a combination of private and public blockchains. In this arrangement, some data will be stored on public nodes that can be accessed by all, while the rest will be in private nodes that can be viewed by only a cherry-picked few.

Advantages of Blockchain

  • Decentralisation

The very creation of the blockchain technology was to warrant complete decentralisation across members. A blockchain is an example of a peer-to-peer network (P2P) network. This means that each computer will assume the position of both the server and client. Without deeming any one device primary or central, the data is broken down and shared amidst all, thus ensuring a copy of the transaction on all the devices, insuring it against instances of malfeasance. The members of the blockchain are only governed by the rules present in the consensus protocol.

P2P networks are equalising where no device has or executes more power than the others, thus making blockchain a rather egalitarian system. If there is no overseeing body, how do things work, you might ask? Through Smart Contracts. While smart contracts have no legal connotations, they are simply commands written into the system that will execute actions once the required conditions have been met. These conditions will be decided by members beforehand, which goes to emphasise the democratic nature of platforms built on a blockchain.

  • Security

On blockchains, timestamps and critical data are encrypted into the node and therefore become unchangeable without subsequently altering every other block in the entire chain. This gives it the rare power of immutability — once a transaction takes place, it becomes permanently memorialised on the chain using a massive amount of electricity. Your private information is not infiltrated by third-party bases or corporations, and you have more agency in what to reveal online and how.

Because blockchains are P2P, your critical data is not stored on a singular device; it is divided among many. This ensures security and maximises privacy. All of this makes it far more difficult for a hacker to break into your data because they’ll have to expend an even larger amount of energy to hack, which they would much rather spend on mining new blocks.

  • Transparency

A related idea that sustains blockchains is that all the transactions are recorded in the blocks in such a way that it becomes impossible to change them. It’s also completely transparent to all the members of the network and makes any foul play easily traceable. This aspect also guarantees players that their currency is not compromised or “double-spent” by past owners — which entails sending the same coin for two different transactions — through undertaking a confirmation process that is publicly available.

While this is, by no means, an easy or energy-efficient exercise, the elusive Satoshi did find a way through Bitcoin. Usually, transaction details are concealed from everyone except for the parties involved to improve security. But here, the transaction details are open to the public without mentioning the specific identities of the parties in order to ensure that it is all in the open.

  • No Middlemen

In the original white paper, Nakamoto talks about how one of the biggest pitfalls of the banking system is that it operates on the trust-based model which is “inherently weak.” But a central governing authority becomes indispensable to maintain credibility for lenders and for avoiding instances of malfeasance and scams. Banks are a pain and come with huge transaction fees, but you tolerate them simply so your money remains safe.

Through Bitcoin, Nakamoto proposes replacing this trust with cryptographic proof — the timestamp that is encoded in each node which provides irrefutable insight and evidence of the transaction that can be verified.

  • Higher Efficiency

How does a blockchain ensure higher efficiency? People detest banks for a number of reasons: long lines, stacks of paperwork, human interaction, and logistical delays being a few. But with blockchains, things are promised to be different. Through smart contracts, transactions happen instantaneously, once the conditions are met, appeasing everyone in the system. They are automated and depend on nothing and no one. Blockchain transactions are not only designed to be secure but also seamless and incredibly efficient.

Challenges Faced by Blockchain

  • Problems in Scalability

Scalability means being able to make adjustments to the workload that the devices in a blockchain network have to undertake. In simple terms, it’s rather difficult to increase the individual bandwidth and programming power — general work capacity, that is — of the individual devices that share the data. The more nodes added, the slower the entire process becomes due to congestion. This brings down its efficiency which is touted to be one of the biggest pros of the technology.

  • Complex Technology

A blockchain platform often involves acquiring a virtual bitcoin wallet in order to trade. This wallet has a public key, which functions as the blockchain identity or a ‘user id’ that others identify you by, as well as a long private key, which is your password, that you ought to remember.

Misplacing this key will result in information/currency theft or in you being locked out of that network, thus losing your assets entirely. This means that only a very small percentage of tech-savvy individuals with an in-depth understanding of how blockchains and cryptocurrencies work can use it.

  • High Energy Consumption

To understand how blockchains consume large amounts of energy, you need to first understand what ‘data mining’ is. Data mining is a validation protocol to affirm the validity and legitimacy of the information on the block. It’s what improves the security of your transactions.

Most platforms undertake this through what is called the Proof of Work (PoW) method in which ‘miners’ compete among themselves to solve complex mathematical problems to obtain cryptographic proof. This process uses up a staggering amount of energy and is not sustainable in the slightest. In fact, Bitcoin, which is the biggest blockchain network, uses nearly 198 terawatt-hours of energy annually. That’s more than what whole countries use!

To tackle the expanding carbon footprint, efforts are being made to develop alternate methods of data validation that do not pump out nearly as much carbon dioxide in the air. While developers have mostly been successful — as seen through the creation of greener blockchains like Algorand (ALGO), Chia (XCH), and Cardano (ADA) — they have not been as widely used or as popular as the consumptive ones. The question to be asked is, can we really afford to make transactions using a ledger that will continue to dig the collective climate-crisis-hole that we’ve created for ourselves?

  • Interoperability

The term might sound complex, but all interoperability means is being able to seamlessly integrate and communicate across different networks. Each blockchain network is built differently and governed by different rules and capacities. One of the challenges that blockchains face, as a system, is that these different organisations that share very little common ground cannot convey and communicate with each other with ease.

Another subsequent issue is that it’s extremely difficult to integrate blockchain technology into existing financial systems. Even though legacy systems are clunky and outdated, organisations are hesitant to shift out of this because it could lead to sweeping changes and loss of data to the cracks in between. Shifting cold turkey to the new technology might take a long time as “the adoption of blockchain is not only a technological but foremostly a psychological challenge,” according to a Frontiers article on the subject.

  • Standardisation Issues

As with Web3 as a whole, since the point of this whole endeavour is that it’s decentralised with no designated leader, standardisation becomes near impossible. As mentioned before, everybody wants complete control over their assets but nobody wants to board a ship without a captain. In the instance that security breaches — like double-spending or cryptographic cracking — take place, the lack of a central authority makes it difficult to demand accountability or reversal of breach.

While the history of blockchain sure is mystifying, we hope that we’ve managed to demystify the concept for you. Blockchains signify both dazzling stories of rags-to-riches as well as astounding falls from grace in the form of million-dollar scams and pyramid schemes. While the idea itself is path-breaking in suggesting a democratised, equitable and, above all, efficient way of doing money, the execution has proved to be a mixed bag so far. But whether blockchain is a fad or the future is for you to decide.