Author: Mohamed Hamza Ghaouri, Intern at FINTERRA
Blockchain is one of the most popular technologies in today’s digital world. The global tech world finds immense potential for this technology to disrupt finance, supply chain, real estate and many other industrial fields. This technology is believed to correspond to what the Internet was in the early 90s. It needs time to mature and be accepted. However, early players will have a definite advantage in this process.
It was from the scars of the 2008 financial crisis and the shortcomings of the centralised financial system that a decentralized, transparent and trustless network called Bitcoin has taken shape. This was the backdrop in which Satoshi Nakamoto introduced the Bitcoin digital currency. Bitcoin introduced the blockchain technology as a ledger mechanism for recording transactions. No single entity holds the bitcoin network. The network is a sum of all the nodes who talk to each other for maintaining the amount of bitcoin every account holder has.
In 2013, Vitalik Buterin published a withe paper discussing the limits of Blockchain-based Bitcoin and defending the potential of a new blockchain called Ethereum blockchain to overcoming these limitations. Ethereum has taken the technology underlying Bitcoin and expanded its capabilities. With its own internet browser, coding language, and payment system, Ethereum opens up a new platform for users to build their own decentralized applications on the Ethereum blockchain. By providing a set of features making the blockchain more adaptable.
Although Bitcoin and Ethereum blockchains are the most popular decentralized networks, there are many other types of blockchain that are used in different fields.
Decentralized networks are not controlled by a single authority or a single node. Each node in the network shares processing power and decision-making processes. The nodes are independent and are distributed all over the world. Decentralization in terms of authority occurs when no party has authority over a network. Decentralization in terms of location occurs when there is no single location where the network concentrates its resources. When it comes to blockchains, there is no central authority governing the network nor any data stored at a single point. Instead, it is distributed among the different nodes.
Blockchain is a new variant of distributed ledger technology. A ledger is a record of transactions. In a normal case, the ledger will be under an authority while in the distributed ledger concept, the same copy of the ledger will be distributed to a group of participants. The blockchain can be called a ledger that shares and synchronizes information simultaneously among all participants in the network. Every record (usually transactions) in the general ledger is seen by everyone and every change made to the general ledger is reflected across all participants in the network. So, the blockchain can be called a distributed ledger. The group of technologies that follow the concept of distributed ledger among the participants is called distributed ledger technologies (DLTs).
DLTs is the technology that underlies the concept of distributed ledger (record of transactions) among the participants instead of being concentrated in the hand of one party (generally an authority). There are three types of DLTs:
- Public DLTs.
- Private DLTs.
- Consortium DLTs.
A blockchain may seem similar to a traditional database. However, blockchain and databases are not the same as they differ in their design and purposes. There are four main differences between a traditional database and a public blockchain:
- Blockchain systems do not allow data modification or deletion of the data (data can be added only). On the other hand, creating, reading, updating and deleting can be performed on a traditional database.
- Each node of a public blockchain contains all the data inside the blocks (there is a full replication of each node). However, traditional databases do not have full data replication as they try to limit data redundancy.
- Blockchains have distributed consensus (a majority of peers should agree on the outcome of the transactions). In contrast, traditional centralized databases operate under protocols such as two-phase validations.
- In the blockchain, any node can validate transactions on the network. However, the databases maintain integrity constraints which are managed by a centralized server.
To sum up, Blockchain can be thought of as a distributed database with a notary public mechanism where data is available at every node and is publicly verifiable by any participant in the network.
Nakamoto, S. (2008). Bitcoin: A Peer-to-Peer Electronic Cash System. Artificial Life, 9. https://doi.org/10.1162/ARTL_a_00247
vitalik buterin. (2013). Ethereum_white_paper-a_next_generation_smart_contract_and_decentralized_application_platform-vitalik-buterin.pdf (p. 36).