The world is about to decentralize but are you ready?
What’s do Decentraland’s stylish “live” DJ parties (which even the Omicron virus couldn’t stop), Beeple’s $69 million NFT artwork, and the cryptocurrency hype that’s going on across the globe? The answer is – blockchain, an emerging technology that promises to change the world by making finance – and other things – more decentralized. However, the big question is how blockchain will bring this drastic change, and is this technology really worth the attention it’s getting?
Blockchain refers to digital ledgers or records of transactions that can be viewed by all the users on a network and cannot be tampered with; it is also called distributed ledger technology (DLT). The sole aim of blockchain is to store and share data. Blocks contain the records of valid transactions that have taken place on the network.
In a blockchain, a request for a transaction is made, the system then authenticates the request. Then, a ‘block’ representing the transaction is created and forwarded to every node (i.e., participant) on the network. The nodes then compete to validate the transaction, using complex algorithms. On successful validation, the block is added to the existing blocks, thus forming a chain. The process of competing to authenticate and complete a block is known as “mining.”
The update is transmitted across the network, and the transaction is completed. The transactions happening on the blockchain are secured using a cryptographic technique called hashing.
Hashing uses complex algorithms to create a string of characters (called the “hash”) from any piece of data. Each block stores its own hash and the hash of the block before it. If anyone tries to tamper with a block, or swap in a fake block, the hash would change, breaking the chain. In cryptocurrency, each time a hash is mined and a block is added to the ledger, the “miner” also earns a token, or part of a token, such as a Bitcoin.
The decentralization comes from the fact that the data is spread out among several nodes, in different locations. This creates redundancy and also means that if somebody tries to change a record at one location, the other nodes would not be altered.
The blockchain was first publicized back in 2008 when for the first time, people were introduced to Bitcoin, the popular cryptocurrency created by an anonymous inventor, or group of inventors, called Satoshi Nakamoto; therefore, Nakamoto is also credited as the inventor of blockchain. However, the journey of blockchain can be traced back to 1982 when Berkeley programmer David Chum, invented Blind Signature technology – an untraceable payment system that separated a person’s identity from their transaction.
Today, this is considered the foundation for the blockchain technology that you know today.
Another significant breakthrough was achieved in 1992 by three young scientists, Stuart Haber, Scott Stornetta, and Dave Bayer, who incorporated Merkle trees while trying to find a way to authenticate some digital documents, allowing several document certificates to be collected into one block. The Merkle tree is a hierarchical collection of nodes that play an essential role in encrypting and verifying the data stored on a blockchain.
In blockchain applications such as Bitcoin, many transactions that are put in a block are subjected to an algorithm to generate a hash. Hashing is imperative for the safety and security of data because once data has run through a hashing algorithm and a hash has been output, the output cannot be used to reconstruct the original file contents.
Thus each file is given a unique identity, and that unique identity can be used to verify and protect the data from being replicated. A Merkle tree is essentially the structure in which the hashed data is organized. In the flow chart mentioned above, hash 0 results from concatenation or end-to-end chaining of hash 0-0 and hash 0-1. That is hash 0 = hash (hash (0-0) + hash (0-1)) where “+” denotes the concatenation function.
Now, here in our tree, if we were to verify the integrity of block L2, we can go back, combine the hashed values of hash 0-0 and hash 1 with the hashed value of data block L2, and finally compare the result with the top hash.
Merkle tree helps in quickly verifying the integrity of the data blocks through applying a modular approach to the verification process, as a small branch can be downloaded quickly, and integrity checks can then be run on just that branch. Once the process is complete, the user can start downloading the files.
The core idea at the heart of the blockchain was the need for a system to include documents whose timestamps cannot be tampered with. Stuart Haber believed, “time is a globally agreed social construct. So, using time means that, in effect, the world would be able to validate your document as having existed in a particular form at a particular time.”
In 1997, Adam Beck introduced the first successful proof-of-work algorithm, and the following year, computer scientist In 2004, computer scientist Hal Finney, developed a reusable proof-of-work protocol based on Beck’s earlier work which allowed users to transfer digital tokens. At the same time, cryptographer and computer scientist Nick Szabo launched a protocol that merged the concept of decentralization reusable proof-of-work to create Bit Gold, a cryptocurrency that served as the predecessor to Bitcoin.
In 2008, the developer (or developers) using the pseudonym Satoshi Nakamoto released a white paper laying out the model for blockchain as we know it. The paper defined an electronic coin as a “chain of digital signatures,” where coins are transferred by “digitally signing a hash of the previous transaction and the public key of the next owner and adding these to the end of the coin.”
There are mainly four types of blockchains:
These are entirely permissionless, and anyone can get on board these blockchains. Moreover, every member has equal rights to access a public blockchain because it’s completely decentralized. Cryptocurrencies like Bitcoin, Ethereum, Litecoin, etc., run on public blockchains.
Private blockchains are managed and controlled by a single organization so a central authority has the power to determine who can access the nodes in such blockchains. Popular blockchain projects such as Ripple and Hyperledger are good examples of private blockchains.
Though controlled by a single organization, but are overseen by the public blockchain, which performs certain transaction validations. The combination of private and permission-based access in these blockchains allows the central organization to control access to specific data. IBM Food Trust, which was developed to improve efficiency throughout the whole food supply chain, runs on a hybrid blockchain-based system.
Consortium blockchains are governed by a group of organizations and require access permissions for nodes. Such blockchains have a greater degree of decentralization but are complicated to set up and maintain, requiring multiple organizations to work in sync.
Cryptocurrency and NFTs are not the only technologies that run on the blockchain; the distributed ledger system has vast potential for applications in various sectors such as:
The traditional system of maintaining patients’ medical histories is often done manually, which makes it difficult to separate patient data from personal information. Blockchain has the potential to revolutionize how patient health record management is done and how information is accessed and shared between stakeholders. Blockchain could allow the sharing of patient records without compromising patient confidentiality.
Research suggests that integrating personal wearable sensors or medical IoT devices can help healthcare professionals access real-time healthcare analytics. This could allow patients to be diagnosed and treated from remote locations, and scientists to access data in anonymized patient records for research. By storing such healthcare analytics data on a blockchain, patients could receive the assurance that their privacy would not be compromised.
Thus a decentralized system of patient healthcare analytic storage powered by blockchain will immensely benefit the patients and make life-saving information available to the physicians at the click of a button.
Another problem that blockchain technology can solve is medical database maintenance. Previously, auditing healthcare accounting information was an expensive and time-taking process as data administrators had to source the data from various departments in an organization manually. In addition, as the collection and sorting were done manually, the margin of error in either recording, maintaining, or disbursing information was considerable.
However, now with the help of blockchain, medical databases can be built up with integrity from the most straightforward units of transactions, and information can be sorted and made ready for auditing in real-time. A report from Forbes reveals that an immediate application of blockchain in the healthcare sector could save expenses worth $100 billion annually by 2025.
Blockchain technology can offer effective solutions to banks and non-banking financial institutions (NBFCs) to improve their payment clearing and credit information systems. It can also enhance the security of online banking transactions. With blockchain, banks could combine their payment protocols with smart contracts, and this would allow them to establish multiple data points on each transaction.
These data points would further enable banks to monitor their loans, track transactions, and easily manage their invoicing and financing-related activities.
In a blockchain-based banking system, each user can be provided with a private key for every transaction on the ledger; this key works like a unique digital signature. So at any point, if a banking record is altered, the digital signature is rendered invalid, and the whole banking network is notified of the anomaly. Thus, the user is protected from nefarious attempts of a hacker trying to steal his or her money.
Cryptocurrencies provide an alternative to traditional banking for people who remain unbanked, for various reasons. There use has also been suggested as a way to decouple currencies from the traditional monetary systems. For example, the hyperinflation that began in Venezuela in 2016 resulted in a steep devolution of the nation’s currency. As a result, many efforts were made by the government to stabilize the economy, including the introduction of a digital coin named Petro currency, aimed at getting around US-led sanctions and allowing the government to raise money to pay its debt. In the case of Petro, this has not so far panned out, as the Petro has failed to gain traction, largely because it is unclear how much control the government exerts over the cryptocurrency – and whether it can be redeemed for any underlying assets.
In 2020, the Venezuelan government shut down the ledger that stores all the Petro transactions for some time. Whereas in reality, a true blockchain ledger can not be switched off for maintenance purposes like that.
Blockchain makes it easier for you to own digital stuff in the virtual world; it is already possible to use cryptocurrency to buy virtual real estate in metaverses like Decentraland, Sandbox, etc, as well as purchasing your favorite artworks, memes, videos, image, etc. as non-fungible tokens (NFTs). Just like with cryptocurrencies, you can trade these digital assets on an online marketplace and earn real money.
These activities also encourage people to join virtual worlds and trigger the development of AR and VR-related technologies. For instance, in 2019, the VR market stood at around only $15 billion, but since then, it has seen exponential growth, and now it is expected to reach a value of more than $70 billion in the next couple of years.
Blockchain can allow users to upload and maintain records of their properties on decentralized blockchain networks, and then Smart contracts could be used for buying and selling properties. Smart contracts are already becoming more and more permissible by state legislation, for example, in 2017 the State of Arizona even passed legislation to legalize smart contracts for property sales.
Interestingly, these are only just a few sectors of the many that blockchain could transform. Experts believe that in the coming years, the way various other industries such as pharmaceuticals, logistics, insurance, education, stock trading, hospitality, gaming, crowdfunding, etc. function, would entirely change once the distributed ledger technology is introduced on a large scale.
Low transaction rate
As blockchain depends on hash verification through a massive network, the transaction approval time on a blockchain ledger is comparatively slower than traditional digital transaction methods. For instance, the Bitcoin blockchain only processes 4.6 transactions per second, compared to an impressive 1700 transactions per second rate of Visa.
Due to the added advantage of the security and node-by-node verification also, the transactions on a blockchain-based system are slow.
High energy cost
Tens of thousands of computers and blockchain mining centers suck electricity from power grids for the hashing and other peer-to-peer computer computations by which transactions are validated and verified, therefore large amounts of energy are required for supporting the blockchain infrastructure. This also results in a high carbon footprint which is definitely not good for the environment.
In 2021 a study by Cambridge university determined that a single Bitcoin transaction requires 2203.5 kWh of power, which is equal to the power consumption of an average US household over 75.51 days.
Loss of assets
The Blockchain is decentralized and lacks a central authority, like a bank that allows you to reset your password. So if a user loses his unique digital ID, password, or key, then they permanently lose access to their assets. Moreover, there have been cases when buyers found their expensive NFTs disappear from their crypto wallets because they failed to meet the terms and conditions of the online marketplace on which they were featured. In these cases, users didn’t receive any compensation for their losses.
Blockchain has come a long way and emerged as a significant disruptor in many industries ranging from finance to healthcare. There is no doubt this decentralized technology has the potential to revolutionize the way we go about our lives. Interestingly, it has already started doing so at some places, especially on the internet.
Many experts believe that the decentralization of digital services is giving rise to a new internet known as Web 3.0. However, there are still many challenges to overcome before we all enter a true blockchain-powered world.
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The world is about to decentralize but are you ready?