What is Blockchain: Features and Use Case

Blockchain as a technology has changed how a lot of our day-to-day life functions are carried out. Digital transactions, for example, have seen a major overhaul since Blockchain came into existence. The rising popularity of Blockchain is only indicative of the fact that there is a growing job market for this skill, and soon Blockchain specialists will be in high demand. This article will provide an overview of the concept.

For an understanding of Blockchain, we'll start with an example that will elucidate our point of view better. There's a hacker who wants to steal from a bank. Now, every bank runs on a centralized ecosystem, and that itself acts as a center point of failure. If the hacker can get into the system, all the customer information available could get corrupted and lead to huge losses. Although the hackers can be caught, the information that is compromised is complicated to secure at a later stage. This is where technology can make a difference. The remedy is setting up a block using Blockchain.

How does that work? This tutorial will explain all this and take you through the following:

  • What is Blockchain?
  • Overview of the Bitcoin story
  • Features of Blockchain, including
    • Public distributed ledger
    • Hash encryption
    • Proof of work consensus algorithm
    • Concept of mining
  • A use case showcasing how Blockchain can be used for banking operations

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What is Blockchain?

Blockchain is a list of records called blocks that store data publicly and in chronological order. The information is encrypted using cryptography to ensure that the privacy of the user is not compromised and data cannot be altered.

Information on a Blockchain network is not controlled by a centralized authority, unlike modern financial institutions. The participants of the network maintain the data, and they hold the democratic authority to approve any transaction which can happen on a Blockchain network. Therefore, a typical Blockchain network is a public Blockchain.

As long as you have access to the network, you have access to the data within the Blockchain. If you are a participant in the Blockchain network, you will have the same copy of the ledger, which all other participants have. Even if one node or data on one particular participant computer gets corrupted, the other participants will be alerted immediately, and they can rectify it as soon as possible.

The Bitcoin Story

Bitcoin was introduced in 2009 by someone or a group of people known as Satoshi Nakamoto. It aimed to solve the problem faced by fiat currencies with the help of Blockchain technology. As of 2018, there were more than 1,600 cryptocurrencies that followed the concepts of Bitcoin and Blockchain, including, Ethereum, Litecoin, Dash, and Ripple.

Whenever a sender has made a transaction, he sends Bitcoins to a receiver by submitting the transaction on a public Blockchain network of Bitcoin. The miners around the world do verifications to authenticate users. There are specific participants in the Bitcoin network who are identified as miners, and they verify the authenticity of the sender and the receiver. They also validate whether the sender has enough Bitcoins to send to the receiver and also ensure that the sanity of the underlying Blockchain network to the Bitcoin is not corrupt.

Once the miner has authenticated the transaction and verified all the parameters, the transaction is added to a block, and then that block is made part of the main Blockchain. After this is done, transactions that were associated with the block are executed. Once the transaction is complete, the block is added, and the ledgers across all the nodes are updated, thereby allowing all the participants to have the same copy of the information.

Features of Blockchain

These are the four features of Blockchain which we are going to talk about in detail:

  • We have a public distributed ledger, which works using a hashing encryption.
  • Every block has a hash value, which is the digital signature of the block.
  • All the transactions are approved and verified on the Blockchain network using a proof-of-work consensus algorithm.
  • The Blockchain network utilizes the resources of the miners, who are there to validate the transactions for rewards.
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Public Distributed Ledger

A public distributed ledger is a collection of digital data that is shared, synchronized, and replicated around the world, across multiple sites, countries, and institutions. Now let's consider a blockchain that can be accessed by anyone in the network around the world. If someone tries to alter data in one of the blocks, everyone in the network can see the alteration, because everyone in the network has a copy of the ledger. In this way, data tampering is prevented.

Public Distributed Ledger

Hash Encryption

Blockchain uses cryptography (see definition of "cryptography" above) to ensure that all the data in the blocks is kept secure from unauthorized access and is not altered. Blockchain uses SHA-256 for encryption. SHA-256 is one of the strongest hash functions available. This cryptographic hash algorithm generates an almost unique 256-bit signature for a text. Blockchain also uses digital signatures to validate users.

Each user has a public and private key. The public key is used to identify the user uniquely, and the private key gives the user access to everything in the account. In the process from the sender's side, the sender's message is passed through a hash function; then, the output is passed through a signature algorithm with the user's private key, then the user's digital signature is obtained. In the transmission, the user's message, digital signature, and public key are transmitted.

Hash Encryption

In the process on the receiver's side, the message is passed through a cryptographic function to get a hash value. That hash value is compared with the hash output obtained bypassing the digital signature and public key through a verification function.

As mentioned, each block in a blockchain uses SHA-256 to encrypt and therefore secure the data. Every block has four fields: 

  • Previous hash—this field stores the hash of the previous block in the Blockchain
  • Transaction details—this field contains information regarding several transactions
  • Nonce—this field contains a random value (the nonce value) whose sole purpose is to act as a variate for the hash value
  • Hash address—this field contains the unique identification of the block; it is a hex value of 64 characters, both letters, and numbers, obtained by using the SHA-256 algorithm

The first three values (previous hash, transaction details, and nonce) are passed through a hashing function to produce the fourth value, the hash address of that particular block. 

Proof of Work

Bitcoin uses a proof-of-work system. What is proof of work? It is a piece of data that's very hard to produce (meaning it takes a lot of time or costs a lot of money) but can be easily verified by others, and it satisfies specific requirements. With bitcoin, proof of work is a competition among miners who want to add a block to the Blockchain—meaning they have to find the nonce value for the block by solving a mathematical puzzle. Once a miner discovers a nonce value, he or she spreads the word throughout the network, and if other miners validate the claim, the miner is rewarded with 12.5 bitcoins or another form of compensation. Finding a nonce value also adds that block to the Blockchain.

Choosing a nonce value is the primary objective of miners. They have to find a value that is less than the target value. If they find a value greater than the target, then their mining effort is rejected. But if they can successfully generate a hash value using the nonce that is less than the target value, then their effort is accepted. This is where the entire computational power of the miner is used—to generate the hash value.

Finding a nonce value requires a lot of time, money, and resources. When the nonce value is found, the miner spreads the word about finding this value, other miners attempt to validate the claim, and if it's verified, the miner gets the reward. So a miner is rewarded for being the first one to find the nonce, and that adds a block to the Blockchain.

As mentioned, as of today, the reward is 12.5 bitcoins. Every four years, the amount of bitcoin a miner can earn is reduced by half. Mining is the only way new bitcoins can be generated, and it ensures that there's a limit to how many bitcoins can exist in the market.

Miners

Miners get paid in Bitcoins, and a successful verification is the only way the Bitcoins get added to the network. That is the concept of mining, and when a miner has completed the proof of work consensus, he is rewarded.

A miner's fee is 12.5 Bitcoins for adding a block onto the Blockchain; however, the reward reduces by half every four years. When the fourth year approaches, the Bitcoin reward will go down to 6.25 Bitcoins, and miners also get the sum of all the transaction fees for a particular block.

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Other Fields That Use Blockchain

The financial services industry is an open field that uses blockchain technology extensively, but it's not the only one. Forbes mentions healthcare, crowdfunding, and ride-sharing in its article "Eight Ways Blockchain Will Impact the World Beyond Cryptocurrency." Let's look at a few other fields.

Travel

Blockchain technology can be used for things like:

  • Tracking luggage, especially with multiple flights in one itinerary and international flights
  • Identifying passengers, saving time and reducing lines and wait times
  • Making and accepting payments for services

Music

The rise of digital music has posed problems regarding issues like piracy and artist compensation. Blockchain can:

  • Help prevent piracy (illegal sharing) of music files
  • Be used to compensate artists for purchased songs and albums

Cyber Security

Even a giant company like Lockheed Martin is using Blockchain in its cybersecurity efforts. Blockchain can:

  • Help secure sensitive data, thanks to its cryptography feature
  • Eliminate the need for passwords, because users and devices can be authenticated using the public and private keys

Human Resources

Blockchain technology is a natural fit for improving time-consuming and costly HR procedures. For example, it can:

  • Eliminate the need to run individual verification checks on potential employees—blockchain transactions can store data regarding identity and employment history
  • Track payments and expenses, making things like paying taxes much easier for both employers and employees

Blockchain as a Use Case in Banking

Blockchain finds excellent use in banking. As of now, a user validates his identity to each bank he goes to, over and over. Is there a way we can ease the process with Blockchain? The answer is yes. We can use truffle, ethereum, ganache, and smart contracts, which are part of the Blockchain technology ecosystem, to make it work.

Conclusion

Are you intrigued by Blockchain technology? If you want to know more, check out our free resources on Blockchain and how it is impacting businesses around the world. You can also check out our Blockchain Certification Training Course and sign up today to begin a career in this burgeoning field.

About the Author

Rahul VenugopalRahul Venugopal

Rahul Venugopal is a Senior Product Manager with over six years of experience in Digital Marketing, Growth Hacking, and Mobile-App based marketing. He specializes in Online User Behaviour Analysis and Creative and Campaign Optimization.

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