How Blockchain Works

Blockchain has impressed the world with it’s simplicity and utility. Not many technologies can say that in today’s world, where new technologies go as fast as they come. Brought into limelight by Bitcoin, blockchain has stepped out from it’s shadows and begun on a path of it’s own.

So what exactly is blockchain? A blockchain is a data structure that can be used to record and maintain digital transactions shared over a network of computers. Every computer (or node) can manipulate the record based on predefined rules and in a tamper-proof, secure manner using cryptography, thus eliminating the need for a central authority. A record thus created is typically called a distributed ledger.

There are different types of blockchains. In blockchain adding data to the record is by a process of consensus. If a node wants to add data, others run algorithms to authorise or reject the request after verification. If majority of the nodes reach the conclusion that the request is valid, then it is granted approval. This consensus process ensures that only valid nodes can add data. It is extremely difficult to change or remove a block of data, once it is added. In this way, a ‘chain’ of ‘blocks’ of data is formed. Hence the name.

The distributed ledger and the consensus process are the highlights of blockchain. There are different configurations of blockchains like public blockchains and closed blockchains. These configurations typically depend on the size of the network and the use case. For example, the bitcoin blockchain is a public blockchain - where anyone can contribute to the ledger and is permission less. In closed blockchains, only authorised nodes can contribute.

How Blockchain Works

A network of computers is required for a blockchain to function. Each participant computer is called a node. Every node has a copy of the entire ledger. This is to ensure high fault tolerance. This means that even if one or more of the nodes go down or become inaccessible, the blockchain data integrity is maintained.

Transactions are recorded using a consensus mechanism, which is nothing but a set of rules that all the nodes on the network have to follow. These set of rules are nothing but codified business logic suitable for the application. If these rules are followed, the transaction is marked valid. Every node makes this validation. After approval is received from all the nodes, a new block is created with this transaction and this block is recorded by every node.

Why is blockchain becoming popular?

It gets rid of the middleman in a secure and reliable way.

Since there is no central source of data, there is no vulnerability to be exploited that can affect the entire network.

It ensures privacy and confidentiality

A public and private key is generated to seal a record. This ensures that data is updated by only the valid node, and no one else.

Robustness and Transparency

Transactions are immutable - once a transaction is committed, it cannot be erased. Because of the distributed nature of the protocol, it’s extremely difficult to tamper with the data maliciously.

There are other advantages as well. For example, for financial services, it speeds up business drastically. Traditionally, trades have to be often verified by a central clearinghouse. This clearinghouse maintains it’s own ledger. Unsurprisingly, it can often take days to clear a transaction. Additionally, the clearinghouse needs to be paid a small fee for it’s function. Blockchain eliminates the need for a clearinghouse by providing each party it’s own copy of the ledger. Not only does this increase the speed of the trade, it’s also more secure, and cheaper. Standard network protocols can be used for communication, and transactions can be cleared automatically in minutes or even seconds.

Blockchain provides more cost effectiveness and efficiency than traditional systems. It’s therefore an attractive technology for businesses worldwide.

Some possible applications of blockchain:

Trading and ownership in online marketplaces

Ownership of any digital asset can be established in a peer to peer fashion. Transfer of ownership can also happen in the same fashion.

MyPowers is working on this

File storage

Currently file storage systems need centralised databases and heavy storage areas. Peer to peer file systems are now tackling these problems. Storj seems to be using blockchain to solve this, according to their website.

Voting and Authentication

An increasing number of political parties and organisations seem to be wanting to promote the use of blockchain to build a more transparent system for voting. In 2014, the Danish Political party announced a blockchain based electronic voting system for it’s [annual meeting] (https://tech4parties.org/case-studies/denmark-liberal-alliance-blockchain-secure-online-voting/)

Identity Management

This is another area in which benefits immensely from blockchain. Fake identities and accounts are rampant all over the internet, and blockchain seems to offer a more secure way to establish identity online, as compared to the traditional username and password system. Onename claims to allow you to create tamper-proof identity using blockchain.

Smart Contacts

Distributed ledgers enabled the creation of simple contracts that will execute when specified conditions are met. Etherium is an open source blockchain project that was created specifically to realise this possibility.

Tools and Frameworks:

blockchain.info (https://blockchain.info/api)

Blockchain APIs allow developers to send and receive payment from a blockchain wallet account, programmatically create wallets for users with the ability to load and redeem funds. The APIs also provide access to currency data from the major bitcoin exchanges

Neurowrare( http://neuroware.io/)

Neuroware offers a range of specialized non-financial protocols for the blockchains and provides businesses with the tools and experience to properly leverage the benefits of distributed ledger technologies.

Tierion (https://tierion.com/)

Tierion allows creating a verifiable record of any data or business process on the bitcoin blockchain by offering developer tools & API to anchor data in the blockchain. The company has developed an open standard called ChainPoint for recording data in the blockchain and generating blockchain receipts. Each receipt contains all the information needed to verify the data without relying on a trusted third party

Lisk(https://lisk.io/)

Blockchain apis in javascript.

Colored Coin APIs(http://coloredcoins.org/)

Colored Coin APIs allow to issue new assets, transfer assets between addresses and query for asset metadata and colored addresses that hold an asset

Factom (https://www.factom.com/)

Factom Alpha API allows creating applications that store data in the blockchain without the speed, cost, or size limitations of writing data directly to the bitcoin blockchain. The company aims to give every developer the ability to use the blockchain to build a new generation of applications

Etherium(https://www.ethereum.org/)

Ethereum is a decentralized platform that runs smart contracts: applications that run exactly as programmed without any possibility of downtime, censorship, fraud or third party interference.

Colu (http://documentation.colu.co/)

The Colu engine provides infrastructure for developers that seek to issue and manage digital assets on top of the bitcoin blockchain. The platform implements the Colored Coins protocol and provides developers with an easy to use API/SDK intended to lower the technical barriers required to build bitcoin-based digital assets applications.

BlockCyper(https://www.blockcypher.com/)

BlockCypher API provides a set of the endpoints in addition to some special features like unconfirmed transaction confidence factor, dependable WebHook or WebSockets-based events, on-chain microtransactions and payment forwarding.