Introduction to this blockchain blog series

This is the first blogpost of a blog series about the basics of blockchain technology. We will cover all important aspects of this topic with the goal that anyone who is interested in this field and is not yet an expert can learn about the characteristics, potential benefits but also the risks of creating digital products or services that use a distributed ledger approach (such as the blockchain). In a nutshell, the term Web3 refers to a decentralized version of the internet, where multiple separate computers form a network. Blockchain is the technology behind it that enables and powers this network.

What is the blockchain and what is the technology behind it?

Blockchain has quickly become a buzzword in today's technology-driven world and it may transform the way businesses and individuals conduct certain affairs in the long term. It is a revolutionary new means of securely conducting transactions and storing data, making it a powerful tool for anyone looking to safeguard their financial or personal information. 

So-called dApps are applications built on blockchain technology. The origin of this kind of applications can be traced back to the emergence of dynamic applications, interactive services and machine-to-machine interaction. The term dApps encompasses various forms of web usage and interaction, enabling data to be shared rather than owned (like with TikTok, Meta etc.), with different services presenting different perspectives of the same web/data.

Blockchain is a form of distributed ledger technology. A distributed ledger technology system uses decentralized, secure and immutable data structures to store information across multiple nodes. Each transaction within the blockchain is cryptographically secured, meaning it cannot be altered or deleted without all parties involved being notified. This makes it highly secure from tampering or hacking attempts. By using this system, businesses can ensure their data remains safe. 

Furthermore, blockchain is being used as a platform for smart contracts. Smart contracts are automated agreements with programmed logic that can be self-executed when certain conditions have been met.

How blockchain technology works

At its core, blockchain works by creating a shared decentralized database of transactions that are secured using cryptography. It stores information related to any given transaction in an organized manner, providing users with access to the same data at all times and ensuring no single user or third party organization has control over the entirety of the system. As each block contains a cryptographic hash of the previous block, any attempt to alter data stored within the blockchain would be detected and prevented from happening. 

As well as providing secure storage, blockchain enables peer-to-peer transactions without intermediaries such as banks or governments. This makes transactions much faster than traditional methods and eliminates unnecessary costs associated with such transactions.

Components of blockchain technology

The blockchain is composed of various components, all of which work together to create an immutable and secure record for transactions. I will explore the four essential components of blockchain technology that help it run smoothly and securely: distributed ledger, consensus mechanism, network nodes, and cryptographic keys. 

1. A distributed ledger

A distributed ledger is a database shared across multiple nodes in a blockchain network. This allows all participants to view records of transactions without any single entity having control over the data. All changes must be verified by consensus mechanisms before they can be added to the chain.

2. The consensus mechanism

The consensus mechanism is an integral part of blockchain technology. It enables distributed networks to agree, without the need for a central authority. For the blockchain network to remain secure and accurate, all participants must agree on the same ledger of transactions. The consensus mechanism is used by all nodes in the network to validate new blocks and add them to their version of the blockchain ledger. There exist different kind of consensus mechanism approaches like - Proof of Work (PoW) used by the Bitcoin network - the Proof of Stake (PoS) approach is implemented by the Ethereum network and many other mechanisms which we will explain in detail at a later stage of this blockchain blog series. 

3. Network nodes

Network nodes are an essential part of any blockchain system. They are the computers that store, validate and relay information on a distributed ledger. Network nodes form the backbone of any blockchain network and their collective performance determines how well a blockchain can operate. An important point to mention is that the hardware requirements for running a node are very diverse. This can range from a simple Raspberry Pi to an expensive high-end PC/server. At blokk we also run nodes ourselves, which are useful for app development, but also to support the community of ethereum developers.

4. Cryptographic keys

Cryptographic keys are used to securely encrypt information, granting only authorized access to digital assets. Cryptographic keys are generated from complex algorithms and come in two forms: public keys and private keys.

What are the potential benefits of blockchain technology?

• No central bank, government or other entity controls the blockchain technology in general

• Unparalleled security against cyber-attacks by eliminating opportunities for malicious actors to gain control over large amounts of data. ( if the smart contracts are properly designed, reviewed and implemented)

• Ability to provide greater transparency and trust between parties engaging in transactions. By recording each transaction on an immutable ledger, it becomes virtually impossible for any individual or organization to manipulate or change the outcome. Through smart contracts, efficiency can be increased due to the automation as soon as all parties agree on the terms and conditions, which are entered into the blockchain ledger. The transaction is automatically executed when all terms of the agreement are met. 

• Offers enhanced security through encryption protocols which make it difficult for malicious actors to steal information or tamper with data stored on the network.

• Offers new wealth-building opportunities

• Democratizing - according to Alex Wykoff, director of product at Airfoil Studio. “As long as the basic rules for transactions are followed, blockchain is open for participation by anyone, at any time,” 

• Speed: By eliminating multiple intermediaries and optimizing processes, blockchain technology accelerates financial transactions. This results in transactions that traditionally took hours or even days in centralized systems now taking only minutes or even seconds.

• Cost efficiency: When using a decentralized system without intermediaries, the associated expenses, including transaction and overhead costs, are usually lower compared to those of a conventional system. 

Types of blockchains

There are different types of blockchains. We'll look at the characteristics of public, private and consortium blockchains and how they compare to one another.

Public blockchain

A public blockchain allows everyone to view, participate and help maintain its ledger system by verifying transactions on the network. This type of blockchain encourages the creation of a decentralized network with multiple validators spread across different locations, who can secure the data stored on it without relying on a central authority or third party.

The most well-known example of a public blockchain is Bitcoin, the first decentralized digital currency created by Satoshi Nakamoto in 2008. Since its inception, Bitcoin has become the most widely used cryptocurrency with millions of active users worldwide. Other popular public blockchains include Ethereum, NEO, Litecoin, Dashcoin, Monero, Ripple XRP, and Dogecoin which all use distributed ledger technology to provide secure peer-to-peer transactions without any third parties such as banks or governments involved.

Pros of a public blockchain

• Public access: Not limited to just one organization or user group – anyone can join the network and use it to store and transfer data securely. 

• Security and transparency: Since public blockchains are open source, they are much more secure than their closed-source counterparts as every node in the network is constantly verifying transactions. This makes them highly resistant to hacking, fraud, and other malicious activities. 

• Lower fees: Public blockchain networks typically have lower transaction fees than those associated with private networks due to their decentralized nature which minimizes operational costs.

Cons of public blockchain

• Scalability: As more users join the network, it can become congested and slow down transaction speeds, resulting in high fees for miners who have to process each transaction. 

• Computing power for Proof of Work consensus chains like bitcoin: Some public blockchains require a large amount of computing power and electricity which can affect their efficiency. However, this highly depends on the chosen consensus mechanism. 

• Less privacy: All data stored on a public ledger is visible to all participants in the blockchain, so it’s important to consider how much information you want to make publicly available when considering this type of technology. Anyone can view all transactions on the network, making them less private than other types of blockchain networks.

Private blockchain

A private blockchain is not decentralized and serves a different purpose than a public blockchain. Private blockchains are used to control access to information, ensuring that only those within the network can view it. Unlike a public blockchain, which is open to anyone, private blockchains require permission before allowing users access and provide more control over who can view or manipulate data within the chain.

One example of a private blockchain is Hyperledger Fabric, an open-source platform developed by the Linux Foundation. It is designed to support distributed applications with multiple participants who have different levels of permissions. This makes it ideal for enterprise use cases such as supply chain management or identity management solutions where security and privacy are paramount.

Pros of a private blockchain  

• Private blockchains are a popular choice for organizations that prioritize privacy over public access to their data. They provide users with greater control and the ability to customize settings within an individual platform. 

• Private blockchains obviously offer more privacy than public ones since only invited members can view or edit the shared ledger. As such, these platforms are ideal for businesses that need to keep their operations confidential from competitors or unauthorized personnel. 

• Because there are fewer participants than on public networks, it’s easier for administrators to track the activity on their network and quickly resolve issues that arise.

Cons of a private blockchain

• Trusted third party needed: One issue with private blockchains is that they require a trusted third party to maintain control over the network and validate transactions. This means that they do not offer the same level of decentralization as public blockchains and may be more susceptible to malicious actors or single points of failure.

• Private blockchains are more vulnerable to manipulation by malicious actors since they have fewer participants involved in running the network. This makes them prone to scams and other fraudulent activities, as well as hacking attempts from outside entities looking to gain access or control over data stored on the network.

Consortium blockchain

In a consortium blockchain, instead of only one organization governing the platform, multiple organizations come together to form a cooperative network.

It allows multiple parties to securely share and access an immutable record of transactions. As opposed to public blockchains, consortium blockchains allow more control over who is allowed to participate in the network. This type of blockchain is ideal for organizations that need collaboration between multiple parties to certain tasks, as it provides a secure platform for all members involved.

The R3 consortium for example was formed by leading financial institutions in 2015 to develop Corda, an open-source distributed ledger platform for financial services companies. This particular platform has been used by many banks from countries all over the world, allowing them to securely share data without sacrificing privacy or exposing sensitive information to risk.

Pros of a consortium blockchain

• Scalability: By using multiple nodes to process transactions, it allows for faster transaction times than what would be possible with a single node, meaning it can support larger loads without sacrificing performance. 

• A consortium blockchain provides good privacy by allowing only approved entities to participate in the network and access the transaction data. 

Cons of a consortium blockchain

• Consortium blockchains require the cooperation of all users who have access to the network. If a user fails to cooperate, it could lead to delays or discrepancies in the operation of the system. 

• Transparency: Consortium blockchains are owned by a limited number of participants instead of being open source, which means it lacks some built-in transparency and security features found in public blockchains.

• Costs: Consortium blockchains are typically more expensive than other types of blockchain networks due to their need for multiple nodes operated by different entities. This makes them less cost-effective than permissionless public blockchains and decentralized applications (dApps).

A quick look at the size of the blockchain and web3 market

I collected some available research data on the size of the blockchain and web3 markets as well as some forecasts. The diverse sources and provided insights are not at all consistent and vary heavily depending on the sources. This might be due to different methods of data collection and forecasting, but certainly also has to do with the fact that the entire industry is not very old yet. 

Some interesting insights by Precedence Research, a Canada/ India based company, that were published in September 2022:

• By type: The public cloud segment has held 61% of the total revenue share in 2021.

• By components: The infrastructure & protocols segment accounted for 63% of revenue share in 2021. 

• By applications: The payments segment contributed 45% of total revenue share in 2021(most of it from Bitcoin).

• By enterprise size: The large enterprises segment has held 68.5% revenue share in 2021.

• The North America region accounted for 38% of the total market share in 2021.

Key Takes about blockchain basics

Blockchain technology is a revolutionary distributed ledger system that enables decentralized, secure, and immutable data structures to store information across multiple nodes. It creates a shared database of transactions that are secured using cryptography, making it a powerful tool for safeguarding financial or personal information. The essential components of blockchain technology include distributed ledger, consensus mechanism, network nodes, and cryptographic keys. It offers unparalleled security against cyber-attacks, enhances transparency, and trust between parties engaging in transactions. There are three types of blockchains: public, private, and consortium, each with its own characteristics. Public blockchains are currently one of the most popular types of blockchain applications. They offer greater transparency, a decentralized network, and peer-to-peer transactions without intermediaries such as banks or governments.

I believe that it is important to mention what Roy Amara, a Stanford computer scientist, told his colleagues in the 1960s: “we overestimate the impact of technology in the short-term and underestimate the effect in the long run.” (Source: Oxford Reference) I believe that this will be the same for the blockchain and web3 technology. It is currently (2023) very much hyped and perhaps overestimated in the short term whilst underestimated in the long term. According to a recent research study by Fortune Business Insights, the global blockchain market is projected to grow from $7.18 billion in 2022 to $163.83 billion by 2029.  It has the potential to impact or even revolutionize many business sectors and industries.