The Blockchain beyond cryptocurrencies — A deep dive into the technology that powers bitcoin

king-samuel@newsletter.paragraph.com (King Samuel) — Tue, 22 Mar 2022 10:23:30 GMT

Here the buzzword ‘Blockchain’ is explained using analogies, examples, and images so simple even a dummy will understand.

The goal of this article is to give you a basic understanding of blockchain, how and why it works, the information here is just enough to get you started in the blockchain space and make you excited about the future with blockchain. Let’s get started!

A quick Google search of what blockchain means will reveal a long list of articles and posts around its definition, while definitions vary the underlying complexity becomes apparent from there, what exactly is a blockchain why should you care? Stick long enough and you will know more about blockchain than 90% of the world.

I have organized the information here in order of complexities, to guide your reading. Skip to where ever interests you.

Why blockchain — what problems does it solve?

To understand why the blockchain is important, I’ll take you on a journey from when the internet was created.

The internet is a network of computers, communicating with eachother on a set of laydown standards called protocols, in the case of the internet these protocols are open.

The invention of the internet in the 1980s created unprecedented growth in information technology. We were now able to transmit information at unimaginable speed.

The internet was built on something called open protocols — basically, these are a set of standards that guide the interaction of computers on the internet, example of these protocols include HTTP (HyperText Transfer Protocol) and FTP (File Transfer Protocol). This means nobody owns anything, if you know how to code, you can build anything you want without fear that anyone will change the rules of the game on you. Access was democratized. This allowed companies like Yahoo, Google, Amazon, Facebook, LinkedIn, and YouTube to build amazing solutions on top of these open protocols.

With the invention of smartphones and mobile applications, these companies were able to build more sophisticated software solutions that were not possible on open protocols. Due to the nature of the network effect, these platforms' adoption rates skyrocketed, users were willing to sacrifice their freedom on open protocols to enjoy the streamlined centralized services.

This was the beginning of the second era of the internet commonly referred to as Web2.

This is the internet we have today, where we rely on platforms like WhatsApp to chat with loved ones and do business or Amazon to host our businesses or Uber to hail a ride, or Facebook to connect with over a billion users. These companies are not necessarily bad they allowed us to do things we never saw possible, they brought us closer together and made our lives easier. The problem we have today with the internet is the centralization of power, all our services come from very few companies. Alphabet owns Google search engine, Chrome, YouTube, Google meet, Photos, Map, etc Facebook (Now Meta) owns WhatsApp, Instagram, Facebook including hardware like Oculus headset (the largest producer of VR headsets in the world)

Measuring Network Effects… by Sameer Singh

When so much power is concentrated with very few companies, a long list of problems begin to emerge.

Centralized platforms follow a predictable life cycle. In the beginning, they seek to amass as many users as possible, including other 3 party participants like developers and entrepreneurs(businesses), they do this to make their services more valuable.

Example: You are more likely to spend more time on Facebook if you can do more with Facebook than just chat with people, Meet Facebook business — a part of Facebook that allows businesses to sell their products and services on Facebook with ease. (More users, more businesses)

Another example: Amazon is a marketplace where businesses around the world can sell to a global audience. Amazon Web service — AWS allows developers to host code solutions — websites, mobile apps on the cloud. (More businesses, more developers).

Over time the nature of their relationship with these participants changes. For users, these companies move from attracting users to extracting data from users. For businesses, it becomes a competition.

Why Decentralization Matters by Chris Dixon

Government censorship like the Twitter ban in Nigeria is possible, governments can enact laws to control these companies and thus, their users. These are the problems with centralized platforms, and what drove the invention of the blockchain.

So — How does it work exactly?

If you are familiar with accounting, awesome! This should be easier, if not hang in there with me.

Blockchain is a database powered by multiple computers around the world(decentralised), with no central ownership of these computers, this database is used to store data (transactions, contracts etc), it does this in an append-only system, meaning records in this database can not be changed.

What makes this database(Blockchain) special is its immutability, this is achieved through something called hash function* (Click here). *In a traditional database, you can always come back to edit, change or delete anything stored, as long as you have enough security clearance in that organization, this allows systems like refunds possible — if you send $100 to Jude instead of Daniel mistakenly, maybe because their account numbers look alike, you can appeal to the bank to reverse the transaction, if you are lucky, they will.

This is called soft promise, soft promises exist in all human systems, it gives room for mistakes, uncertainty, and error. Institutions like the court-of-law exist to provide justice in those uncertainties, but this, in turn, creates uncertainty —For example, You ordered a laptop from Jumia using a courier service, Jumia promised delivery in 7days, It's 7 days already but you haven’t seen your laptop and you've paid over $600 for this. Options available include reaching out to customer support of Jumia to complain or the courier service to know what's happening. Resolving this can take weeks which is no guarantee to will get your money back. You cannot 100% trust that the transaction will be successful, or you will get your money back. This is the nature of online payments and any other human system.

Blockchain is code, a computer can not lie — however you program it to do, it will execute everything to the last line, so you can trust that it will do exactly what you've written in the program, with smart contracts on the blockchain you can create an agreement that includes you, Jumia, and the courier service. Transaction will only execute(pay Jumia) if you receive your laptop from the courier service. Failure to receive the laptop within 7days terminates the transaction, you get your money back.

Blockchain is made up of blocks, a block is like a page in a ledger — it is a collection of records, this is usually just transactions but it can be a few other things, like smart contracts.

Blocks have limits, you can only put so much into them, meaning you have to keep adding new blocks.

Bitcoin has an average of around 1500 transactions per block with a block size of 1MB, this is really small.

So what happens when a block is filled? You mine them — Bitcoin uses the proof-of-work consensus model, you have to proof that you mined them. This is done using a hash function.

**A Hash function: **This is a mathematical function that converts whatever you throw at it into a string of numbers and alphabets. Hash provides the encryption demand for blockchain computation. It forms the backbone of a blockchain, each block of verified transactions is converted and stored in the next block as a hash — a series of numbers and alphabets. To prevent anyone from tampering with records, double-spend, or performing any fraudulent transaction. In a blockchain, the hash function used is called Sha-256.

Anthony Camilleri/ReseachGate

The nature of hash functions ensures no one can decrypt the content of the previous block or the block before it etc. Cryptocurrency mining involves working with this hash to create the next block.

Another thing you need to know is that the blockchain is decentralized.

Thousands of hours of research, and billions of dollars of hashpower, have been spent for the sole purpose of attempting to achieve decentralization, and to protect and improve it. — Vitalik Buterin

Blockchain falls under a category of technology called Decentralised ledger technology — DLT, an alternative to centralized systems, that instead of having one computer as the authority, all the computers interact autonomously. Blockchains are a combination of decentralization and distributed systems, similar but different. This gives blockchains like Ethereum a secure base layer that allows others to build solutions of the different shapes.

Instead of having everything stem from the center — Centralisation, access to the network is democratized, no central servers this makes the network more agile against hacks and other limitations centralized systems suffer. The major problem decentralized systems face is scalability. While the nature of centralized systems like VISA, thousands of transactions can be performed second, but when you try to pass a transaction through every computer in a network then validate it before accepting it(add to the blockchain) it makes the network very slow. This will not be a problem for long as we are beginning to see more blockchains like Solana capable of performing transactions per second.

web.itu.edu.ir

Blockchain combines computer science, game theory, and economics. Most of the knowledge that exists in the blockchain has been for decades, Satoshi Nakamoto was able to combine concepts like Cryptography, consensus protocol, etc to create the first blockchain that powered Bitcoin.

So what problems did blockchain solve?

Basically, all the limitations centralized systems have. The nature of blockchain is trustless. This means Mama Ikeche does not have to trust anyone including her bank to send money to her son in school. Taiwo can make videos on the internet without constant worry about how the algorithm will treat his content, these and more are now possible.

We can now truly own what we create on the internet.

How is it different from Bitcoin?

Bitcoin is a cryptocurrency while a blockchain is where cryptocurrencies are created, stored, and used.

Bitcoin was the first utility of the blockchain, over time we discovered how to use blockchain to solve other problems, first, it was ethereum — Introduced smart contracts and a virtual machine to blockchains. today we have different types of a blockchain built to a particular purpose, concept like open blockchain and private blockchain are some examples of the diversity of the technology.

What can I use the blockchain for?

What can you do? A lot! Some of the popular use cases include Decentralized Autonomous organizations — DAOs, Decentralised finance — Defi, Non-fungible tokens — NFTs, decentralized games — GamFi(Play-to-earn), even the metaverse will use the blockchain whether in the form of NFTs as in-metaverse assets or cryptocurrencies for transactions.

Beyond these areas, we have seen more applications at the enterprise level with private blockchain, below is a list of applications/use cases of the blockchain

What next?— learn more

The blockchain is ushering us into a new era of permissionless, transparent, and trustless communications and value transfer, one where we can actually own properties on the internet with NFTs, work autonomously with organizations and communities without barrier or bureaucracy with DAOs, interact with any financial service with few clicks through Defi applications, plug into Web3 applications from a digital wallet with revealing your identity instantly.

This will open up new job opportunities. New skills will be needed, whoever upskills early enjoys a seat at the table.

Blockchain developments, research, blockchain design etc are some examples of new in-demand skills.