The Concept
Last updated
Last updated
Using blockchain technology to track physical assets is not a brand new application. However, the state of the art concepts are not applicable due to several limitations. Scalability is one of the limitations with regard to the number of transactions that the blockchain network can process. Other limitations include the lack of data security and privacy.
Blockchain is a distributed database that is consensually shared, replicated, and synchronized among a group of participants. To better understand the blockchain, it is essential to explain the concept through an example. When an individual deposits a sum of funds into a banking institution, the individual trusts that the fund will be there until they decide to withdraw it or spend it on goods or services. In this traditional financial system, the individual put trust in the bank or any other institution which will have an accurate record of the transaction, such as the amount, the name of the depositor, and the time of the deposit. More broadly, the current society relies on central databases and repositories to collect, maintain, and protect the recorded actions of individuals or institutions of banks or governments.
The technology behind blockchain differs from centralized repositories in that it decentralizes the source of trust creating a trustless network. When an individual deposits funds into a digital wallet, the transaction is recorded and the value is captured on the blockchain network. If this individual purchases any other digital asset, the transaction is recorded along with the change in fund level in the digital account. This trustworthy data and information stored on the blockchain is transparent and is shared with all the parties on the network.
The replication and storage of transactional data by each node, on a blockchain network is known as a distributed ledger. The fundamental characteristics of these distributed ledgers include operation with peer-to-peer networks, decentralized record storing, consensus or trust-based transactions, and tamper resistance. Blockchains are not used for general data storage, but rather hold information about transactions. Sometimes the blockchain will contain the transactions itself or may include the proof that the transaction is valid.
Blockchain has three building blocks mainly:
Block: Block consists of a list of transactions over a period of time. These transactions can represent virtually any type of activity from registering a land deed to a single purchase on the blockchain network. Any rules relating to the block, such as size of blocks, block reward, the number of transactions a block can have etc., are established when the network is first created with genesis block.
Chain: The block of transactions is linked to the preceding block through a cryptographic hash generated by the hash function. The hash value of one block is inserted into the next block which makes a link between the new block and the previous block. Repeating a hash function on an unaltered block of data will always generate the same fixed-length value. If a block of data is altered, it will affect the whole hash eventually leading to different output.
Network: The blockchain network is made up of participants known as nodes each containing a complete record of data and verifying all transactions on a blockchain. There is no centralized authority looking after all the node operations. The data integrity is maintained by the blockchain being replicated on all of the nodes in a trustless manner.
All the nodes are operated by node operators who are incentivized by the network's native token as rewards for their efforts. Nodes compete to solve crypto-puzzles in order to mine the block. The first node completing the puzzle has its solution verified by other nodes and once the solution is verified, it adds the next block to the blockchain. This process of adding blocks in blockchain is called mining.
Every blockchain has its own rules or algorithms governing how nodes validate transactions intended for entry into the blockchain. These rules are called a consensus mechanism and are established when the blockchain is created. Based on the consensus mechanism of a blockchain network, parties who do not know if they can trust each other to agree to an entry should be added to the blockchain. Each blockchain has its own consensus mechanism depending on the type of transaction it is capturing and network activity. The mechanisms facilitate authenticity, or the immutability of transaction records on the blockchain network. Some of these consensus mechanisms are “proof of work”, “proof-of-authority”, and “proof of stake”.
