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Blockchain Essentials

Blockchain Essentials

Over the years, it has become more evident and recurrent that many business networks often develop inefficient procedures over the time and it could be due to the numerous aspects such as the multiple ledgers, substantial loads of data and records that each individual or a member of organization maintains. Every time a record is updated, each business line tends to apply their own methodology to update and maintain these records which is costing exceeding amounts for companies and a tedious and time-consuming process for internal and external audits. In the process of preserving these records, many are exposed to be  redundant, human errors, data precision and unnecessary replication of data. With quite a few members updating their own copy of records, it becomes dreary to authenticate and validate these gargantuan records (historical and transactional). Most of the maintenance work from any member on a given record are transparent. Moreover, for any public or private owned companies, security, reliability and speed becomes highly important when it comes to data.

Blockchain seems to serve and overcome most of the above problems. It is a continuously growing list of records-called BLOCKS, which are tagged and secured using cryptographic codes. Blockchain is a decentralized distributed digital ledger that offers public and private foundations and are highly invincible for anyone to intrude the data as it incorporates Distributed Ledger Technology (DLT). One can think of Blockchain as a database, which is completely decentralized with a network of nodes, usually personal computers of participants from all over the world. (Think of a Node as an Administrator and anyone can join the network voluntarily).

Satoshi Nakamoto, the founder of blockchain concept, also introduced a concept of a peer-to-peer (P2P) electronic cash system famously known as Bitcoin.

And NO, BITCOIN is not same as BLOCKCHAIN!! But without Blockchain, there will be no Bitcoin.

Bitcoin is a permission-less digital cryptocurrency, where any new member can join the network. It is a digital asset that anyone could buy in an open-Public network and its fully anonymous. It uses the DTC-Distributed Trustless Consensus.

Blockchain is a digital distributed ledger or a distributed database where every transaction of bitcoin is recorded and maintained in multiple locations (Bitcoin is just one of the applications of Blockchain). It is a transparent and more secured technology and can be categorized into Public & Private Blockchains. Private blockchains can further be categorized into “Permissioned” and “Permission-less”. Blockchain acts as a platform for Bitcoin and the way Bitcoin operates, contradicts itself from Blockchain.


Public Blockchain vs Private Blockchain vs Federated Blockchain:

owned and managed by personal computers (nodes) on the network and it is highly decentralized, anonymous and everyone has read & write access.

For ex. Bitcoin (cryptocurrency) and Ethereum (Smart Contracts).

Whereas, in Private and permissioned Blockchain technology (image no.4 with blue nodes), only authorized members can update/modify the blocks and may act as a transaction validator on their network (CGI, Microsoft). Both lay out a solid secured network, highly impenetrable but transparent to all users. Private or permissioned Blockchain allows only authorized members appropriate to the network. Not everyone can create transactions, start mining or review and Audit. Pros: There is more privacy, trusted & identified validators, controlled network.

For Ex: Ripple, EverLedger

Federated Blockchain houses only trusted & identified participants with simpler and faster consensus algorithms. They are mostly used in the banking sector, typically anyone in the network can read the transactions but only trusted participants can write to the database. This forms an association or consortium, which by itself decides who can have access to what.

The most popular consortiums/associations are R3CEV (for Banks) & B3i (for Insurance). Royal Bank of Canada (RBC) is a member of R3CEV consortium. Few organizations like British Telecom (BT) and AT&T have patents for Federated Blockchains.

A basic centralized, decentralized & distributed node structures as shown below. Facebook, Twitter & Airbnb’s network are decentralized. However, they are not distributed yet.


OK I GET IT!!  Blocks of Data Chained……… But How?

Each block can be linked to (m)any other block(s) by referring a fact from that block and stored using unique keys. Thus, forming a chain of blocks and the name “BLOCKCHAIN”.


Every Block in the chain contains:

  1.  Transactional Data or any digital asset data-Content
  2.  Timestamps
  3.  Hash---it is a fingerprint and its unique. Once a block is created, a hash is generated specific to the block. A hash value is an alphanumeric value of a fixed length that uniquely identifies data.

Assume Hash as a primary key or a foreign key from the database management system. The hash is a combination of the indexing, previous block hash, timestamp, block data, and nonce as input. Hash from the previous block acts as a connector leading to chain of blocks creating a unique cryptographic signature. Nonce is a 32-bit pseudo random number that can only be used once in the chain.


Technically, this is what a BLOCK is comprised of: - Every single block always holds an index, a timestamp, data or list of transactions, identity and a hash from the previous block which adds a great deal of security and immutability. This evidently shows how a chain is formed linking millions of blocks together in a decentralized and distributed manner.


Use Case:

Let’s assume Person A requests a transaction of $5 to Person B. which is then broadcasted to a P2P Network consisting of decentralized and distributed nodes. Nodes from the network verify (validators) the transaction using customized algorithms and cryptographic calculations. All these different algorithms must lead to the same answer and that’s how it is verified by multiple nodes. Once verified, it will be added as a new block into the blockchain. The person requesting the transaction will be $5 lesser and the Person B will receive $5. These transactions could be anything digital such as cryptocurrency, smart contracts or just records.

Verification Privileges:  (VALIDATORS)

Typically, anyone on the network can verify the legitimacy of any transaction, based on the type of Blockchain. Public Blockchain has evolved around two different concepts of verification based on the rewards, Risk, Stakes, decoding ability. Private Blockchains have their own authorized validators as it concentrates more on security and transparency.

“Proof of Stake” (PoS) Vs “Proof of Work” (PoW)

Proof of Stake is dependent on how many coins a node owns. A miner/Node who has more coins, has more mining power. Peercoin is an example which uses this concept to validate the transactions.

Ex for PoS: - PeerCoin, NXT

Proof of Work is used to validate the transactions of a block by any node in the chain. These nodes or miners in PoW concept would need to solve cryptographic puzzle to verify the legitimacy of a transaction and the first and fastest miner who solves, gets rewarded usually with a coin. This is when a transaction is added to the block or a new block is added to the chain. This could be time consuming for any miner or node, which means PoS is more stable and seems to address this issue. Basically, the more stake you hold, the more you can mine. For Instance, if you have 10% stake, Bitcoin will allow you to mine only 10%.

Ex for PoW :- Bitcoin, LiteCoin

How Secured is Blockchain??

As we know now, it uses cryptography to secure its network eliminating double spending, phishing and frauds which are a major concern in the finance industry. Methodology is very similar to the database management where it uses to Public and Private key for every transaction. Public key are users address who are on the blockchain. Private key is a password that will enable the user, access their bitcoin wallet or any other digital asset accounts. Identity of the user is based on the possession of these two keys which forms a cryptographic key. In a private Blockchain, operators can allow nodes with permissions only and it is a controlled network.

Why Blockchain??

Blockchain is an end to end encrypted and tough to breach and it eliminates a third-party requirement. Companies will no longer have to rely on single massive servers. Since, the identical files are distributed all over the network and the participants keep copies of the file and agree on changes by consensus methodology.

A company called EverLedger prevents fraud using blockchain to identify and evaluate the origin of diamonds and how it’s made. Somehow this reminds me of the movie “Blood Diamond”.

Where Blockchain is useful:

Many industries are already in Blockchain R&D and are obtaining patents. Implementing Blockchain entirely depends on the industry level, what levels of security, speed and privacy are needed or should it be a consortium, like the banks use. It can be used for maintaining System of records, Cloud Storage, Voting, Audit Trails, data management, Digital Identity, record keeping, Cryptocurrency, Crypto-Contracts, payroll services, Banking, Real Estate, Insurance & Identity management.

Blockchain Limitations:

  1. Complexity of using cryptographic information.
  2. Network size should be robust: Efficient network speed and cost: As of now, it can only process about seven transactions per second and each transaction costs about $0.20 and can only store 80 bytes of data.
  3. Unavoidable security flaw- “51% Attack” if more than half of the computers working as service nodes in the network, tell a lie, the lie will become the truth.
  4. There is NO Help desk to call


Geographically, if you ever wondered where the so-called BITCOIN validators or nodes are located.



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