Some people consider it the greatest technological innovation since the invention of the Internet. Others believe it is a serious threat to the world monetary order. Still others consider them a passing fad. Opinions often differ widely when it comes to blockchain. TECHBOOK explains the basics.
There are various terms in the crypto world: from Bitcoin to Ethereum, coin and token, cryptocurrency to blockchain. The latter is much more than a database limited to financial transactions. But what exactly is behind a blockchain? TECHBOOK explains the term.
What is the blockchain?
Simply explained, this is a publicly accessible, digital register in which you can enter something, but nothing can be deleted. The technology has been around since the early 1990s. First of all, it is not THE blockchain at all, because there are many of them. There are now hundreds of blockchains that work in different ways. There are more every week. They all have one thing in common: They register transactions, such as the receipt and exit of digital tokens. Such tokens are basically tokens of value that represent themselves or something else. They can be sent and received using electronic addresses.
We know such tokens from our analogue everyday life, for example as deposit tokens for beer glasses at a folk festival. Such a mark represents on the one hand the glass and on the other hand the amount that you paid and that you get back if you bring the glass back. In principle, you could also trade with these brands, since they are worth something. Or you could paint them and sell them as works of art and much more besides. If you don’t think of a deposit but of a cloakroom token, then it becomes clear how difficult it can be to determine the real value. It is the same with tokens on the blockchain.
If the token has its own blockchain, it is called a coin. Everyone probably knows the digital currency Bitcoin. If the token does not have its own infrastructure but runs on another blockchain, then it is “only” a token. For example, the Metaverse currencies SAND and MANA use the Ethereum blockchain, so they are tokens and not coins.
Also Read: What is Ethereum? The cryptocurrency at a glance
Why do you need a blockchain?
Blockchains have many possible applications – and new ones are constantly being added. Most people are familiar with the use of cryptocurrencies for transactions. Few know that blockchains can do much more than that. In the field of digital identity, they play a role when it comes to proving who you are via the Internet. Personal data, such as patient data, can be managed independently on the blockchain. There are even chains that specialize in medicine. Blockchains also play a role in the digital management of supply chains. This makes it possible, for example, to trace the origin and processing of organic products step by step. Some blockchains even reward the reduction of CO₂ emissions through tokens and thus contribute to the fight against climate change. Many other applications are already available or planned
What is the difference between blockchain and bitcoin?
Bitcoin and blockchain sound like synonyms to some. However, this is wrong. The Bitcoin blockchain is just one of many. However, it is the most important of the available blockchains. Bitcoin transactions are summarized in blocks, which, when lined up, form the complete ledger – like in a bank. Unlike the bank, however, there is no control body that can ensure which transactions have actually taken place. The blockchain therefore has an integrated mechanism that guarantees that only valid blocks are included in the chain.
The proof-of-work procedure
The Bitcoin blockchain works according to a process called Proof-of-Work (POW). Each block contains a cryptographic hash value that references the previous block. A decentralized number of computers around the world work to find this value and add the new block to the chain. The reward for this is a fixed Bitcoin amount – which is why the whole thing is also known as “Bitcoin Mining”. The disadvantage of the process is the immense energy consumption, which is why many municipalities and even entire countries ban mining.
The Proof-of-Stake process
The most important method of competition is called Proof-of-Stake (PoS). Blocks are not “mined” here, but a consensus mechanism is used to determine who may append the next block to the chain – and is rewarded with coins. In contrast to Proof-of-Work, no proof of the work done – in the form of computationally intensive guesswork – is required. Instead, the members of the blockchain network must already be invested in the respective cryptocurrency in order to be able to validate new blocks – i.e. prove a share (stake). This ensures that malicious actors cannot simply take over the validation of the blockchain. This process requires only a tiny fraction of the energy of POW. The method is therefore more environmentally friendly, more scalable, easier to handle, cheaper and faster – there are almost only advantages. PoS is only considered to be a little more vulnerable when it comes to security.
Most newer blockchains work according to the PoS method. Some chains are now CO₂-neutral and some are even formally carbon-negative. There are other methods as well, but they are less common. These include, for example, proof-of-capacity or proof-of-authority. Overall, the math behind blockchains is far more complex than most people can imagine. But you also get a lot of technological possibilities and security.
What makes blockchains so secure?
There are several factors that make blockchains more secure than other digital technologies. On the one hand, it has no place, it is everywhere and nowhere. A decentralized network of globally connected computers creates the blockchain. That’s why a burned-out data center or the theft of hard drives cannot harm a blockchain. That is the safety factor of decentralization. On the other hand, sophisticated mathematical security procedures make unauthorized access to data practically impossible. Only human error, triggered by carelessness, manipulation, phishing or social engineering, can change something about security. This is the security factor of cryptography.
Risks arise more in the peripheral areas than on the blockchain itself. For example, so-called bridges have been successfully attacked by hackers several times. These are software bridges that can be used to bring tokens from one blockchain to another. There is also another significant risk: If I want or have to trust a third party out of convenience or ignorance, such as a central depository or a crypto service, because I don’t want to manage the digital keys myself, so-called third-party risks. If the operator of a crypto exchange is a criminal, then my digital keys are in bad hands there. In principle, however, this applies to many sensitive areas. One only remembers various bank scandals. A reasonable solution to minimize third-party risks is the use of BaFin-licensed crypto exchanges, which now exist.
Also Read: Bitcoin Rises! The best apps for buying and selling crypto
How will we use blockchains in the future?
Evidence of transactions on a blockchain can be viewed by anyone but changed by no one. This special feature makes them attractive for many present and future requirements. AI applications are increasingly becoming the subject of innovative discourse within the blockchain scene. Artificial intelligence (AI) gives the blockchain new possibilities.
With a view to the near future, this could also result in an application for journalism, for example. A blockchain could use artificial intelligence to distinguish fake photos, fake videos and fake audio from real events and only digitally record real news. If an event had not been registered in the blockchain, it would not have taken place. Every photo, every video, every audio recording would be publicly verifiable. This is just one example of many ideas that will arise around the topic of blockchain and AI. So it is more than just Bitcoin, because blockchains offer the potential for the technological solution of various societal problems.