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Do you really know what Blockchain technology is?

21 Oct, 2021 | Data & Analytics | 1 Comment

Insights -> Trends and News

Over the last few years we have been able to appreciate how the concept of blockchain, or chain of blocks, is becoming more and more fashionable. However, many people are unaware of what is behind its technology and many others simply associate the concept of blockchain with that of cryptocurrencies.

In this post we are going to make a introduction to blockchain technology reviewing its origins, characteristics and evolution in recent years.

What is Blockchain?

Although Blockchain is usually defined taking the Bitcoin blockchain as a reference, I think it is convenient to give a more general definition that helps us understand this technology.

blockchain technology bitcoin cryptocurrency

Blockchain is a technology or computer protocol that works as a database distributed in nodes in which the information is grouped in blocks forming a chain.

In this way, the information is verified through mechanisms that guarantee its veracity, and stored in blocks that are incorporated into the chain, occupying a specific place in it. Furthermore, each node of the blockchain contains all the information of the chain, aspect that guarantees the availability and security of the information, as well as its integrity.

Now that we have understood the concept and know some characteristics of Blockchain, we are going to delve into its technology by talking about Bitcoin. But why is it necessary to understand Bitcoin to talk about Blockchain?

 

Bitcoin, much more than a cryptocurrency

Back in 2009, in the midst of the financial crisis, Satoshi Nakamoto published the 'white paper' of Bitcoin, an article that explains both the proposal and the first implementation of blockchain technology. Thus, Bitcoin arises with the purpose of creating a decentralized network that allows the transfer of value from one person to another without the need for intermediaries.

In Bitcoin, Nakamoto brings together a series of already invented technologies to create the first practical implementation of a Blockchain.

Although many people think that this technology was born with the creation of Bitcoin, the concept of Blockchain emerged in 1991, when Stuart Haber and W. Scott Stornetta published the article: “How to Time-Stamp a Digital Document ". This work introduced the idea of ​​creating a chain of hashes to generate an order in a group of documents with dynamic growth.

Therefore, Bitcoin was born with the daring idea of ​​creating a financial system that does not depend on institutions, governments, or trusted third parties. For this, a electronic payment system 'peer to peer' based on cryptography and the use of time stamping.

How does this system work then?

All this theoretical proposal is very good, however, it may be difficult for us to get an idea of ​​how these systems work or how we can benefit from their technology.

Currently, both to pay for a product or service and to send money to another person, it is necessary to make use of a bank or other institution or company that provides trust between the interested parties. While in the traditional financial system the existence of these intermediaries is necessary, with Bitcoin that intermediary or third party disappears.

In this new system, the users they have the money in wallets and they can make transactions to any other wallet on the blockchain. Therefore, we can understand that wallets are the means of accessing the blockchain and being able to interact with it. In addition, as the blockchain is public, we can see all the wallets and know how many Bitcoins each one owns. However, in this blockchain we cannot know who is behind each wallet, so the privacy of the users is guaranteed.

Infographic Blockchain Bitcoin Cryptocurrencies

So ... how do you guarantee the validity of transactions? When they are done transactionsThese they must be validated before being executed. This is where the proof of work and mining concept.

Miners gather a series of transactions that must be validated in one block. The first to solve a math problem seals the block, receiving a reward in return. The rest of the miners verify that their solution is adequate and the transaction block is added to the chain. Finally, all nodes update their vision with the added blocks so that they can be checked by anyone.

There are explorers that allow anyone to see the Bitcoin blockchain, the characteristics of each block and the transactions grouped in them.

The Role of Cryptocurrencies in Blockchain Technology

In the case of Bitcoin, since its purpose is the transfer of value through the peer-to-peer system, Your cryptocurrency (BTC) is the substitute for fiat money to carry out transactions.

In addition to the transfer of value, in a decentralized system which depends on the work and resources of the nodes necessary a mechanism to incentivize them. These reward systems allow financially reward the people who support and guarantee the operation of the network, as is the case with miners doing proof of work on the Bitcoin network.

Also, in the case of Bitcoin, this mechanism also allows the issuance of new Bitcoins, which are put into circulation until the maximum supply is reached. This last aspect makes Bitcoin a financial system that is not subject to inflation, since there will never be more than 21 million in circulation.

Bitcoin problems and evolution of Blockchain technology

Since its inception in 2009, the Bitcoin cryptocurrency has seen exponential growth. However, since its value depends on supply and demand, it has been subjected to strong speculative movements that have made it an extremely volatile asset.

On the other hand, Bitcoin, as a system, has been criticized by the excessive consumption of energy required for mining, annually comparable with the energy expenditure of a country like Argentina. This in turn results in a detrimental impact on the environment. Moreover, another of the big problems of Bitcoin is its scalabilityAs it can only confirm around 7 transactions per second compared to 1.700 for VISA or 115 for PayPal.

Due to these inconveniences and as a result of the daring proposal to replace the established financial system, around Bitcoin they have appeared a series of agents, such as central banks and governments, that They try to undermine the undeniable technological improvement that Bitcoin brings with it.

Consequently, we have seen strong regulations and prohibitions that do nothing other than manifest the monetary revolution proposed by Bitcoin against the traditional financial system.

Bitcoin Evolution

Now that we have seen the problems that Bitcoin presents we can understand how thanks to the technological evolution of recent years Improvements have been developed and proposed to address the drawbacks of Satoshi Nakamoto's initial proposal.

Being an open source project, members of the Bitcoin community have contributed to the development of the ecosystem through the so-called BIP (Bitcoin Improvement Proposal). A BIP is a document with a proposal for improvement, whether technical or organizational, of the Bitcoin network.

Some of these proposals have generated quite a few discrepancies within the community, leading to new projects based on the Bitcoin code, such as the case of Bitcoin Cash for scalability improvement. Other projects thought to be an alternative to Bitcoin have also appeared, as is the case with Litecoin for low value transfers.

New Blockchains and applications of their technology

In 2015 the platform appeared Ethereum, for an decentralized project that introduces for the first time the possibility of programming on the blockchain. This platform, which gives way to a new generation of blockchains, offers the possibility of programming smart contracts, or smart contracts, allowing the creation of decentralized applications (Dapps) that benefit from its technology.

ETHEREUM Blockchain Bitcoin cryptocurrency

With the emergence of Ethereum and other similar platforms, and thanks to the possibility of decentralizing any market through the blockchain, more and more sectors are implementing this technology.

Blockchain technology is already being used for the creation of decentralized storage systems, identity management, decentralization of financial services or other developing fields such as the Internet of Things (IoT).

Despite having talked about decentralization as one of the purposes for which Nakamoto created the Bitcoin blockchain, these systems can be created publicly or privately, and there is the possibility that they are controlled by centralized entities. Therefore, the technology blockchain will have to break through regulations and attempts by states and banks to create their own cryptocurrencies and digital currencies to continue to have monetary control.

For the moment, countries like El Salvador have already accepted Bitcoin as legal tender, while others, like China, will try to continue to maintain financial control of their citizens through digital currencies such as the digital yuan. Although the battle for the next few years is served, we must not forget that the adoption and implementation of blockchain technology is a reality that will mark a new milestone in the technological development of the world.

Daniel Checa

Daniel Checa

Daniel Checa He is a collaborator in the Panel's Data & Analytics area. You can contact him via email here.

Comments

1 Comment

  1. Felipe

    Thanks for the article.
    I see that we share the same enthusiasm for this technology and we see the great potential it has to change many things (for the better)
    regards

    Reply

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