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Blockchain Technology: Definition, Types & Uses

Instructor: Lyna Griffin

Lyna has tutored undergraduate Information Management Systems and Database Development. She has a Bachelor's degree in Electrical Engineering and a Masters degree in Information Technology.

In this lesson, you will find out what blockchain technology is, how it works, and what makes is revolutionary. The different types of blockchain technology are included as well as some real world examples and uses.

What is Blockchain Technology?

Blockchain technology is made up of extremely secure, shared blocks of transaction data called distributed ledgers which are distributed among thousands of computers in an agreed state of authenticity.

These ledgers contain records that are unchanging and unchangeable over time and are used for any transaction or to track any asset. Blockchain technology is said to possess the abilities to revolutionize internet technology. It facilitates the transmitting of transactions in a safe and unchangeable environment.

How it Works

The Blockchain

A series of transactions form a block and a series of connected blocks form a blockchain (Figure 1).


Blockchain


Participating Nodes/Devices

Transaction records are distributed among thousands of computers with each computer knowing the origin of an asset and is updated with any authorized changes made over time. Each computer has its own copy of this up-to-date blockchain at all times (Figure 2). Data, once agreed and authenticated by all participating computers within the blockchain, cannot be changed. That record remains the same for whatever transaction it is employed.


Blockchain2


Transaction Authentication

When a new transaction is created, it is broadcast to the thousands of computers connected within the network. The transaction is authenticated or verified and then added as a block (E) to the previous transactions blocks (Figure 1).


Transaction Authentication


For a transaction to be accepted as authentic, all participating computers and systems must agree.

Figure 3. This ensures that no part of the transaction or record can be successfully altered. How? As a new block of transactions is being added to the chain, it is linked to the cryptographic hash of the previous block in the chain. This means that any change to any transaction will make all other blocks in the chain unrecognizable (as their hash keys are linked) and all connected nodes (having a copy of the blockchain) will reject that transaction.

In the event a genuine error occurs and a new transaction needs to be created, authentication is done by all nodes in the chain before being used. Details of the old value are still kept and visible. On the other hand, in the event that an unauthenticated request is attempted, the transaction is rejected (Figure 3).

Unlike a single database or system which can be hacked into, intercepting data and changing it successfully would mean hacking into all of the thousands of connected computers (each holding a copy of the blockchain) in the network practically an impossible task.

Think of a high security safe that has multiple digital codes or keys to be accessed. Each manager has to enter their unique codes or insert unique individual keys for the safe to open. If an invalid key is used or the wrong code or key is inserted, the safe will not open. This is because in combination with all the other manager's keys, the input code/combination is unrecognizable. If one transaction on the chain is intercepted and tampered with, all other blocks become unrecognizable. The authenticity of one block depends on the details of all other blocks in the chain.

Types of Blockchain Technologies

Public Blockchain

The public blockchain technology is developed for general public use and is based on Proof of Work (PoW) consensus algorithms. With this blockchain configuration, any member of the public can download the necessary code and enable their local device as a node on the public blockchain network. This enables them to:

  • validate transactions,
  • participate in authentication census,
  • participate in design of the blockchain structure, and
  • access and read transactions though transparent and anonymous.

One of the main advantages of this configuration is the reduced need for special servers and system administrators, thereby reducing costs. However, the freedom of membership for public nodes can be a potential source of disruption to this type of blockchain model.

Private Blockchain Technology

Private blockchain configurations, as the name suggests, are exclusive to an organization and not available for general public use. They are characterized by:

  • write and read permissions which are exclusive to the organization,
  • better scalability, and
  • better compliance with government security and privacy regulations.

However, private blockchain configurations are as equally vulnerable to security breaches as centralized systems.

Consortium Blockchain

The consortium blockchain technology, also known as the federated blockchain, draws its characteristics from both the public and private blockchain technologies. Transactions are fast and the system is very scalable. Consortium blockchain is partly private in that it:

  • does not allow just any member of the public to be part of the consensus of authenticating transactions in the chain, and
  • assigns consensus for transaction authentication to a pre-selected group of nodes.

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