Blockchain for Dummies

By Aaron de Miranda Colaço

Blockchain. It’s so hard to understand it, and it’s so new. Our goal here is to provide a simple description, readable in 2 minutes, about what Blockchain is and what it does.

Aaron and I work at qiibee, and we help set-up loyalty on the blockchain solutions for businesses and services. But, first of all, what is Blockchain?

Blockchain 101

‘Whereas most technologies tend to automate workers on the periphery doing menial tasks, blockchains automate away the center. Instead of putting the taxi driver out of a job, blockchain puts Uber out of a job and lets the taxi drivers work with the customer directly’

Vitalik Buterin

 

A Blockchain is a network of computers that work in a decentralized manner and agree on the current true state of data in a transparent and predictable manner.

Interest in blockchain has grown significantly over the past five years as the technology has matured and large organizations, and even world governments, have started dabbling in it.

It moved along the Gartner Hype Cycle from `The Peak of Inflated Expectations` in 2016 to the `Trough of Disillusionment` in 2018, due to multiple failed projects, and scam ICOs – a way for projects and individuals to raise money in the open (crypto) markets.

We’re now at a point where companies are beginning to understand that blockchain isn’t a silver bullet and needs to be evaluated to determine how much benefit it can really add.

There are, at a very high level, two kinds of blockchains:

• Public blockchains like Ethereum and Bitcoin
• Private blockchains like Hyperledger Fabric and Corda

The Bitcoin public blockchain was the first digital currency to solve the double spend problem without the need for a central authority or server. A decade later it is still arguably the gold standard in decentralization and continues to inspire multiple other teams and projects.

Ethereum, the second-largest cryptocurrency by market cap after Bitcoin, was initially described in a white paper by Vitalik Buterin in 2013 who believed there was a need for a general purpose blockchain to build decentralized applications upon. In 2014 work on Ethereum officially began through a Swiss registered company. Ethereum describes itself as `a global, open-source platform for decentralized applications`. The code on the Ethereum is mostly written in a Turing complete language called Solidity. Ethereum has the largest developer community and a very low barrier to entry making it attractive to build and prototype projects on. While a majority of the projects on Ethereum revolve around the transfer of value and decentralized finance, it has also seen a lot innovation in the p2p messaging, and other domains. Some of the most popular projects like Status are open source.

Public blockchains have the following properties:

• Open – anonymous participation
• Censorship resistant
• Use native tokens to access and pay for services

The public blockchain space is evolving and maturing at an accelerated space but still hasn’t reached a point where large enterprises feel comfortable launching full-fledged projects on it.

This has opened the doors to private enterprise chains that provide guarantees around privacy, access control, and permissions that the public chains currently do not.

Enterprise chains are significantly harder, compared to Ethereum, to get started, due to the additional complexity and setup. However, having the ability to harness the benefits of a public blockchain without the concerns of privacy and scalability has been a huge advantage for enterprises and more than makes up for the additional complexity.

Private chains defer from their open counterparts by not allowing anonymous participants (all members of a private blockchain are known) and allowing for confidential contracts and transactions between parties.

The 3 main pillars of Blockchain overall are:

• Decentralization
• Transparency
• Immutability

Each chain achieves it in different ways based on its core principles.

The Ethereum and Bitcoin chains are totally open, while enterprise chains achieve these in a closed business context with known participants.

The main part of any blockchain system is its consensus layer. The most well-known is the Proof of Work (PoW) consensus that’s being used by the Ethereum and Bitcoin blockchains. It rewards nodes for solving a complex mathematical puzzle that consumes a lot of computational resources.

While PoW is secure, it is also inefficient in terms of the performance and the massive cost of electricity to run it. As a result, Ethereum is moving to the Proof of Stake (PoS) consensus, which rewards nodes proportionately to the number of coins the node stakes to mint a new block.

Most blockchains also have a `Smart Contract` layer that allows developers to write a code that executes on the blockchain in a deterministic manner. Smart contracts are used to encode core business rules needed to carry out an action on the blockchain.

The main benefits Blockchain provides to both individuals and businesses are:

• Transparency
• Audit Trail
• Provenance
• Deterministic outcomes

When to use Blockchain:

• Untrusted parties
• Multiple writers and stakeholders
• Need for single source of truth
• Avoid intermediaries
• Auditability

Aaron de Miranda Colaço (aaroncolaco.com) is the Head of Blockchain at qiibee and works closely with enterprises to help them use blockchain to solve their complex business needs.