Blockchain – All you need to know about it

How does Blockchain technology work?

Now that we understand what blockchain technology is and its main definitions and what it does, lets see how it works.

Cryptocurrency transactions are verified and added to the ledger through a process called mining.

Every transaction that you make goes through the same steps regardless of what it is used for.

Blockchain technology is a list of blocks that collects transactional information in groups and stores the transactional records in these data structures called blocks. Each block contains some hashed information.

If the same information is introduced in the input, it will always deliver the same hash in the output. If the data value is unchanged, then the hash values are the same. Even if a very small change in the input information is made then the whole output will change. After a small change, the output hash will widely differ and won’t even match the actual output by even a small amount. This effect is known as the avalanche effect.

In cryptography, the avalanche effect refers to a desirable property of the algorithm of cryptography, mainly block ciphers and cryptographic hash functions (CHF’s).

Bitcoin, the largest and the most priced cryptocurrency, uses the SHA-256 cryptographic hash function in its algorithm.

A few famous and common hashing algorithms are MD5, SHA-1, SHA-2, NTLM, LANMAN, SHA-256, SHA-384, and SHA-512. Refer to other articles for examples of cryptos

Are blockchain transactions reversible?

If you are wondering whether you can undo your transactions, the simple answer is no. It is impossible for blockchain transactions to be modified. Modifying is impossible even through hacking.

Every extra group of information (block) that is added strengthens the verification of the previous block and hence the entire blockchain. Before a transaction is added to the blockchain it must be authenticated and authorised. That is why the payments are verified and confirmed by an online community. Once the transaction’s information is recorded on the ledger, it is nearly impossible for it to be modified and can’t be changed by anyone. You can say that it is a one way transaction. This means that once you have done a transaction, that’s it, it is made and added to blockchain and can’t ever be changed or cancelled.

You should be extremely careful while making transactions. If you have accidentally sent a huge amount or any amounts to the wrong wallet address, then that’s it. The transaction cant be taken back. As crypto transactions are irreversible, they can neither be taken back nor cancelled once made.

The only thing that you could try is to ask the person who you have sent to, for a refund of the money that you have accidentally sent. There is only a small chance that you would get it back. If the person is very kind and wants to help other people, he might give you a refund.

Mining

In blockchain technology, mining is a process in which transaction details are added to the ledger. If you are thinking that mining is the extraction of very valuable minerals or other geological materials from the Earth, well, then you are half correct. It actually is related to the extraction of valuable materials but not from the earth or the soil. For instance, after a bitcoin transaction is made, it is the job of the miners to add it to the block. They are just like real life miners but they have to work on a digital platform.

Are you thinking that they mine voluntarily? Well, the answer is no, miners get a set amount as their reward.

When miners add a new block to bitcoin’s blockchain, they’re rewarded with enough bitcoins to make their time and energy worthwhile. For example :

When bitcoin was first introduced, mining one new block would earn you 50 BTC. Three years later, this was halved to 25 BTC. By 2016, this was halved again to 12.5 BTC. On May 11, 2020, the reward halved again to 6.25 BTC.

This means that the reward was decreased by 12.5% of the initial amount. As the value of bitcoin kept increasing, the reward kept decreasing.

This is the reward for crypto miners, but for the blockchains that do not use cryptos, it is completely different.

When it comes to blockchains that do not use cryptocurrency miners will be paid but not in a digital form like bitcoin.

Proof of work

Proof of Work, PoW, is a blockchain concord algorithm. Although the actual concept has been around for some time, it was only first implemented in Bitcoin. In Proof of Work, Miners (validators) hash the data they want to add until they produce a specific solution.

PoW is one of the consensus tools for attaining accord on the blockchain network. A consensus algorithm is a way to secure the ledger of the crypto. PoW is used to confirm transactions and add new blocks to the chain. With Proof of work, miners compete against each other to validate transactions and in the end, they get a set amount as a reward.

Types of blockchain networks

We need different types of blockchains as there are different needs for different people. For example, Bitcoin or Ethereum use public blockchain as they want all the users to view the blockchain or transact money all over the world.

If a new bank opens, it wouldn’t want all the people to access it or modify it. They wouldn’t even allow people to view it. In this case they would use a private blockchain which allows only authorised people to access it, view it or modify it. There are several ways to build a blockchain network. They are public, private, consortium / hybrid blockchains.

Public blockchain

Public blockchain is a kind of distributed ledger system which has absolutely no access restrictions. Anyone who has the capability can send transactions as well as be a participant and modify it or contribute to it. A few of the largest and most known public blockchains are Bitcoin, Ethereum and Litecoin.

Private blockchain

A private blockchain is not exactly like a public blockchain, it is exactly the opposite. It is permissioned and access to it is restricted. A person can only join this network if he has been allowed to by the owners. A few of the largest and most known public blockchains are mostly banks and companies like that.

Consortium blockchain / hybrid blockchain

A consortium blockchain is like a mix of private and public blockchains. In this blockchain, there are two types of users. This consortium blockchain is divided into two different types, where a few nodes are private, while the rest of the nodes are not private but public.

As a result, a person is the main user and has all the controls over the blockchain, while all the others are the ones who just access the blockchain but can’t control. This type of blockchain can be used when there is a need for both public and private blockchain features. Hence this type of blockchain is a hybrid between private and public blockchains where some aspects of the organizations are made public, while others remain private.

What are smart contracts in blockchain – are they good or bad?

Just by reading the word smart contract, we can’t assume that it is smart or is a contract. It actually has a very different meaning. To quicken up the transactions made, a set of rules are created and they are stored on the blockchain. These set of rules get executed automatically and don’t need anyone to imply them on blockchain. These set of rules that run by themselves when a transaction is made are called smart contracts. A smart contract can define conditions for corporate bond transfers, include terms for travel insurance to be paid and much more.

Smart contracts cannot be determined whether they are of good use or bad use. Although, it entirely depends on who uses it and what kinds of rules they imply. If a person creates a rule that helps in quickening the transactions, then we can say that smart contracts are put to good use. If a person creates a set of tracking rules and applies them on the blockchain, products can be automatically tracked through smart contracts from point to point, removing human intervention and error.

Though smart contracts are secure, they actually are a bit vulnerable. Hackers may try to hack them as they know that if they get control of it, they can imply a rule that benefits the hackers in a financial way. If a hacker who gains access creates a set of rules that transfer all the money to him, then we can say that it is put up to bad use.

Another thing is that there might also be a few chances of errors taking place while implementing the rules. We can’t give a 100% guarantee saying that no errors will take place for sure and you can apply any numbers of rules without even a single glitch. Nobody knows what glitch might happen. It may be working fine perfectly for a second and in the next second it may just totally screw up. Although no such things have happened, there are a few chances of it happening.

Normal payments vs blockchain payments

Blockchain transactions are very different from transactions that we do in our day to day life. For example :

Dash is a person who goes over to the store to purchase something. When he is looking to purchase something in the store, he just then remembers that there is no cash in his wallets. So he quickly goes over to the cash machine (ATM) to retrieve cash.

When you withdraw money from the ATM machine or when someone credits money to your card, the bank knows pretty much all your information. Information like where you are and how much you are spending. Thats because they are third party mediators who help us in the process of paying.

When you pay using cryptos, that’s where blockchain technology comes in and everything starts to change. This is because no one is aware of your personal information when you pay through this method. When somebody pays you or when you pay somebody, this money gets stored in your wallet that you have.

One thing is that you need to have a generated wallet address if someone wants to pay you. For example :

Wallet address – 9d9c993b17d8f8bf936248b45ba45fddb75ed8554a561da1a634c68a40c6d32a wants to pay 4 litecoins to this wallet address – y03fd525beac5098d575cde9e2ceb91845ae8731510a28e1902e289f32897fdf

Note : This is a sample wallet address, do not use it or you will lose your money.

All you need to do is to share your wallet address with them, and that’s it, you have received your crypto. Your cryptos are always available to you no matter what happens to the finance system as they aren’t tied to any single authority like a financial institute.

Pros and Cons

Now that we have what blockchain is and many more aspects of it, let’s have a look at the pros and cons of this fascinating piece of technology :

The making of blockchain leads us to a lot of advantages in a range of industries and services as blockchain provides extended security even in environments which are unreliable. However, its scattered nature also brings us a few disadvantages. For instance blockchain presents limited efficiency and requires increased storage capacity.

Pros

• Transactions are safe
• Smart contracts to speed up transactions
• Immutable (permanent) records
• Trusted
• Transparent

• Stored in a distributed network of nodes
• Stability

Cons

• Low number of transactions per second
• 51% attack
• Very hard to modify a block once it is created
• If they lose their private key, then their money is lost

Can blockchain be hacked?

Although it is very hard to hack blockchain, there are some ways in which it is possible. Blockchain technology has got the attention of a lot of people (including hackers). A lot of hackers have been looking to loot money from blockchain.

Modifying blockchain data or code is usually very hard and often requires a hard fork, where one chain is abandoned, and a new one is taken up.

Recently, the number of blockchain hackers and number of attackers have drastically increased as hackers have found that vulnerabilities do in fact exist and they would be able to find it out. In recent years, public data shows that hackers have stolen an amount of more than $2 billion in blockchain cryptocurrency. That’s a huge amount for looting.The ways how blockchain can be hacked are:

• By having control of more than 50% of the computing power.

When you have more than 50% of the computing power, this means that you have got access to blockchain. This also allows the hacker to rewrite transaction history and carry out double spends. Double spends can be explained as erasable transactions. It can allow the token to be used more than once. Transactions can be erased once the goods are received. This means that the tokens can be used again and more transactions can be made. This is called the 51% attack.

• Keyloggers (password stealers)

Keyloggers are like viruses that have the capability to note every single password or PIN that is entered in your device. It can then transfer all the data to the hackers or attackers. If this virus gets into your device, then that’s it. They have access to all your information.

If you are wondering how they would be able to get this virus onto your device, they actually have a lot of options. They can do this through sending some spam information to you. If you click this mail and do what it asks you to do believing that it’s a bank mail as it has a title like “Your bank card is going to expire”, then that’s it, they are successful and you lose.

They can also get this virus into your device by installing an infected software and running it. A recent study found several apps on Google Store were pretending to be Trezor, a popular crypto wallet. The installing software method is not as easy as the previous one as you need to install a software on that person’s device. This can be possible by making the person believe that’s it a software for some other purposes.

• Typosquatting

Typosquatting can be simply referred to as a fake URL. This type of hijacking mainly targets users who type incorrect URLs. If they know that a huge amount of people commonly go to a website called “aaaacknowledgementing.com” (just an example) then they will simply create a website called aaaaacknowledgementing.com (with an extra ‘a’) with the same features.

People who type the URL incorrectly and accidentally go into this website and don’t realise any changes, will just continue to use this website. They might not know that this is a spam data mining website. Then the hacker will receive all the passwords and PINs.

Thank you for reading, we hope you have enjoyed reading our article and understood the concepts. Understanding Blockchain will not only help you take your career prospects further, it will also strengthen your knowledge.

Disclaimer: Digital Wallets News does not recommend that any cryptocurrency should be bought, sold, or held by you. Do conduct your own due diligence and consult your financial advisor before making any investment decisions.