What’s the Blockchain? | A Beginners’ Guide

13 min readMar 31, 2021

How can we effectively protect our data? Blockchain provides an exciting technology for more transparency as well as security….

Blockchain connecting the world (Graphic: Adobe Stock)

Do you trust your bank, your government, or companies like Facebook? All three have sensitive data about us stored on their servers. The fact that this data can be manipulated, both by third parties and by ourselves, is demonstrated to us time and again. The most recent example, which is shaking the German stock market, is the formerly celebrated DAX payment service provider Wirecard. This company was missing 1.9 billion euros from its 2020 balance sheet. As a result, the company’s share price plummeted, it became the first DAX company in history to file for insolvency, and everyone who had invested money in the company was left empty-handed.

But how could something like this be prevented in the future?

In this guide, we take a look at blockchain. What it is, what makes it so disruptive, who and where is working on its development, and what its future might look like.

“The blockchain will do to the financial system what the internet did to media”
- Harvard Business Review

The blockchain aims to create transparency and security! With its help, users no longer have to trust each other because no one can cheat the system. It is important to understand that Blockchain is only a certain type of Distributed Ledger Technology (DLT). In a DLT, data is shared and synchronized over a widely distributed network. Thus, decentralization takes place. Instead of a single source of data, each user on the network has a copy.

In contrast to other types of DLT, a blockchain, as the name suggests, stores data and transactions on blocks that are then linked together in a chain. An identical copy of this chain is then stored at all network participants. Any change to the data is thus noticed and excluded.

Cryptocurrencies such as Bitcoin or Ether were created on the basis of this technology. After their emergence, these currencies have fueled an irrational hype around the use of blockchain and transformed it into a real buzzword. As with other young technologies, their developers still face technical challenges. Now that the euphoria of speculators and “gold diggers” has subsided, more and more governments and companies are recognizing the potential and focusing on building their own blockchain-based applications. The potential is enormous.

Summary: What makes blockchain so disruptive?

First of all, the Blockchain is a specific type of database.
The data in the blockchain is immutable and transparently documented through chaining.
Because of the decentralized data storage, hacker attacks are only possible on the entire network and are therefore almost impossible, since no one has that much computing power these days.
Transfers can take place in almost real time.
Each value can be assigned to a participant. Through cryptography (encryption), the values in the blockchain are stored transparently, but also confidentially and anonymously.
Intermediaries such as banks, notaries or states are no longer required for transactions. Business processes can be automated and thus implemented more quickly and cost-effectively.
The resulting advantages and opportunities for many possible applications are enormous!

WTF is the blockchain?

Trust is one of the most important resources of the 21st century. Every day we trust banks to hold our money, our government to represent our interests, and companies not to misuse the data stored about us. But how can we be sure that our data is not being manipulated? Blockchain offers one tool. Its main uses are

Digital currencies
Data access/sharing
Data reconciliation
Identity protection
Payments.

Problems with centralized data

Most information today is centrally organized. Our account information, as well as identity data collected by the government and its agencies, is stored on servers of individual companies/entities. It is not transparent for us what is stored about us as well as what happens with our data.

On the other hand, centralized data storage is prone to errors and easy to manipulate and attack. In October 2013, it became known that Adobe had 154 million customer records, including login and credit card data, stolen. In May 2014, it hit Ebay when the group admitted that hackers had full access to 145 million customer records for 229 days. In June 2020, the financial world was rocked by Wirecard when it failed to report 1.9 billion euros in its balance sheet. The number of cases in which private data records were (inadvertently) altered by company employees is unlikely to have become transparent to the public in the process for the most part.

One scenario that could pose a further threat in the future is identity theft. Back in 1995, the movie “The Net” with Sandra Bullock was released. Her life is turned upside down when she returns from vacation and her digital identity has been altered. Suddenly she is — according to her digital data — a wanted criminal. That’s an extreme example, but can you understand what happens to your own data?

How the blockchain gets around these problems

These examples show us that our centralized data structure is error-prone and vulnerable to attack. This is where blockchain now comes into play. The security of the blockchain can be explained as follows: When the data in a previous block of the blockchain changes, its unique hash changes. But since each hash has integrated the hash of its previous block, the two blocks would no longer match. To prevent unraveling of the chains, recomputation of all previous hashes would have to occur across the network. This requires an enormous amount of computing power, which is impossible with current hardware. This immutability of data is revolutionary, because coupled with transparency and other future technology such as machine learning, it opens up a whole new range of applications!

One possible application of blockchain is smart contracts. Smart Contracts are self-executing contracts that are programmed on the Blockchain. By enabling transactions and agreements by anonymous parties without central organizations, they are both more transparent, cost-effective, and efficient compared to traditional contracts. Their operation is based on if-then rules. Once the conditions specified in the code are met, an action is automatically executed. At the same time, the network is informed about it to ensure the security typical of blockchain. However, it is important to remember that smart contracts, like blockchain, are still in their early stages and are immature. Errors in the program code allow manipulation from the outside.

Real-world examples of blockchain use:

According to Forbes’ 2020 Blockchain 50 list, the financial market, technology and automotive sectors are among the leading blockchain integration sectors. Deloitte also lists the energy as well as healthcare sectors as beneficiaries of blockchain in its 2020 Global Blockchain Survey.

Bank

Blockchain is made for transactions. The banking sector, for one, expects blockchain to save on intermediary costs. According to a 2017 PWC study, blockchain is expected to reduce infrastructure costs in the banking sector by between US$15 billion and US$20 billion per year in 2022. Second, it is expected to reduce the cost of cross-border transactions. To avoid being disrupted, many banks are experimenting with blockchain applications and smart contracts. Their survival will depend on how well they can digitize their business as well as transition to new technologies like blockchain.

Technology

For technology companies as well as government organizations, blockchain offers entirely new opportunities for transparency, in addition to security aspects. (Customer) data that is managed in a decentralized manner is less vulnerable. Looking at global trade, Blockchain could support and make more efficient the traceability of goods & services as well as settlement of contract details.

Transportation

Our vehicles are continuously collecting more data. Tesla alone was able to access 10 billion miles (16 billion kilometers) of historical data in November 2018. An example of how this data could be used in the future is shown in a paper by the Frankfurt School’s Blockchain Center. Our vehicles can become a (financially) autonomous entity with enough artificial intelligence. In the process, lack of trust can be replaced by blockchain technology. “The autonomous car is able to perform transactions and maintain itself. This reduces the need for accounting and payment processes and opens up new possibilities for car ownership. It can participate in car sharing, negotiate rates and generate revenue. Blockchain technology enables the car to act as an autonomous and financial entity. Companies or individuals can become investors and shareholders through a smart contract or DAO. The owned car is an open ecosystem that anyone can participate in.” The immutability of data can also support Smart Insurances, which read vehicle data and activate it in the event of an insurance claim.

For more real-world examples, from using blockchain in the education system to elections, CBInsights lists HERE.

“Faith in Blockchain has fallen victim to ‘the massive hype and irrational exuberance in the past, driven largely over a Bitcoinbuying frenzy.’”
- Deloitte Blockchain Trends 2020

The question of whether blockchain is just a passing fad no longer arises once the hype ends. Instead, the focus is shifting to the question of how it can be integrated into everyday life. In this context, it is not so much technical problems as interpersonal blockades that will slow down the development of the blockchain. One of the key challenges will be to bring competitors together and work on joint solutions.

Cryptography, Keys and Blocks: How the blockchain works

A distributed network, digital encrypted transactions and a ledger — that’s all it takes for the blockchain? Not quite…

Governments and companies alike collect data about us. But what happens to it? Blockchain offers a technology to protect our data and create transparency.

So how can transparency and security be combined? Blockchain solves this by combining three components: A distributed network, digital transactions, and a stored ledger.

Decentralization in the form of the distributed network is at the core of the blockchain. The larger this network, the more secure the data, because each computer in the network, also called a “node,” has a synchronized copy of the blockchain — called the ledger. For example, in 2019, the Bitcoin network consisted of about 60,000 computers.
Digital transactions in the blockchain are obfuscated from other users using cryptography (encryption). This is done by means of asymmetric keys, the so-called public key and the private key. The latter is the access to the digital wallet and is used to sign the transaction. If the private key falls into the wrong hands, anyone can access the personal data. The public key, on the other hand, can be seen by everyone in the network. After the transaction, it is used to verify the actions of the private key. Only the owner of the private key can create an update on the blockchain.
The completed transaction is now stored in the ledger and then distributed on the network.

Step by step: transactions on the blockchain.

We now know the three main elements of the Blockchain.
But how do transactions on the blockchain work in detail?

Step #1: Transactions are logged and summarized.

Every transaction between two parties is logged and stored under a unique hash (for example, #DFCD 24D9 AEFE 93B9). Multiple transactions are combined into a single hash via the so-called Merkle Tree. This is the basis for the new block in the blockchain. The hash of the merged transactions is finally combined with a timestamp and the hash of the previous block. Finally, a so-called nonce (a one-time code) is appended. This makes the new block uniquely identifiable.

Step #2: The block is distributed to the network and validated.

Since in blockchains the members are anonymous, there is no way to know if they are trustworthy. The computers present in the network check each new block and validate it. The tests to validate a block are called consensus models. There are different models with different strengths and weaknesses:

“Proof of work”: to add a new block to the chain, a difficult puzzle must be solved. This process is called “mining” and consumes a lot of computing power. In 2020, mining generated about 10% of the world’s energy consumption. The miners who solve the puzzle first, thus confirming the new block, receive a reward (e.g. tokens or bitcoins). This model is used by many cryptocurrencies, including Bitcoin (uses the SHA256 algorithm) and Ethereum (Etash).
“Proof of stake”: the validator is chosen randomly, but weighted by the number of tokens. The more tokens one has, the higher the probability of being selected. A pre-determined transaction fee is paid for the validation. In contrast to the proof of work model, less energy is consumed here. However, the focus is on those who hold a high number of tokens.
Step #3: The block is attached to the existing chain.
Once the new block is validated by the miners, it is appended to the existing chain using its unique hash. Since its hash includes that of the previous block, its positioning is clear and makes it difficult to tamper with.

Step #4: The chain is shared with the network.

The transaction is completed by updating the chain with all network computers.

That’s it! That was a quick run-through of how the blockchain works. Since the technology is still very young, it is constantly evolving. Especially in combination with applications like smart contracts, we will undoubtedly see further technological changes in the coming years. But already today, companies like Amazon or Walmart are using the Blockchain in small everyday applications and experimenting with more products. We can be excited.

Estonia, Baidu and IBM: Top blockchain users 2020

Amazon, Baidu, Facebook and Tencent — the biggest companies of our time have recognized the potential of the blockchain and are working on it.

As the crypto-currency & blockchain hype subsides, companies and governments are increasingly focusing on building sustainable value creation models. There is still a lot of experimentation and research on the technology. Nevertheless, the blockchain is already being used experimentally by the banking sector up to the end consumer.

Together we will take a look at the hotspots and the pioneers of the scene.

Leading countries in the development of blockchain

Governments have shown great interest in the blockchain. Their advantages, such as the strong security provided by unalterable data, high transparency and the elimination of intermediaries, have been recognized. Now it is much more a question of its concrete application.

Switzerland: In early 2020, Switzerland was home to more than 600 blockchain companies, including Monetas, Ethereum and Xapo. In 2017, 21 percent of global blockchain investments flowed into Switzerland alone. The majority of the world’s leading blockchain companies are based in Zug (the “CryptoValley”). The city, idyllically located on Lake Zug, has created a blockchain-friendly ecosystem with political openness, leading infrastructure and attractive tax rates. Apparently with success. The value of the 50 most important blockchain startups in CryptoValley was over 44 billion dollars.

China: The government in Beijing has called on companies to become world leaders in blockchain. The country owns the majority of Bitcoin mines. The central bank is working on its own crypto-currency, the supervisory authorities are cracking down on private coins and have banned virtual IPOs (ICOs). The government is trying to control the technology behind the blockchain and put it at the service of the state. China’s Internet authority has published regulations on blockchains, according to which the nodes (network participants) real names and contact data must be recorded. This centralized control is likely to challenge the basic idea of a transparent but also anonymous blockchain.

USA: Over 40 percent of all blockchain companies are located in the USA. The big tech companies around GAFA (Google, Apple, Facebook, Amazon) are researching possible applications. The first are providing the market with platforms to combine cloud computing with the advantages of the blockchain. The interest is there. However, the use in the mass market is still far from being commonplace.

Japan: Considered to be Bitcoin’s home country. In the fourth quarter of 2017, around 40 percent of Bitcoin trading was conducted in yen. The country is considered a pioneer in blockchain and crypto-currencies, but became more conservative in its efforts after the country’s leading exchange platform was hacked in 2018.

United Arab Empirates (Dubai): The government has set itself the ambitious goal of including all government-related data and documents in the blockchain by 2021, thus creating a blockchain-based government. This is one of the reasons why Dubai is one of the favorites for blockchain startups.

Malta: This small island in the Mediterranean Sea is considered one of the most blockchain-friendly countries in the world. Its government has set the legal framework for the technology in 2018. Since then, it has licensed crypto currencies and set up the first blockchain-based government agency.

Estonia: In 2007, Estonia’s state institutions were under cyber attack for weeks. This vulnerability served as a wake-up call for the government to digitize and secure services using radically new technologies like the blockchain. Advanced encryption technology is being used for this purpose. 99 percent of all public services are now available to Estonians as electronic data.

Great Britain: The British have the second highest number of blockchain startups in the world. The British government aims to implement the blockchain in the voting and healthcare systems.

Pioneers of the scene

Startups as well as long-established companies worldwide are looking for possibilities to integrate the blockchain into their business. Some do this in order to help shape the future. Others, however, are aware of the disruptive danger of technology and try to keep their business model successful.

Amazon (Seattle, USA)

Blockchain: Hyperledger Fabric
https://aws.amazon.com/de/blockchain/

As an extension of its cloud computing solution AWS, Amazon offers an exciting tool in the form of Managed Blockchain. The world’s largest food company Nestlé uses it to build a hyperledger fabric based blockchain together with its Australian coffee manufacturer Chain of Origin. Thanks to this, customers can track every step of their coffee in the procurement and production process.

Algorand (Boston, USA)

Blockchain: Algorand 2.0
https://www.algorand.com/

The Boston-based financial blockchain company Algorand offers a next-generation platform. It relies entirely on a proof-of-stake consensus protocol. In addition, the Algorand node repository is open source. With Algorand 2.0, the company expanded its range of products to include decentralized applications (dapps) that enable smart contracts.

Cool Stuff

Fancy building your own blockchain in a few minutes? Handelsblatt has built a cool interactive feature about it: https://tool.handelsblatt.com/specials/blockchain/.

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