Article by: Lillian Kazmierczak - Finance Writer for Toarc United
According to a recent UK banking poll, 59% of the consumers claimed they had not heard of blockchain technology, with 80% admitting that they don't understand cryptocurrency. The poll was of 12,000 global consumers from the UK, Canada, China, France, Germany, Hong Kong, India, Mexico, the UAE, the US, and Singapore.
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I am not surprised by these findings; I am concerned that so few people have taken the time to become better acquainted with the technology that is changing how we do things on the internet every day. In this article, I will demystify the layers of blockchain and make them a bit more user-friendly!
A Brief Overview
Blockchain technology is a method of recording information that makes it impossible to change, cheat the system, or hack. It is a transaction done peer-to-peer or you to me, which makes it efficient and cost-effective because it eliminates the middleman, and it is transparent because all the information of the transaction is traceable and verified. It will help to envision blockchain as a train; each boxcar is a block of the information held together by the chain (coupling to each car). Later I will explain how this train rides through the process and the blocks (boxcars) are added.
Bitcoin is the first cryptocurrency to use blockchain technology successfully. It’s basis is a peer-to-peer technology, game theory, and cryptography.
Banking and the financial industries are currently the most significant users of blockchain technology. They have already seen considerable savings in its use, along with an increase in transaction privacy and safety.
Bitcoin and blockchain technology have been around for almost a decade and have already seen plenty of change. Because of its ever-changing nature (primarily due to new and more advanced technologies), the blockchain that originated is much different than the blockchain today and will be different than the blockchain in a decade.
The Three Properties of Blockchain
Blockchain maintains three properties: decentralization, consistency, and scalability.
Blockchain exists outside of government agencies and central authorities. The wealth is distributed over multiple users in cryptocurrency. It becomes decentralized when the thousands of computers locally or globally work in tandem to mine the cryptocurrency.
Decentralization in blockchain eliminates human error (through poor calculations). In addition, the user has control over their assets (eliminating third parties), with blockchain making it more complicated and more expensive to hack, deterring most hackers.
Blockchain uses algorithms; because of the algorithms, multiple terms used throughout this article are mathematical terms. The puzzles to be solved in mining cryptocurrency are mathematical puzzles. The algorithms themselves are often deterrents to hackers! Every block on the chain (boxcar) is seen, making it transparent. Since each blockchain user uses the technology to suit their needs, it becomes harder for hackers to break.
Blockchain uses nodes or individual servers connected as a network to exchange information and record the transactions continually. This keeps the data consistent and verifiable throughout the node network.
Each node in the network has an IP address and a copy of the digital ledger (DLT), but not all nodes have the same function. A transaction must be validated by a majority of nodes before being added, making each transaction transparent, secure, and free from hacking.
As the number of resources on each network increases, so does the available data, its capabilities, and how it performs should increase as well—the power to compute increases as the number of nodes in the network increase (imagine the ocean splashing the shoreline and pulling in the sand (nodes) as the current gets stronger. The increase in computing power helps the blockchain system to accommodate the increase in users, smart contracts, queries, and all transactions.
Currently, cryptocurrency can only achieve two of these three properties in a transaction, though the goal is to create the ability to ensure the use of all three. When discussing scalability, it would be remiss if we didn’t discuss the Blockchain Trilemma.
The Blockchain Trilemma
The blockchain trilemma states you can only have two out of three scalability aspects that allow blockchain to remain transparent, secure, and inexpensive (referring to the fee it takes to complete a transaction.)
Scalability has the most issues because the nodes validate the transactions and put them through, but they can only support a certain number of transactions. For example, say it takes 300 nodes to confirm 70,000 transactions; what happens if there are 200,000 users during that time? Right now, there is no specific ratio set for this dilemma, so you can see how scalability could be an issue.
Remember the nodes or our miners in cryptocurrency? All nodes are equally important; they keep the blockchain decentralized and distribute control equally. However, sometimes a project, say Lillcoin wants to scale or increase the amount of throughput of transactions per second. This will give Lillcoin a privilege over someone else not being equal anymore Lillcoin has compromised the scalability.
Security is the pride of blockchain technology, but…decentralized technology is open-sourced. While most blockchain developers have a concept to make their blockchain 51% less likely to be hacked, this open-source allows hackers to read the code and try to hack it. Keep in mind this is very rare, but it can happen.
If you think of the trilemma as a triangle full of water, your job as a node is to keep that water in the triangle no matter what goes on. The water can escape no matter what side of the triangle is compromised; this is the blockchain trilemma!
As blockchain continues to emerge, it breaks down into three generations: Blockchain 1.0 (cryptocurrency), Decentralized Apps (DApps) 2.0, and Widespread Apps 3.0.
Blockchain 1.0 – Cryptocurrency
Blockchain uses a decentralized ledger (DLT) which stores the transactions as digital
assets between the digital wallets of the clients (the entire process is virtual) using governance and consensus algorithms. This process used by the network members determines how transactions get recorded onto the blockchain and hard-coded into the system.
Decentralized Apps (DApps) - Blockchain 2.0
Blockchain 2.0 is the smart contract (sometimes referred to as the modeling layer) used by the digital ledgers to support decentralized apps (DApps). DApps are used to buy and sell event tickets, timestamping it, record it and identify the user (if you buy Bitcoin, the DApps can tell you have bought 100 Bitcoin on 12-1-21 at 3:10 am.)
Widespread Apps – Blockchain 3.0
Widespread apps are decentralized ledgers designed for a specific industry or public sector. For example, Healthcare has its own blockchain apps, as does the local government and international trading.
Think of blockchain generators as children; the older it gets, the more evolved it becomes. Bitcoin is blockchain 1.0 (first child), Etherium is blockchain 2.0 (second child). You can see the progression as they add onto the generations.
The Layers of Blockchain
As you have seen, blockchain is very complex. So let’s break down the layers and see how each one works alone and with the others to maintain the integrity of the blockchain.
The Application Layer
The application layer is all about developing and finding solutions for blockchain across all the applications and industries. As I am explaining the application layer, I need to delve into protocols in blockchain because they clear the way for information sharing and rule the processes of the security system, the participating nodes, and their interactions and transactions in the validation process. Protocols are the rules you play by in the computing world that decide how information gets stored in the blockchain.
The application layer hides the lackluster details of the blockchain, but it allows the nodes to interact and create the blockchain without showing all the details of how it is done. Think of it as HTTPS; you know there is a lot of code behind it, but all you can see is the internet site you connected to, not all the details that make it work.
This layer is also called Layer 3 Protocols. These protocols let the applications run a blockchain plus the actual application. (imagine a highway, the concrete of the highway is the actual application, the highway is the application the blockchain runs on.)
This application layer consists of a code chain, DApps, smart contracts, and an upper interface. These are broken down into sublayers: applications and executions.
The Application Sublayer
This sublayer has all the applications you and I use for goods and services. It consists of scripts or step-by-step instructions that get carried out by nodes. API’s in an application program interface letting your computer talk to another node or my computer. Our computers use user interfaces to interact with a computer, such as a mouse or software, and the framework, the supporting structure.
The blockchain network is the back-end system or the side of the website you never see, but the hosting part of the blockchain gives access to the app or website while using the APIs to do this.
The Execution Sublayer
The execution layer is chain code, smart contracts, and the underlying rules. The smart contracts have a specific address and code with business logic (smart contracts with Etherium use Solidity.)
Oracles or solutions for a computational problem and DApps are the web applications that link and interact with the smart contract and code chain. Smart contracts placed in the code chains can be different for different industries. For example, they may be patient information, pharmacy transactions, or outpatient billing in Healthcare. Although they may be insurance forms and claims in the insurance industry, the code chain is specific to the user.
Code chain runs on network nodes, smart contracts run on the organization’s peer nodes. The application sends instructions to the execution layer, which executes the transaction.
The Consensus Layer
This layer has all the core components needed to sustain the blockchain, the consensus protocols, and the associated subsystems. The consensus layer (protocol) is essential to any blockchain. Here, blocks are validated then placed for the nodes to agree on everything. In the consensus protocols, all the transaction rules are reinforced, ensuring they are followed to the letter. This layer rules the blockchain protocols; there would be no organization, security, and transparency without it. Users such as cryptocurrency have their own consensus methods.
The Network Layer
This layer is also called the Peer-to-Peer (P2P) layer; it takes transactions, care of discovery (the recognition and articulation of blockchain opportunities), and block propagation or getting a specific block of the chain started.
This layer ensures every node in the network gets the information needed to get the job done. In this layer, there are two sets of nodes: full nodes that validate and verify transactions, mining and enforcing consensus rules, and light nodes responsible for keeping the header of the blockchain and sending transactions. In addition, they are responsible for upholding the network trust.
The Data Layer
The data layer (data structure) of blockchain is represented by link-listed blocks (connected by blocks), and transactions get ordered. This structure has two components: link lists and pointers.
Pointers are variables that tell us where other variables can be located. The link list is a list of chained blocks; each block has a pointer and data from the previous block, creating the blockchain.
A Merkle tree provides integrity, irrefutable proof, and security for the blockchain. A data structure (picture a tree) made up of hashes (leaves of the Merkle tree )holding the information from the previous block, the block version number, the current difficulty of the target, or how difficult it is to mine (if it is cryptocurrency), nonce (number only used once) is the number given to the encrypted block and timestamped.
Cryptography, consensus algorithms, and the Merkle trees are the basis of blockchain. The first block on the chain is called the genesis block and has no pointer because it is the first. Maintaining the security and integrity of the block, transactions are digitally signed on the blockchain. Signatures are done with a private key; only key holders can open a transaction. Then, the user is verified, the block is checked to ensure it has not been compromised and that the data is also signed. If it has been tampered with, the signature is no longer valid. This maintains the security of all blockchain transactions.
The Infrastructure Layer
The infrastructure layer is the architecture of the blockchain. Within this infrastructure is the hyperledger framework of fabric. This Hyperledger fabric supports private-permission organizations or multiple organizations and private-permissionless use cases. Businesses in the same industry can set up networks in this layer and own the peer (nodes). As long as the organization from this business network with one node remains on the blockchain, this network will stay alive.
There are more complex things that happen between administrators that I am not addressing; if you want to delve in deeper, use the link at the beginning of the paragraph above.
The Hardware Layer