What is blockchain?
Author： Ken Poon
The blockchain technology originated in early 1990’s when research scientists Stuart Haber and W. Scott Stornetta introduced a computationally practical solution for time-stamping digital documents that couldn’t be altered[i]. However, this technology went unused until 2004, a computer scientist Hal Finney introduced a non-exchangeable or non-fungible Hashcash based proof of work token that could then be transferred from person to person, an early prototype of cryptocurrency.
In late 2008 an unidentified individual named Satoshi Nakamoto released a white paper introducing a decentralized peer-to-peer digital currency called Bitcoin, basing on the Hashcash proof of work (PoW) algorithm, with a decentralized peer-to-peer protocol for tracking and verifying the transactions. In January 2009, the first bitcoin block was mined and transacted.
In 2013, Vitalik Buterin, a programmer and a co-founder of the Bitcoin Magazine started the development of a new blockchain-based distributed computing platform, Ethereum, featuring a scripting functionality called smart contracts. The difference between Bitcoin and Ethereum is that the latter can record other assets such as loans or contracts, not just currency.
This is how blockchain works: when a transaction is initiated, it is bundled into a block. Every block contains different transactions which must each be independently verified. Once achieved, the transaction is marked valid and posted to the public.
Blockchain provided the answer to digital trust because it records important information in a public space and doesn’t allow anyone to remove it. It’s transparent, time-stamped and decentralized.
The application of blockchain can be categorized in four layers, namely distributed ledger, value transfer network, token incentive system, and asset digitization. A distributed ledger is a database that is consensually shared and synchronized across multiple nodes, essentially every computer in the network. Once the information is stored, it becomes immutable. Some jewellery retailers for example, Chow Tai Fook and De Beer had implemented a distributed ledger blockchain system to track the source of diamond[ii]. Value transfer network or value transfer ledger enables digital values (currencies in particular) to be transferrable and exchangeable without any physical boundaries and barriers, it has become the most popular blockchain application by far. The token incentive system digitalizes a reward mechanism through the use of blockchain, enabling an online token economy connecting all stakeholders in the ecosystem. The assets digitization is the futuristic vision of blockchain, where assets like shares, bonds, derivatives, luxury items, or even properties can be tokenized and their ownership could be easily exchanged through the digital certificate.
Blockchains can be divided into four categories: public chains, private chains, alliance chains, and side chains.
A public chain is a blockchain that anyone can participate in the process. Public blockchains are generally considered to be completely decentralized. Some characteristics of public blockchain include open source, low threshold of access, and user protection by developers.
A private chain is a blockchain whose write permissions are only in the hands of an organization. Access to private chain is restrictive, and may only open to the outside world to some extent. Many hyperledger projects are private chains. Characteristics of private chain include faster speed, good privacy and low transaction cost.
An alliance blockchain is in between public and private. The degree of openness and decentralization of the alliance chain is limited. The participants are screened out in advance or directly specified. The read permission of the database may be public or may be restricted to the participants of the system just like the write permission. Characteristics of alliance chain include relatively low transaction cost, easy connection by nodes, and flexibility.
A side chain, strictly speaking, it is not a blockchain itself, it can be understood as an extended protocol of the blockchain. The early "sidechain" is to solve the limitation of the Bitcoin blockchain technology. The side chain is a path that connects different blockchains to each other to achieve the expansion of the blockchain. Characteristics of side chain include independency and flexibility.