Hype or not, a majority of the large companies worldwide are looking into the benefits of blockchain technology. So what is a blockchain? Many different definitions are thrown around the internet these days and that’s where the confusion starts.
Blockchain technology is a key application of distributed ledger technology (also called DLT). Unfortunately some people use the terms blockchain and distributed ledger interchangeably. A distributed ledger is a special type of ledger in which transaction records are distributed and synchronised across a peer-to-peer network. A consensus algorithm is required to establish agreement among all the participants. Each participant in the network holds an identical copy of the ledger. Any changes or additions made to the ledger are reflected and copied to all participants. The security and accuracy of transactions are maintained by deploying cryptographic keys and signatures to control access and permissions in the shared ledger. This decentralized architecture eliminates the need of a central authority to keep control against fraud.
A blockchain is a special type of distributed ledger and is essentially similar to a shared database. A key characteristic of a blockchain is that the data of transactions is timestamped and bundled into a block. Every block is linked together with a previous block using a cryptographic hash. This makes the data of transactions immutable and indelible. The most defining characteristic of a blockchain is the chosen consensus algorithm. This mechanism determines how participants reach consensus about the state of the ledger. Examples of various algorithms are Proof of Work, Proof of Stake and Practical Byzantine Fault Tolerance.
There is no single model for blockchain systems; different flavors have different levels of centralization. A blockchain can be public or private. Public blockchains are built to be accessible by anyone. Private blockchains operate with known participants in a trusted environment. Another crucial distinction to be made is whether a blockchain application is permissioned or permissionless. In the case of a permissionless blockchain all parties are free to write data to the blockchain. With a permissioned blockchain, on the contrary, access to write is restricted.
It is extremely helpful to ask yourself in what category a blockchain operates. This can be public permissionless or permissioned on one the hand or private permissionless or permissioned on the other hand.
Reference material:
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/492972/gs-16-1-distributed-ledger-technology.pdf
https://www.theverge.com/2018/3/7/17091766/blockchain-bitcoin-ethereum-cryptocurrency-meaning
https://papers.ssrn.com/sol3/Papers.cfm?abstract_id=2940335