ViaWallet Academy | The Features of Blockchain: How Blockchain Reshapes the Worl

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As we all know, a blockchain network is a distributed shared ledger and database that features decentralization, immutability, traceability, collective maintenance, openness, and transparency.

“Decentralization, immutability, traceability, collective maintenance, openness, and transparency” are apparently the features of blockchain. That said, why does blockchain choose to have these features, and how are they realized?

During our first article Introduction: The What, Why, and How of Blockchain, we explained that the technical structure of a blockchain system consists of six layers: the data layer, network layer, consensus layer, incentive layer, contract layer, and application layer. Of the six layers, the data layer and the network layer are the building blocks of a blockchain system, and most blockchain features are based on these two layers.



You would know that the concept of blockchain was first set out in a paper titled Bitcoin: A Peer-to-Peer Electronic Cash System published by Satoshi Nakamoto. Therefore, when exploring the answer to “why does blockchain have certain features”, we must first answer another question: what did Satoshi Nakamoto think when he created Bitcoin?

To understand the views of Satoshi Nakamoto, we need to first introduce the background. The Bitcoin whitepaper was released at the end of 2008, and the biggest global event that year was the subprime mortgage crisis in the US.

At the turn of the century, George W. Bush was elected President of the United States. During his first year in office, the dot-com bubble burst, and a large swath of Internet companies went under. In his second year, the country was hit by what might be the worst terrorist attack in its history: the 911 attack. Battered by the two tragedies, the US economy was in precarious shape and plummeted.

To save the economy, the Bush administration and the Fed introduced loose fiscal and monetary policies featuring “tax cut and interest rate reduction”. In other words, they tried to stimulate the economy via excessive money printing. However, at the time, there were no emerging industries in the US. Therefore, even though the government was printing more money, the funds could not be channeled into the economic system. So, what’s the solution?

Those of you who are familiar with economics might have already guessed it: channel the money into real estate. Since the US real estate market was almost saturated at the time, banks introduced subprime mortgages to stimulate the market.

What are subprime mortgages? Simply put, they are loans provided for individuals with poor credit status and weak repayment ability. For example, when applying for a housing mortgage, Smith provided the bank with such materials as credit reports, proof of employment, and bank statements to prove his ability to repay. Upon careful assessment, the bank decided to approve his application. Such mortgages are called prime mortgages. Adam also wants to apply for a housing mortgage, but he is unemployed. Despite that, the bank lent him money without any assessment or with loose reviews. Such loans are referred to as subprime mortgages.

It is common sense that subprime mortgages are likely to lead to a high default rate, and banks should not approve such loans. So, why did banks in the US offer subprime mortgages anyway? The idea is simple. The borrower’s property was mortgaged to the bank, and if the loan cannot be repaid, the bank will simply sell the property to cover the debt. As such, banks either profit from interests or properties.

This logic looks fine, but it should be noted that housing prices can go down, and if the real estate bubble bursts, seizing cheap properties would be pointless. Bankers in the US were fully aware of such risks. However, tempted by the huge profits, they decided to offer subprime mortgages despite the significant risks.

As if the risk of subprime mortgages was not enough, US banks also rolled out more derivatives. To recover the money they lent as quickly as possible, banks, insurance companies, and rating agencies packaged these subprime mortgages into premium financial products, and investors could receive the interests paid by borrowers to banks once they bought such products.

Anyone with a basic understanding of finance knows that bank loans snowball, and the money lent always goes back to banks in a different form. Meanwhile, banks can offer more loans as long as they maintain a certain ratio of bank reserve. Under this mode, US subprime mortgages snowballed.

US inflation soared at the end of 2006. To tighten the monetary supply, the Fed hiked interest rates 17 times in a row, raising the figure from 1% to 6.7%. Facing surging interest rates, a growing number of poor borrowers were unable to pay their mortgages, resulting in massive bad debts. As such, they started selling properties at low prices to pay off their loans, and plenty of second-hand properties entered the market. Affected by the oversupply, property prices fell in the short term. Increasingly, properties were worth less than mortgages. As such, the falling housing prices and growing bad debt ratio gave rise to a vicious circle. Subprime mortgages that were sold as “premium financial products” had all become traps. Though some of them were insured, insurance companies were also in a tough position. As such, financial institutions could not receive the compensation and went bust.

At this point, almost the whole financial system was hit, and the subprime mortgage crisis broke out.

Looking back at the subprime mortgage crisis, the government, the Fed, and banks all had to share the blame, but unlike ordinary people who solely focused on the mistaken decision-making of these institutions, Satoshi Nakamoto pointed to the centralized system behind them.

Decentralization is the most vital feature of blockchain technology. It is the ultimate goal of Satoshi Nakamoto. Since blockchain was born, decentralization has always been regarded as the golden rule by all blockchain users.

In reality, “centralization” is everywhere. To provide services, institutions like banks, securities, schools, and hospitals first need to bring together all users who demand services.

There is no doubt that centralized services are convenient, but centralization is also subject to some fatal problems, such as power imbalance and the lack of information transparency.

In our everyday life, promotional campaigns often feature one sentence: “XX reserves the right of final interpretation of the event”, and users have to suck up to it if they wish to participate in the campaign. Sometimes, centralized entities don’t seem so strong, but they use all kinds of dirty tricks. For instance, during the subprime mortgage crisis, bankers, who operated centralized entities, were not stupid and knew everything about the significant risks involved in subprime mortgages. Despite that, banks could still package subprime mortgages as “premium assets” and sell them to retail investors. Meanwhile, rating agencies, who collaborated with banks, gave these assets triple-A ratings nonetheless.

Decentralization is the only solution that could prevent the reoccurrence of such problems.

Blockchain primarily relies on the network layer to achieve decentralization. Blockchain systems adopt P2P (peer-to-peer) networks and abandon the model of centralized servers used by traditional databases, thereby building a network where everyone can send, receive, and store information.

Concerning the recording of data, by creating the consensus layer and the incentive layer, blockchain systems allow all nodes to maintain the network and bear witness to the data. As such, all data and information are recorded truthfully, and the data ledger remains unique.

As for data storage, each node in the blockchain network maintains a complete copy of the data, which means that the normal operation of the entire network would not be affected even if some nodes are attacked or mistaken. All participants can view historical data and trace each transaction. Moreover, everyone may compete for the right to update blocks on a level playing field.

Blockchain allows all participants to view historical data and trace each transaction. How is that achieved?

In Introduction: The What, Why, and How of Blockchain, we mentioned that the data layer is at the bottom of blockchain systems. While a traditional database stores all data in centralized servers, a blockchain network uses a blockchain structure.

In a so-called blockchain structure, data recorded within a certain period is packaged into a block, and blocks are then strung together in a chronological order. When recording data, a blockchain system first uses certain cryptographic methods to encrypt the content and then have it recorded into blocks. On a blockchain, each block contains the content of the previous block.

In this way, blockchain data become interlinked, and each piece of data can be traced back to its origin through the “blockchain data structure”, which makes blockchains traceable.

Traceability is a major feature of blockchain that promotes the application of blockchain technology in fields like supply chain management. With blockchain, users can view all the information about a product in every stage, covering production, processing, transportation, and sales, which effectively keeps counterfeit and shoddy products away from the market.

Since blockchain is essentially a database, ensuring the authenticity of data is a major issue.

That said, how does blockchain ensure the immutability of historical data?

In the Traceability section, we illustrated the blockchain data structure. In fact, this structure also enables the immutability of historical data.

When recording data using the blockchain structure, the blockchain requires the recorder to add the encrypted information of the previous block into the new block. Once the recording process is completed, a piece of encrypted information will be generated, which will be added to the next block. We will go into the specific implementation of this mechanism in a future article.

With this approach, a new block will always contain the content of the previous block, and if someone plans to tamper with part of the historical data, he would have to modify all the subsequent information, which is extremely difficult and expensive.

Decentralization, traceability, and immutability are the three most important features of blockchain, and once a blockchain achieves all the three, it would also feature other characteristics. For example, decentralization also enables collective network maintenance, and traceability also means that blockchain data will be open and transparent. Relying on these features, blockchain has the potential to reshape the world.