Basics of Blockchain

Karthik Margabandu
Jul 24, 2017 · 3 min read

Why Blockchain?

Use of Fiat currency poses several complications. Currently, the central banks are the authority or middleman when it comes to circulation of money. This kind of a central authority or a third party/middleman regulating transactions is a problem as they serve as a bottleneck in terms of scaling the speed of transactions. Further, they also charge a significant amount of money to process transactions (serve as clearinghouse). Off late with the progress in technology, this fee has reduced but still a nominal amount is charged for every transaction.

Apart from the fee and the speed of transactions, the central authority could be be a single point of failure as currently they are the only source of book keeping ensuring right accountability. This is dangerous as anything hampering their books would invariably cripple the economy and lead to a mayhem.

Think of a transaction where you are in United States trying send money to your grandmother in Kenya. Central Banks will have to serve as the clearing house for such a transaction and they take sufficient time to process this thereby making cross border transactions extremely inefficient.

Also, paper currencies are designed in such a way that once a transaction is made using a credit card, the transactions can be cancelled or pulled back — called chargebacks. Although the frequency of such chargebacks these days aren’t much, they still continue to be a problem in pockets effectively leading to double spending.

The crux of all these problems lie in the fact that a central authority was regulating the monetary system. Centralization of power is crippling. The solution to address this was to decentralize the power and ensure everyone participating in the market had equal power and thus was born the brainchild of Satoshi Nakamoto — the first Blockchain database and the origin of cryptocurrencies called Bitcoins.

What is Blockchain?

Blockchain is a decentralized distributed ledger that records all the transactions in a peer 2 peer money transfer network. The blockchain technology, when introduced, served a single purpose — digital book keeping or accounting. This is done in a way that the records cannot be tampered with and the records rather than being stored in one centralized location is stored with everyone who is part of this network.

To oversimplify blockchain, consider this analogous to an Excel document uploaded on Google Drive where people with permissions can access the document and make changes.

Blockchain however is a lot more than just an Excel document on a shared drive. Let’s deconstruct the definition to understand it better — “Blockchain is a decentralized distributed ledger”.

In accounting, it is important to store all the transactions to ensure the book is kept properly. Blockchain does just this but it ensures transparency as the ledger is available with anyone who is part of the network — open to all.

How can the complications posed by Fiat currency and Central Authority regulation be resolved?

The premise of Blockchain is that it is decentralized. This automatically ensures transparency and hence everybody part of the network has access to all the transactions that take place. This also ensures that there is no bottleneck or single source of failure as the ledger is distributed with everyone who is part of the network thereby ensuring seamless bookkeeping.

While the bookkeeping can be done for any currency, Fiat currency included, primary use of Blockchain technology has been used to record the transactions of cryptocurrencies — predominantly Bitcoin. You’ll often hear ‘Bitcoin Blockchain’ together, this just means that the Blockchain Technology is used to record Bitcoin transactions between people.

As the market is being made for Bitcoins; more and more vendors are starting to accept Bitcoins, Bitcoin Blockchain Technology ensures seamless transactions between people as the average transaction time is not more than 1 hour and the transaction fee is almost negligible.

Rather than a central authority verifying transactions, people in the network verify transactions which ensures that there can no double spending (will be explained in detail in the subsequent articles). Further, since the transactions are verified by nodes (people who are on the Blockchain network), it’s extremely difficult to call back a transaction as the people in the network are supposed to agree to this which eliminates chargebacks.

Increased visibility also ensures that there is very minimal fraudulent transactions and cryptography reinforces this.

Up Next — Details on how the transactions work.

Karthik Margabandu

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Strategic & Analytics Consultant | Driving Differentiated Thinking Models| Customer Value | Traveling | Foodie | Altruism

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