Demystifying Blockchain
Blockchain is being touted as the next big thing after internet because of its tremendous potential to transform the digital economy as we know it today. Here’s the how and why of it!
When Satoshi Nakamoto introduced the concept of Bitcoin in his white paper “Bitcoin: A Peer-to-Peer Electronic Cash System” in 2008, little did anyone know that it would usher an era of a technological revolution. It is not the Bitcoin itself, but its underlying technology, blockchain, which is at the center of this revolution.
Bitcoin and cryptocurrency is just one of the numerous applications of blockchain technology which are being developed. Blockchain has found an early adopter in the financial services industry which is aggressively experimenting with it in applications like trade finance, international payments, know your customer (KYC), replacing centralized databases and other such areas. Surprisingly, blockchain has found as large number of applications in non-financial industries like healthcare, music, IoT, energy, e-commerce and even charity. It’s not just start-ups but also the large organizations that are experimenting with blockchain and developing innovative solutions. In this article we will try to understand what is the blockchain technology and what makes it so popular.
Blockchain simplified
To simply put, blockchain is a decentralized database shared among the participants who verify the transactions before they can be recorded in a chronological order. The most common type of a blockchain, which is also used in Bitcoin, is the public blockchain so we will consider it as the focal point of our discussion going forward.
Now, most of us have would have used a google spreadsheet or an excel sheet to record and share data with our peers or colleagues. You can think of blockchain as a massive google spreadsheet which has been shared with everyone in the world, who has internet and wishes to access it. This creates a peer-to-peer network of users (like you and me!) who can then confirm the transactions without the need for any trusted centralized intermediary. For example, you need a centralized authority like bank to make an online transfer of money to your friend, or a credit card company to authorize an online purchase on Amazon. On the other hand, none of these intermediaries are involved in case you wish to transfer a Bitcoin to your friend. Your transaction will be verified by the network of participants, often referred to as nodes, and then recorded in the public ledger, such that this transaction cannot be tampered in future.
“Blockchain is a decentralized, distributed database which uses cryptography and consensus mechanism to securely store transactions in a tamper-proof manner”
What actually happens?
When a transaction occurs in a blockchain network, it is typically followed by a set of actions described below.
· Participating nodes in the blockchain network gather the transactions occurring in the same timeframe into a group. This group of transactions is what forms a block in the blockchain.
· Nodes compete which each other to solve the cryptographical puzzle in order to verify the transaction. Nodes basically run complex mathematical functions on their computers to arrive at a target output, only after which the transactions can be considered as verified.
· Node which solves the puzzle fastest notifies rest of the network that it has solved the puzzle. It also broadcasts the solutions that it has arrived at, so that the rest of the network can check it.
· If rest of the network is in the consensus about the solutions achieved by the winning node then they agree to add this new block to the blockchain. This block can be added only if 51% of the network participants are in the consensus about the solution.
· If a transaction which has been recorded needs to be changed, then the same process has to be repeated and a 51% consensus has to be reached again among the network nodes.
And this is how a new block gets created in the blockchain network! The transactions get verified and recorded without the involvement of any third party. Irrespective of what the application is, following are the 3 core features of any typical blockchain network.
1. Decentralization
Decentralization lies at the heart of the blockchain technology. In fact, one of the main reasons why Satoshi Nakamoto created Bitcoin was to create a system for digital payments directly between the users, without the need of any trusted third party between them. Blockchain technology is able to achieve decentralization by removing the need of centralized trusted authorities to verify and record the transactions. Instead, this task is performed by the network of participants who run complex functions to verify and then record the transactions in a shared ledger. Blockchain basically creates a “trustless” environment where no one trusts anyone else and hence each transaction is verified rigorously before being approved and added to the database. This ledger of records is stored on the computers of all the participating nodes and is open to anyone who wishes to access it.
2. Cryptography
We know that blockchain eliminates the need for centralized authorities, then how does it ensure the security of transactions, something which is taken care of by the intermediaries in the current scenario? Enter cryptography!
Cryptographical functions are complex mathematical algorithms which convert any input into a fixed length of a unique output. You may enter this whole article as an input and it will still produce a fixed length of output, such that it is impossible to arrive at the input even if you know the output and the function. Not going into much technical details, it is sufficient to conclude that cryptography is a defining feature of blockchain which ensures that transactions happening on the network are extremely secure. Also, cryptography ensures that a particular asset/currency is being transferred only once, thus solving the problem of double-spending in digital cash.
3. Immutability
One of the biggest strengths of blockchain is that it is almost impossible to tamper the transactions which have already been recorded in its decentralized ledger. If a hacker wishes to change a past record then he would need to change all the subsequent records too, for which he would need to have more computing power then the 51% of the network participants. While such a scenario is not impossible, it is highly unrealistic and unlikely, thus making blockchain immutable.
What’s all the buzz about
Technology has taken big leaps in the last decade and we have seen many inventions, but nothing has created a buzz like the blockchain technology has. So, is it a bubble? Is it all hyped up? Are people acting on the fear of missing out? Well, all of these questions would be more relevant for cryptocurrencies, an application of blockchain, but I believe that blockchain is being pursued for all the right reasons.
· Blockchain is disruptive because it is the only technology which can eliminate the third parties and still offer security provided by them. In fact, blockchain can be said to be more secure as it does not rely on a centralized database to record all the data. Centralized databases have proven to be quite vulnerable and act as single point of failure as they become the target for hackers.
· By eliminating the middlemen, blockchain based solutions have the potential to reduce costs for the end users. End users can save up on the fees/commission paid to the intermediaries, which can be quite high, as in the case of international money transfers.
· Blockchain does not rely on any human capabilities and works completely based on hard coded logic. This reduces the chances of errors while executing transactions and also increases efficiency of the entire system.
Equipped with such advantages, blockchain has the potential to impact almost every industry and change how we do business, and even live life.
Imagine selling the excess electricity generated by you from your rooftop solar directly to your neighbor, that too instantly and on your own terms. Or knowing exactly from where the products that you use come from and whether they were produced using sustainable practices? Or being able to partially own a house with a stranger, in a location far from yours, without having to worry about security and legal issues. Or being able to download music directly from the artists themselves. All of this and much more is being made possible by blockchain.
You name it and blockchain can be applied to that industry to solve various problems that currently exist. With this kind of potential displayed by blockchain so far, there is no doubt that it is being pushed as the next big thing and billions of dollars are already riding on such a nascent technology.
