What is Blockchain Explained Simply!
Yes! Yes! Yes! It’s TRUE that it's the future…
If you have been following banking, investing, or cryptocurrency over the last few years, you might have heard of this buzzword called BLOCKCHAIN. And while there’s a lot that surrounds this buzzword, let's break it down for simple understanding and understand what is blockchain in simple terms.
By concept, blockchain is based on a peer-to-peer (P2P) topology, & is a distributed ledger technology (DLT) that allows data to be stored globally on thousands of servers.
Here’s a video explaining what is Blockchain and how it works,
And that too, while letting anyone on the network see everyone else’s entries in almost real-time, which makes it difficult for one user to gain complete control of the network. In turn, making it highly secure as compared to the available current technologies and as anyone in the network can see each entry, by using blockchain, we can achieve greater transparency as well. (For more info, ref: What is Blockchain Technology and How Does it Work)
Blocks in the blockchain consist of digital pieces of information and specifically have three parts to them:
- They store information about transactions like the date, time, and the amount transferred
- They store information about participants. For example, it will contain information for your purchase from Amazon on a record with your name along with Amazon.com. But instead of using your actual name, your purchase is recorded without any identifying information, it is referred to as “digital signature” and is sort of like a username.
- They store information that helps in differentiating them from other blocks. Similar to the way you and I have names to distinguish us from one another, each block stores a unique code called a “hash” that serves the same purpose. These hashes are nothing more than cryptographic codes created by special algorithms to help distinguish two blocks from each other
Also, do note that, in this example of Amazon, we are storing just one entry. But in reality, a single block in blockchain can store 1MB of data and that’s why, depending on the size of the transaction, a single block can store a few thousand transactions under one roof.
So, by now you understood that blockchain is based on transactions, but how does blockchain works? Let me explain.
So, whenever a block stores new data, it is added to the blockchain. Blockchain, on a basic level, consists of multiple blocks strung together. And in order for a block to be added to the blockchain, however, these four things must happen:
- A transaction must occur.
- That transaction must be verified. What does verified mean? Let’s continue our Amazon example, after making that purchase, your transaction must be verified with other public records of information. With blockchain, however, that job is left up to a network of other blocks and someone designated as a Miner. So, When you make your purchase from Amazon, that network of blocks rushes to check that your transaction happened in the way you said it did. That is, they verify your transaction details including transaction time, dollar amount, and the participants who were involved in it.
For eg, you cannot send 50 BTC to someone in your network if you only have 10 BTC in your wallet
- That transaction must be stored in a block. Once your transaction has been verified as accurate & legit, it gets the green light for inclusion. Further, the transaction’s amount, your digital signature, and Amazon’s digital signature are all stored in a block for further processing.
- That block must be given a hash. So, once all of a block’s transactions have been verified, it must be assigned a unique, identifying code called a hash and once hashing is completed, the block can be added to the blockchain. It is this hash ID that differentiates the processed transaction from the others and even a small space can make a huge difference in its identification.
Are you now wondering how this process goes so seamlessly? The answer is because of miners. It's the role of a miner to validate new transactions and record them on the global ledger ( that is blockchain ). And for their job, they usually receive a reward. If we talk in terms of bitcoin, it's 12.5 BTC for one successful validation.
I know what you’re thinking, 12.5 BTC isn’t much, but hey, if you convert it to US dollars, it's probably worth around $35000… and, yes, that’s real money we’re talking about.
Moving on, whenever a new block is added to the blockchain, it becomes publicly available for anyone to view on the network. For eg, you can have a look at Bitcoin’s blockchain (https://www.blockchain.com/btc/blocks). After clicking the link, you will see that you have access to transaction data, along with information about when (“Time”), where (“Height”), and by who (“Relayed By”) of every block that was added to the blockchain.
Lastly, currently, blockchain is being employed in various industries including but not limited to banking, voting, healthcare, and IoT systems. The scope of applications for blockchain technology is increasing as industries are finding new use cases where it could be used as an enhancement.
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