Behind the Scenes of Cryptocurrencies — Blockchain
Do you know that 1 Bitcoin is equivalent to a whopping amount of $39,551 (= 30,24,830 INR) as of today?
Since digital currencies/tokens have such a massive impact in today’s world, with people investing an abundance of their wealth in Bitcoin and Ethereum, it is important to be aware of the technology behind them and other assets alike.
So here we go!
Today, most content creators turn to YouTube, Instagram, and other platforms to post their content. You must realize that we have little to no say in their policymaking or other decisions. So if one day, Instagram decides to replace all our feeds with images of the famous Elon Musk, it could simply do it. ¯\_(ツ)_/¯
But wait, why worry when you’ve got Blockchain?
Because of the fact that blockchain can shift the power from organizations to the hands of creators and participants of the network, it is gaining huge popularity.
Also here’s an interesting fact.
Did you know that the concept of blockchain existed before Bitcoin was born?
In 2008, Satoshi Nakamoto, the bitcoin creator(s), cited the works of S. Haber and W.S. Stornetta three times in their famous whitepaper — “Bitcoin: A Peer-to-Peer Electronic Cash System”.
If you’re really curious to know why Haber and Stornetta founded what is now called blockchain, do read this article written by Vipin Bharathan.
Now that you know what’s behind Bitcoin, let’s see how it actually works.
Do you remember the times when people noted down their transactions on paper? Over time, with the improvement of technology and information overflow, data was digitized and stored in databases.
Today, we (are bound to) trust big organizations to safely store our data.
Trust…
Here’s why our records are much safer on a blockchain.
Blockchain simply contains synchronized data across multiple, independent stakeholders.
Let me help you visualize that.
Say there are 5 peers in the network. All these 5 peers share the same data, for example, your transaction details. In case one of the peers changes the data on his machine, usually, for his own benefit, this manipulated data can be easily spotted due to its mismatch with its 4 other peers. Data is thus synchronous among all peers participating in the network.
Once consensus (the agreement of a majority of nodes) is achieved, data is added to a block on the blockchain.
Now a question arises. Who adds these blocks to the blockchain?
It’s the miners. Miners solve a cryptographic puzzle (proof of work), verify the authenticity of the data, and add them to the blockchain. Upon successful addition of a block, they are rewarded. 💰₿
A genesis block is the first block of the chain. Satoshi Nakamoto created the first-ever block on the Bitcoin blockchain.
All other blocks on the blockchain are called valid blocks. They contain hash, timestamp, data, and nonce.
Do you ask why data is much safer on a blockchain? Well, here’s the answer to that.
Each and every valid block on the chain has the hash of the previous block. Manipulating the data on any one of the blocks will lead to a mismatch of the generated hash and the recorded hash on the next block. Therefore, if one of the blocks has been rewritten, all blocks following it will also need manipulation making it computationally impossible. This makes blockchain immutable.
Every transaction that took place on a blockchain is known to every peer on the network. Therefore there are as many copies of data as there are peers/nodes in the network.
Clearly, a single party cannot egoistically alter the data on the chain to benefit.
Nodes collectively participate/vote to decide on changes to be made, if required, on the blockchain.
Therefore, this ensures the elimination of a single party to decide the changes to be made on the network, but rather have every participant have a say in it.
This is what is essentially called decentralization. The power is distributed and is not in the hands of a single party or an organization, therefore eliminating errors, fraud, and bias in the system.
I know this article is flooded with an overwhelming amount of information and terms but let me help you recall it quickly with the following key takeaways:
❑ Blockchain consists of a series of blocks containing verified, immutable, synchronized data.
❑ The genesis block is the first block on the blockchain and all other blocks are called valid blocks that hold data, timestamp, nonce, and hash.
❑ Every node of the peer-to-peer network has a copy of the entire blockchain.
❑ A consensus mechanism is used in making important decisions with the involvement of all the nodes on the network.
❑ Miners add blocks of data to the blockchain network and get rewarded for their work.
❑ Decentralization in blockchain enables the transfer of power from a single entity to all participants in the network, therefore eliminating unfairness in the system.
❑ Bitcoin and Ethereum are an application of blockchain technology.
With the above knowledge, where do you think blockchain can be used?
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