This was originally published at shivendramisra.com/blog
Do you stand where I did a few months ago? Looking at everyone talking about “Blockchain” and not having a single clue? If so, don’t worry, because you’ve landed on the right post, my friend.
The media has done a great job of creating so much hype about it, that not understanding blockchain almost made me feel guilty.
While most of the technological innovations emerge from necessity and problems, blockchain, in most cases, is quite the opposite. It is a technology looking for problems to solve.
Blockchain is going through an interesting wave of adoption where people and executives are using it to make their businesses seem cool and trendy and, on the other hand, startups are using it to raise tons of money from Venture Capital Firms and Initial Coin Offerings (sometimes, for absolutely nothing).
Don’t believe me? Read about this startup which raised $4 billion without even a live product! Investors still don’t know how the majority of that capital will be used.
Let’s leave ICOs aside for a while and only focus on venture deals like the angel, seed, Series A, convertible notes etc.
The amount of money raised by Blockchain startups (only through venture deals) in the first 5 months of 2018 already surpassed the amount raised in the whole of 2017!
I wonder if I make a landing page showing the “next big blockchain project” can I get millions of dollars? (Probably, yes!)
Okay, so enough said about Blockchain’s popularity, let’s us understand what the hell it actually is!
Going back to the Roots
Blockchain came into picture first when Bitcoin was released by Satoshi Nakamoto. Before him (or her or them), nobody could solve the common problem pertaining to all virtual currencies — the problem of double spending.
When I send a file to a person, the copy of the file remains with me as well as that person. But, that cannot happen with money, right? When I send you 1 BTC, I should not have it!
And that is the problem of double spending which no one could solve effectively until Bitcoin introduced Blockchain.
Using blockchain, Satoshi solved this problem by making a decentralized network of participants wherein the network itself ensured that funds are not spent more than once without the need for a central authority.
In simple terms, as the name indicates, blockchain is a chain of blocks that contain information in such a manner that the data is almost immutable.
It is a distributed ledger which helps to record transactions and track assets.
Being distributed, all the participants in the blockchain network have a copy of the blockchain which is open to all. This also removes the need for any intermediary or a centralized server to hold the data.
Though it may seem complex to understand the fundamental values of Blockchain, the following example should make everything clear.
A popular analogy used to explain the behavior of blockchain is that of Google Docs and MS Word.
Before Google Docs, if people working on the same project wanted to share files together, they would send one version of the MS Word document, wait for the other person to make the required changes and then return it back.
Until the person returns the updated copy back, you cannot make further changes which means that you are locked from accessing the document.
That is how databases work today — two owners cannot update the same database at once. Rather, one has to wait for the other person to finish.
That is also how banks work today — they briefly lock access to particular accounts while they execute the transfer and when the transfer is executed, they release the access again.
Imagine Google Docs now,
All the parties involved in a particular project can have access to the same document at the same time and can effectively see all the changes that are being made by anyone on the team.
Each member can continuously verify the changes that are being made to the document.
This is what the blockchain essentially is. All the participants (called nodes) in a network have a copy of the blockchain (or the ledger) so that when the changes are made, they can be instantly verified by achieving a consensus amongst the group members.
To understand blockchains, let us first see what distributed ledgers are.
What is a distributed ledger?
In simple accounting theory, we know of a ledger as a book of financial accounts which stores transactions.
The concept of ledgers started as early as 3200 BC when quantities were recorded on clay tablets.
The double-entry system of accounting emerged over 700 years ago in 1340 AD.
Then, in 2009 AD with the inception of Bitcoin, blockchain (a type of distributed ledger technology) was introduced.
Imagine a ledger that records transactions happening in the bitcoin network. Instead of this ledger only being in your computer, it is present in everyone’s computer in the bitcoin network. This is called a distributed ledger.
A distributed ledger is a database, the identical copy of which is distributed amongst all nodes (participants) in a network.
The ledger with each node is not updated by any central authority but by the network itself.
Each node constructs its own updates to the ledger and adds it to his/her copy of the ledger.
These updates are then voted upon by all the nodes in the network and ensures that the conclusion reached is agreed by the majority of participants.
Once this happens, the ledger is updated with the help of a consensus algorithm and the version of the ledger which is decided by the majority is stored by all the nodes as their own copy.
This system establishes trust in the network without the presence of a central authority such as the banks or the governments. This is the most ground-breaking feature of distributed ledgers.
The best part?
The best part is that it helps us to create a new way of recording transactions and transferring information and assets between people with trust being built into the system automatically.
What can I do with it?
There is actually no limit to what you can do with it! This technology has a variety of use cases in different industries.
For example, in the finance industry, it can revolutionize Loyalty Programs, Stock Trading, Online Identity, Payments, Raising Capital (ICOs) etc by making the user experience better and systems more transparent.
The blockchain cannot be described just as a revolution. It is a tsunami-like phenomenon, slowly advancing and gradually enveloping everything along its way by the force of its progression — William Mougayar
Okay, so decentralization is cool and all, but how does it actually work?
Now that you understand what decentralized ledgers are, we can see how Blockchains actually work.
Blockchain is a type of decentralized ledger technology which links different pieces of information (called blocks) together with the help of cryptographic signing, thus forming a block-chain.
Before diving in, let me define two key terms for you to remember
— Open Ledger and Distributed Ledger
Open Ledger means that the blockchain or the ledger is open for everyone to see. Anyone can have a look at the transactions that took place between various parties in a particular blockchain.
Distributed Ledger, as discussed above, means that all the nodes on the network can have a copy of the same blockchain. This ensures that multiple parties verify a given set of information.
But there’s a catch!
How do the nodes (participants in the network) get to know that a new block has been added so that they can also add it to their copy of the ledger?
This is where miners come in!
Miners validate a transaction and solve a cryptographic puzzle to add a block to the chain.
The miner who is the first one to solve it gets a financial reward (in form of BTC or transaction fees) for his efforts. Thus, hundreds of miners compete for validating a block.
Once a miner validates the block, the other miners who were competing to validate the same block, get to know that the block has already been validated and there is no use of solving the cryptographic puzzle again.
Thus, they simply add the validated block to their copy of the ledger and try to validate the next block. This is how the copy of the ledger with all the miners stays updated.
Anatomy of a Block
Since we have referred to blocks a hundred times in this post, I figured it’s important for you to know what is a block made of.
There are three main components of every block on the blockchain. Which are:
- Hash of the block
- Hash of the previous block
The data contains any information that people want to store in the blockchain. For example, in the case of Bitcoin, the data contains the address of the sender, the address of the receiver and the amount transferred.
Hash is the output of a hash function.
A hash function takes in an input and returns an output of a fixed size. For example, bitcoin uses the SHA-256 Cryptographic Hash Algorithm.
A hash essentially looks like this — 27878E76C24573C020EF44DBD9CA541344A95994F17138A4F859B3436962CF71
The main feature of hashes is that they are unique. Every set of data has a different hash and changing the data (the input) will inevitably change the hash (the output).
Moreover, it is impossible to derive the input from the output.
Due to this uniqueness, the blockchain prevents anyone from changing the data inside a particular block. How? Let’s see;
Each block contains the hash of the data it has as well as the hash of the previous block
When the data of a particular block changes, the hash of the block also changes (As you see in the above example).
Now let’s say some malicious node in the network tries to tamper with the data in the second block.
As the hash of this block was also contained in the next block, the hash of the current block no longer matches the hash stored in the next block.
Culprit Caught?! No, not so fast.
Computers nowadays have the capacity to generate hundreds of thousands of hashes per second and they can then change the hash of the block ahead of the current block and continue this process until all the blocks ahead of it are validated.
What stops the hacker from doing this? Proof of Work!
These efforts of a hacker can be combated by a Proof-of-Work mechanism which is popularly used in Bitcoin. Due to this system, it takes around 10 minutes to validate a block and add it to the blockchain.
Hence, this gives a lot of time to the other nodes in the network to identify that the data of a block has been tampered with.
In other words, till the time the hacker changes the data of all the blocks, he will definitely be caught by other nodes in the network. Problem solved!
Blockchain issues and limitations
Blockchain seems too fancy to have any flaws right? False!
Every new technology goes viral before anyone can understand its underlying flaws. Same is the case with blockchain.
Only after years and years of research and development in this sector, we have come to realize the inherent disadvantages of this technology which might not make most of our dreams come true.
Many applications of blockchain in various industries suffer because of the following limitations:
Though it has been almost ten years since the inception of bitcoin and blockchain, it is still a hard sell for many people.
This can be mapped to the complexity of the concepts and terms involved in the blockchain space. Concepts like Distributed Ledger Technology and Cryptography are not easy for people to grasp in a day.
It takes some effort on the part of the person to find resources, follow the industry and slowly build a robust understanding of the ecosystem.
The jargons and the lingo of the community are an added burden for the common man trying to get a hold of things quickly.
The debates about frauds, scams and associated regulatory concerns have always been a key feature of the blockchain industry.
Since this space is highly unregulated, many scamsters and fraudsters have successfully got away with millions of dollars of cash from investors.
Investors have often invested in ICOs with “revolutionary” tech only to realize that their money is gone forever. One such case is Onecoin, which claimed to be the “next bitcoin” but instead ran away with all the capital raised.
One may try to avoid such frauds by investing in trusted coins like Bitcoin, Ethereum, Ripple etc, but you are still prone to events like shutting down of the exchange you deal with and hacking of your online wallet. The fraud in the industry majorly stems from the lack of proper regulatory action on the part of the government and institutions.
Immutability and Smart Contracts
While the information in a centralized database can be edited in case of wrong input, this is not possible with the use of blockchain.
Once the data is entered into a block and the block is added to the chain, it stays there forever. In such a case, it becomes increasingly important to ensure that the data entered is accurate in the first place.
Another aspect of immutability involves smart contracts. The code that goes into the smart contracts should thoroughly be tested by developers by providing solutions for every possible scenario.
However, there have been cases where flaws have been exploited by hackers to steal huge sums of money. An example of this is the DAO Attack. Such bugs in the code cannot be debugged like any other software and if not written properly, a huge amount of value may be lost forever.
Transaction Costs and Speed
People often like to talk about how bitcoin and other cryptocurrencies which are running on blockchain
can outdo banks completely. However, the major aspect not considered by such people is the scalability and the bandwidth of blockchain.
Talking about bitcoin, it can only handle 7 transactions per second, which makes it impossible to be used simultaneously worldwide by millions of people.
Miners usually prioritize transactions with high fees and thus a huge backlog of transactions builds up, making the network slower and expensive.
Other applications of blockchain such as gaming and IoT can also suffer due to its cumbersome nature.
Consequently, a popular Ethereum-based game called Etheremon recently moved away partially from Ethereum due to scalability and fee issues.
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Though blockchain has a huge potential to disrupt multiple industries, it may as well be more beneficial for institutions if blockchain does not live up to its hype.
Banks have long been established as the middleman in all our transactions with each other. The fortune of banks comes from the transactions we need. However, in a situation when we don’t need the trust established by these banks, their profits may also fall significantly.
Thus, the collaboration of banks and governments to not allow blockchain to flourish is also a possibility which can hamper its growth. Though this situation may seem a bit far-fetched, it can definitely happen.
“The bigger thing with Bitcoin is not Bitcoin itself but what does that decentralized technology do?” — Ashton Kutcher
Blockchain is probably the best invention of the 21st century, one that may lead to a revolution bigger than the Internet itself.
It is simply a decentralized technology that has trust built into the system and eliminates the need for big players in our world who just act as mere middlemen.
E-voting, supply chain management, IoT, Artificial Intelligence, Transportation, Finance, Real Estate and many other industries are on the brink of disruption.
The world needs to get above the hype created by cryptocurrencies and ICOs and look at the bigger picture → the revolution that is coming along with the new business models and entrepreneurs that follow. The current giants will fall and new ones will rise. The question is,
Are you going to be a player or a spectator?
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I am a Blockchain and Cryptocurrency enthusiast and I’m highly interested in solving real-world problems through technology and Entrepreneurship. Apart from writing, coding and reading books, I am also passionate about fitness and sports. You can check more of my posts here. Reach out to me on LinkedIn, I’m waiting for your message!