Blockchain: How it works?

Everyone is talking about the blockchain technology which is expected to change the socio-economic landscape of the world in the near future.

The technology is mostly known for its connection with Bitcoin, the popular cryptocurrency which has seen a meteoric rise in valuation in the recent months. But blockchain is not just about Bitcoin. Its applications are beyond the cryptocurrencies, ranging from governance to preventing financial frauds.

Unsurprisingly, major technology firms across the world such as Microsoft, IBM and Intel are hopping onto the blockchain bandwagon. And it’s not just the West that’s excited about blockchain. India is seriously considering the integration of blockchain into the country’s digital economy.

Finance minister Arun Jaitely while presenting the Union Budget 2018–19 said that the government was willing to explore the use of blockchain technology.

Why Is It Called Blockchain?

A block is a record of new transactions. When a block is completed, it’s added to the chain. Bitcoin owners have the private password (a complex key) to an address on the chain, which is where their ownership is recorded. Crypto-currency proponents like the distributed storage without a middleman — you don’t need a bank to verify the transfer of money or take a cut of the transaction.

What is blockchain technology?

Blockchain technology was originally developed to facilitate the digital currency Bitcoin. But these are two separate technologies. While bitcoin is an encrypted currency, blockchain is the platform for peer-to-peer payment, supply chain tracking, and lots more. Consider this as an operating system for applications such as bitcoins and ethereum to function.

In the simplest words, blockchain technology is a shared and open ledger that keeps a record of the transactions and cannot be modified. And as the name implies, blockchain includes an ever-increasing blocks of data with each block containing transaction information.

These blocks have unique features like:

• They are time stamped.

Each block has a date and time attached to it.

• They are distributed and decentralized.

Each block has multiple copies placed in several locations.

• They are transparent.

Anyone can view what’s on the block.

• They are computationally irreversible.

The blockchain technology is based on decentralisation which means the data is accessible to everyone while the data is managed by a cluster of computers and not owned by a single person.

Top features of blockchain:

Security:

One of the major issues with today’s digital economy is online security. Blockchain addresses that concern to a large extent.

The technology relies on a consensus from all network members for the validation of a transaction. And all validated transactions are permanently stored in the data blocks which cannot be altered or deleted by anyone.

A decentralised system makes it difficult for hackers to breach the transaction by targeting one unit, a common pain point in a centralised system where the data is stored at a single core.

Immutability:

Immutability refers to the fact that the blockchain is highly resistant to alterations. In a blockchain setup, the data blocks are linked and secured with a special cryptography, called hash.

For instance, hash for “Good Morning” is E526F13918F16C1C65FC4AC51ABE8B5B991769AE6718495A7AD9984406A14A2C. And the hash for “Good Mornin” is 551294185A8D2AD6A0C72EC63FF7D68F4C4AC538B334D3256AFE21DE001E7C26.

So, any minute alteration generates a different hash and is immediately flagged. Also, it is impossible for one to trace back the older one.

There is Always a Downside:

However, like any system created by humans, there are always downsides.

Blockchain technology has a pretty steep learning curve. Especially for the typical individual without a technical background, all the jargon and computer science concepts involved may intimidate and scare away otherwise would-be users. However, the rising popularity of cryptocurrency is resulting in the blockchain moving into the mainstream, with a lot more resources available to make the topic more approachable.

Transferring, trading, and buying cryptocurrencies usually involves a transaction fee, and is not usually instantaneous. The former can be costly, the latter inconvenient.

There is also a concept called the “51% attack” — if for some reason 51% of a peer-to-peer network validates an otherwise invalid transaction, it will still get approved and added to the ledger by nature of how the validation process works. Maybe right now it’s unlikely to happen, but it is a security flaw that might have potential for exploitation in the future.

So, to conclude, I think that blockchain technology has innumerable benefits which can be exploited in the future. There is also a scope for improvement, as there is with any technology that mankind has developed.