What is Blockchain technology? (Part 1- Blockchain Series)
This is the first part of the 100 part series on Blockchain.
We as individuals and businesses interact with a lot of other businesses and service providers online and offline on a daily basis. We buy clothes online, import medicines from different parts of the world, and use remote financial and banking services. In such a scenario, where everything is available at your fingertips except the trust for the other party, how do you validate the authenticity of the clothes that you got online, or how do you know that the medicines you imported are genuine and not some cheap counterfeit or how do you know that your financial and personal data is safe and is not getting misused by some hacker sitting in some part of the world. There has always been a dire need for a system that can assure us that whatever we are buying is authentic, whatever data we are sharing is safe and secure. There has always been a need for a system that is reliable and robust so that trust is no longer a barrier for businesses and individuals to get things done.
The solution to all of these pain points lies in Blockchain Technology. You might have heard about various cryptocurrencies like Bitcoin, Ether, Ripple, etc., and Blockchain is the technology that powers them all.
Blockchain has gained a lot of popularity recently. It has been claimed to be a game-changer and has been even referred to as the internet of value by many industry experts. The invention of Blockchain technology can be compared to the invention of the wheel, motor, and internet that changed the world. It has been predicted that Blockchain technology will rule the next decade.
What is Blockchain?
Blockchain is a tamper-proof distributed digital ledger. This digital ledger is safe, secure, transparent, and decentralized, which simply means that it is not controlled by a single authority. It is like a ledger that a bank uses to keep track of all customer transactions. However, in a bank, the ledger is controlled by the bank, and only the bank can see the transactions. Whereas in blockchain, there is no central authority, and the ledger runs on multiple computers and doesn’t require any single person to authenticate or settle transactions.
Let’s try to understand how Blockchain works through a real-life analogy. For this analogy, we are going to take the example of Google Sheets on Google Drive. While Google Sheets is not technically a Blockchain, it’s a pretty accurate analogy to how Blockchain works.
· When someone creates a spreadsheet in Google Drive, they can share it with multiple people. In our analogy, this spreadsheet can be compared to a Blockchain.
· The spreadsheet is generally shared over a large network of computers when shared with multiple people. The computers having a copy of the spreadsheet are referred to as nodes in the Blockchain world.
· Every node on the network has access to the same spreadsheet. Whenever someone edits or modifies the spreadsheet, it gets updated automatically on every computer on the network. Thus, the spreadsheet is updated in real-time, and a single version of the spreadsheet is always visible to everyone on the network.
On the contrary, if you put data on an Excel sheet on your computer, it is just one file that has to be shared with the other people on the network by emailing them. If one makes some modifications in the Excel sheet, the modified file has to be saved and emailed to other recipients. Sometimes, many versions of a single Excel sheet are created, and it is quite possible to lose track of the most recent versions of the document and wind up updating old versions of the Excel sheet. Also, when the records or files are present on one central computer, they can easily be hacked and manipulated.
On Blockchain, like Google Sheets, there will be multiple copies of the digital document, and each node/user on the network will have a copy and access to the same exact document. Therefore, it is not possible to tamper with them. Before any change can be made in the documents, the majority of the users have to agree to it. It puts the control in the hands of all the users instead of one central database that can be changed anytime by anyone with proper access.
Additionally, Blockchain technology is secured through cryptography, thus making it nearly impossible for hackers to hack it and tamper with the data inside it.
Properties of Blockchain
There are certain features and properties of Blockchain that makes it suitable for such a wide array of industries:
1. Decentralized
Decentralization is one of the most critical components of Blockchain. It has even been viewed as a revolutionary technology that will decentralize the web. Decentralization refers to the transfer of control from a centralized entity (individual, organization, or group) to a distributed network.
Decentralization gives you the power to store your valuable assets like your data, money, documents in a network that can then be easily accessed from anywhere in the world over the internet. Through this decentralized technology, a user has direct control over his asset via his private key.
A user can also easily transfer his asset to anyone at any point of time from anywhere in the world. This feature of decentralization eliminates the need to rely on any third party or middlemen for these transactions. Thus, cutting down the high transaction fees charged by these third-party service providers. For instance, when you transfer a sum of money to your friend, you have to rely on a bank to perform this task. But with Blockchain, you can do these transactions without the involvement of any third party.
The main rationale behind this concept is to place your trust in the network rather than in a single centralized body like a bank or a government.
The benefits of a decentralized system are as follows:
· A decentralized system shifts the power back to the users as they are the ones controlling all of their data and transactions.
· A decentralized system is complicated to hack and is not prone to failure. As there is no central point in such a system, it can better survive a malicious cyberattack and accidental failures.
· As the data doesn’t reside with a third party, this eliminates the possibility of data tampering and misuse of the data. Further removing these third parties from the equation lowers the transaction costs significantly.
· In a decentralized system, the processing time for transactions is reduced to minutes. Additionally, these transactions can be processed at any point of time at any day of the year irrespective of any festival, holiday, etc.
· The changes made in a public Blockchain are visible to all the parties on the network, thus making them transparent.
2. Distributed Ledger
Distributed Ledger is the second critical feature that makes a Blockchain so powerful and effective. The word distributed ledger is composed of two terms — Distributed and Ledger. Ledger, as the name suggests, is the record of all transactions, and distributed means that the ledger is shared with every person on the same network. The distributed ledger contains the record of each and every transaction that took place over the network.
And every node of the network has access to a copy of this updated ledger. Any updates or changes in the ledger are reflected in almost real-time in all the copies of the ledger across the network.
Some of the key advantages of such a distributed system for the stakeholders involved are as follows:
· A distributed system makes it easier to track the movement of goods as the same ledger is shared across all the users on the network. This is one of the main reasons why many big companies have started integrating Blockchain Technology into their supply chain.
· All the transactions are recorded on one single ledger, making it easier to manage, view, refer to, and verify the transactions. In simple terms, it reduces the complexity involved in managing multiple ledgers.
3. Immutability
Immutability is another critical component of Blockchain. Immutability means something that can’t be changed or altered. Once the data has been recorded inside a Blockchain, it becomes nearly impossible to change it, thus making it tamper-proof and immutable. To better understand the concept of immutability, let us take the example of an email. Once you share a document in an email with a group of your friends, you can not take it back. The only way to do this is to ask all of your friends to delete that email which is quite difficult. This is exactly how immutability works in the Blockchain network. This is very important when you want to trust something or when you want to make something more trustable. For example, suppose you have built a database on your computer, and if you want to change data because everything is in your control, you can change the data and change the data in any way you want to. But with blockchain, that is not possible.
4. Consensus
As the name indicates, Blockchain is a chain of blocks that store transactions or data. Each block can be thought of as a page in the ledger.
A new block of transactions is created after a certain fixed duration. The block is then sent to each node which verifies the block. And once the verification is done, the block gets added to the Blockchain. This verification and validation of blocks by these participating nodes is called consensus.
Without consent from the majority of nodes, any transaction block can not be added to the ledger. And once the transaction block gets added to the ledger, no user on the network won’t be able to edit or delete it.
5. Solution for Double Spending Problem
Before understanding how Blockchain solves the problem of double-spending, let us first understand what double-spending actually means. Double spending is simply the risk that a user may spend the same currency units twice. Double spending is a potential loophole specifically applicable to digital currencies. Suppose you go to a cafe and order coffee worth $5. You pay in cash. The service provider at the cafe confirms that you have paid, and you receive your coffee in exchange for the money. Now, is it possible to spend the same $5 somewhere else to make another purchase? The answer is NO. The double-spending problem never arises in physical currency. But unlike physical currencies, a digital currency consists of digital information which can be reproduced or duplicated easily. In the case of digital currency, a currency holder can make a copy of the digital token. He will now have 2 copies of the same token. He can send one token to a merchant while keeping the original token with himself. Thus, spending the digital currency twice by its owner.
Double-spending was one of the very serious concerns with Bitcoin initially because there was no central authority to verify that a token is spent only once.
Let’s take another real-life scenario to understand the double-spending of digital currency better — Suppose you went on a trip with your friend and clicked his photo on your mobile. He asked you to share his picture with him through WhatsApp. You shared his picture on his demand, but now there are two copies of the same picture — one is with him, and one is with you. This is a classic example of understanding the issue of double-spending. In traditional online transactions, banks are the centralized authorities that ensure no double-spending.
Blockchain, being decentralized, found a solution for double-spending through the consensus mechanism. The consensus mechanism requires users to vote on valid transactions, and only then these transactions get appended to the latest block.
Let us understand it through an example — there are three persons Phil, Lyra, and Matt. Lyra has 1 Bitcoin with her. Lyra sends that Bitcoin to Phil. Simultaneously, Lyra does another transaction and sends the same Bitcoin to Matt as well. The second transaction will be rejected by the participating nodes on Blockchain. Every transaction before getting committed to the Blockchain is verified against the ledger records by the nodes. So in the first case, when Lyra sends money to Phil, the transaction will be validated against the ledger, which will show that Lyra has one Bitcoin with her, which means that she can transfer her one Bitcoin to Phil. Thus, making it a valid transaction. But in the second transaction, which Lyra does to Matt when the transaction is validated against the ledger, it gets rejected as there is no Bitcoin left with Lyra, so she can’t make any transaction to Matt.
Thus, mitigating the problem of double-spending.
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Happy learning!
