A Guide to Blockchain ⛓
Why Blockchain?
My parents recently bought a car and for the first time, I got to sit through the entire process and see how it works. My first thought was why are we constantly going back to the dealership for hours on end? Why is the process so complex and involve so many contracts and signatures? Why can’t we just select a car we want, give them the money, and walk out with the car? This long, tedious process not only applies to buying a car but also to so many other tasks such as taking out a loan or transferring money globally.
All the examples listed above have one thing in common: the use of an intermediary to handle the transfer and exchange of money. When buying a car, the bank acts as a middleman that both the dealership and buyer trust. The problem is that this intermediary is what makes the process lengthy, costly, and at times risky.
What if there was a system that allowed us to remove the intermediary and allow transactions to involve only the two entities? This hypothetical exists in the form of the blockchain.
Blockchain is a public ledger which cannot be tampered with because of its core decentralized nature and design.
Blockchain is a fairly recent technology with a variety of applications ranging from banking and financial services to healthcare. However, not many people are aware of this technology and exactly what separates it from traditional systems that we use today. Let’s delve deeper into this technology and explore how it works.
Defining Blockchain and Its Functionality
Put simply, blockchain is a publicly available, continuous record of who holds what. Anyone who has a copy can view and add records to the database but cannot alter or remove records that already exist.
The blockchain is comprised of interconnected “blocks” that have 3 parts
- Data: any information relevant to the transaction. For example, Bitcoin details the sender, receiver, and amount of coins.
- Hash: the “fingerprint” or unique identifier for a block. Every time a change is made to a block, its hash changes
- Previous block’s hash: this is what creates the “chain” and keeps all blocks interconnected.
Hashing
Each “block” in the blockchain points to the next one (except the genesis block). Remember that if the contents of a block change, then the hash changes as well. This means that if someone tampers with a block, its hash will change and will no longer be the same as the value stored in the block after it. While this property keeps the blockchain secure, it isn’t enough.
The issue is computers are very fast at calculating hashes and can calculate what the individual hashes of thousands of future blocks. With this information, they can change the hashes in all proceeding blocks allowing them to tamper with the blockchain. To avoid this, blockchain implemented a solution called proof of work.
Proof of Work
Proof of work essentially slows down the creation of new blocks and makes it so that new blocks aren’t immediately added to the ledger. Bitcoin for example, takes 10 minutes to calculate the proof of work and add a new block to the chain.
Distributed Network
The last piece of security the blockchain offers is the fact that it is a “peer-to-peer” network. This means that there is no central authority controlling the addition or alteration of blocks on the blockchain. When a new block wishes to be added, it must be verified by all the other users in the system. Once this block is approved, it can then be added to everyone’s copy of the blockchain. Let’s expand on this idea.
What Makes Blockchain Different?
One of blockchain’s most appealing qualities is its decentralized architecture. Let’s draw a comparison between a centralized and decentralized ledger.
Centralized Ledger
A common example of centralized ledgers can be seen in banking. A bank often has two ledgers, one for its private use and one that it reveals to the public. In this case, the bank has the ability to tamper with the ledger and modify it with false values. This was one of the contributing factors to the financial crisis as it was difficult to determine whether the numbers being publicly shown were actually accurate.
In this example, it is clear that the central authority has too much power since it can tweak the numbers for self-benefit.
Decentralized Ledger
What makes blockchain different and such an appealing technology is the fact that it is decentralized. Rather than one central authority managing the ledger, transactions on the blockchain are validated by other nodes in the system. Furthermore, each transaction is available for all users on the system to see, increasing transparency and making sure that the true numbers cannot be hidden.
In order to tamper with just one block on the chain, a user must modify all existing blocks on the chain, calculate their proof of works, and take control of the peer-to-peer network.
What Uses Does Blockchain Have?
Now that we’ve talked about how this technology works, where can it be applied? Although many think cryptocurrencies are the only use of blockchain, it’s a diverse technology that can be applied to a plethora of spaces. Let’s list a few uses to get started.
- Banking/payments
- Global money transfer instantly
- Cybersecurity
- Supply chain management
- Forecasting
- Networking/IoT
- Insurance
- Private transport
- Cloud storage
- Charity
- Voter Verification
- Healthcare
Money Transfer
One of the main uses of blockchain and especially Bitcoin is the ability to transfer money quickly and easily. By eliminating the need for an intermediary, money transfer is instant and cheap. One example can be seen in El Salvador where Bitcoin was recently declared an accepted currency. 20% of El Salvador’s GDP is comprised of international money transfers and the adoption of Bitcoin makes these exchanges more efficient.
Voter Verification
A public ledger of immutable votes can make online voting a streamlined and viable option, since it can make an election harder to rig. Voters can also record their vote on the blockchain without the risk of releasing their identity or political ideas. Votes can even be counted accurately by the system itself (smart contracts), removing any human error or bias.
Charity
Common issues in charity and donations are inefficiency and corruption. How do we know our donations are going to the right place? Blockchain can make donating a safer and quicker task as each donation becomes publicly recorded. This way, the donator can track his or her money and make sure it ends up in the right hands.
Healthcare
Blockchain can help hospitals keep track of patient data and prevent this data from falling into the wrong hands. In the medical industry, data is very private and current systems are at risk of being hacked which can lead to potential disaster. This makes the handling of data safer and can even make treatment and diagnosis faster.
Digital Currency
Of course one of the biggest names tied to blockchain that we have all heard is Bitcoin, a cryptocurrency. But what is Bitcoin? Let’s dive a bit deeper.
What is a Cryptocurrency?
In 2008, Satoshi Nakamoto released a white paper titled Bitcoin: A Peer-to-Peer Electronic Cash System with the goal of creating a peer-to-peer network for transactions and exchanges. His goal was to eliminate the need for an intermediary — like a bank — to exist in transactions between two people. As of now, thousands of cryptocurrencies similar to Bitcoin now exist each with unique traits.
You may be thinking, if it’s a digital currency, why can’t I just make copies of this money? This problem is called “double spending” and is one of the issues that bitcoin set out to solve. Essentially, since a digital currency does not physically exist, using it doesn’t necessarily take it away from that person. Traditional solutions to this problem involved the use for third person intermediaries; however, Satoshi Nakamoto wanted to create a decentralized network leading to the birth of the blockchain and cryptocurrencies.
Your next question may be what gives these currencies value?
- Digital Scarcity: Idea that there is a finite amount of coins available making certain currencies like Bitcoin similar to “digital gold”
- Supply and Demand: Some currencies have a fixed amount of coins while others don’t. Demand can increase as a project’s utility becomes more known or valuable.
- Cost of Production: Certain currencies such as Bitcoin and Ethereum require participants to verify transactions on the blockchain. This is a computationally expensive task requiring electricity and costly equipment.
- Competition: Currently there are thousands of different crypto projects in existence each unique in their own way. Certain coins offer utilities that are more appealing than others giving them an edge in the market.
What are Some Negatives About Blockchain?
Up till now I’ve only been pointing out all the positives of this new technology but there are a few disadvantages that are important to recognize.
- Slower Process: As blockchain becomes more widely known and more users are on the network, it makes the entire system slower and more backed up as adding a new block is an expensive process.
- Energy Consumption: Bitcoin’s energy consumption can be calculated by taking its hashrate (total computational power to mine bitcoin) and estimating energy requirements miners are using to meet that rate. Mining is very computationally expensive and requires large rigs that use a lot of electricity to constantly run.
- Not Available to All: One of the main issues is that this technology is not accessible to everyone. For example, in El Salvador where Bitcoin was made a national currency, many protested that they did not have internet access and therefore could not use Bitcoin at all.
- Young Technology: Because blockchain is such a new technology and its implications are unknown, many are apprehensive to accept it as the “future.” While it seems appealing, it is very complex and hard to tell if it will be a successful project.
My Thoughts
While there are many more disadvantages that we can discuss, I believe that this technology is truly revolutionary. Of course as a 16 year old, my opinion may not be the most developed and is definitely not going to influence anyone, but I am interested in the space and in broadening my knowledge.
Because it is such a current technology, there are many pioneers in the space who are dedicated to expanding knowledge of this technology. One such person is Naval Ravikant, an investor and thinker who claimed that those who criticize the technology either don’t fully understand the space or are unwilling to accept change.
Bitcoin is a tool for freeing humanity from oligarchs and tyrants, dressed up as a get-rich-quick scheme.
— Naval Ravikant
This quote addresses how though many see bitcoin and blockchain as a scam, it is a revolutionary idea that will have large scale impact over time.
TL;DR
- Blockchain is a public ledger which cannot be tampered with because of its core decentralized nature and design
- Blockchain is a distributed (peer to peer) network that removes the need for intermediaries in transactions
- Each block has 3 parts: data, a hash, and the previous block’s hash
- The hash is a unique identifier for each block and is what keeps each block interconnected on the chain
- Proof of work is used for cryptocurrency mining to validate new transactions on the blockchain
- Blockchain has a variety of applications: banking/payments, voting, charity, and healthcare to name a few
- Cryptocurrencies solve the double spending problem using the blockchain to publicly record when exchanges are made
- Some disadvantages of blockchain are the fact that it is not easily scalable, it consumes a lot of electricity, and is a very young technology making it difficult to trust
Sources
Hi my name is Fazal. I am a 16 year old based in the Bay Area of California. Connect with me on Linkedin and check out my Github to see what other projects I am working on! Subscribe to my Newsletter for monthly updates on what I am working on. Check out the Machine Learning Club I founded and what projects we have completed so far. If you would like to schedule a meeting, use my Calendly. Thanks for reading!
