Why is Blockchain a Powerful Thought?
I am sure you have heard of Cryptocurrency.
Because the only way that you have not heard of cryptocurrency is if you are living under a rock.
Cryptocurrencies have caused a huge frenzy among the masses for the past couple of years — thanks to Bitcoin and the internet. It is clear that the masses have warmed up to the idea of cryptocurrency, but for most, it is seen as an opportunity to speculate and earn money. So much that, governments across the globe are at loggerheads about taking a legal stance to support or not to support cryptocurrency. The extreme volatile nature, the possibility of money laundering, the anonymous nature of transactions among other reasons have had the governments render them illegal in most cases.
Though the money-making aspect of cryptocurrencies is making news for all sorts of reasons, what many don’t understand is the underlying technology behind it — Blockchain.
So, let’s take a step back to understand what blockchain is.
Why do we need blockchain?
The current world operates on trust-based models. To perform any transaction between two parties, an intermediary trusted by both the parties is needed of them.
Today, any digital money transfer needs at least one or more financial entity as an intermediary. As a user, trusting these intermediaries is a requirement to perform transactions with other parties.
We need to trust the bank in holding our account balance, securing and assisting in the transfer of funds. Similar is the case with trusting service-based enterprises like Uber/Lyft, Real Estate Agency/Registry, etc. We trust these enterprises and the enterprises charge us for the service they provide.
So what’s the big deal in trusting these enterprises?
We place trust in centralized enterprises for their ability to maintain the source of truth, money or assets and in return, they have control over our balances, purchase history and personal data.
The immense trust placed on these institutions only makes them even more rent-seeking. The ledger maintained by these third parties can be tampered if the enterprise wishes to. In case of conflict, the transaction reversibility gives an option for mediation between the payee and the payer. The mediation for these conflicts drives up the transaction costs and brings in the requirement of trusting these institutions.
And moreover, these centralized entities will take away the value from the value creators because of huge dependency created in the ecosystem.
The powerful thought
A thought emerged in 2008, Satoshi Nakamoto introduced Bitcoin and presented a powerful concept to this world.
Bitcoin: A digital payment system allowing transaction between any two parties based on cryptographic proofs without the need of trusted third party
A system where one can perform peer-to-peer immutable transactions which once performed can’t be reversed even if the intermediary or any party wishes to do so. This system decreases the transaction costs immensely & removes the option for arbitration, thereby, removing the need of a trusted intermediary.
So how is this implemented?
A set of unknown participants maintain a uniform ledger which distributes trust among all the participants of the network, unlike in a centralized system where the trust is placed with one entity.
This distributed ledger system:
- Should be a uniform ledger maintained by unknown participants — Permissionless network
- Should not allow double spending, i.e. amount once spent cannot be allowed in another transaction.
- Should reach an agreement (consensus) on the contents of the ledger, in spite of rogue ledger-keepers in the system — Consensus Algorithm
- Should incentivize the ledger-keepers for their efforts, costs & good behavior — Cryptocurrency incentives
Blockchain provides immutability through cryptographic proof and is a sequentially maintained block which takes place by linking the new transaction blocks with the previous transaction blocks. Anyone can join the network to maintain this ledger of transactions.
Take for example, if Alice sends Bob 10 dollars, the transaction is sent to all the ledger-keepers to validate the transaction.
Some validations could include:
Does Alice have those 10 dollars?
Is she authorized to send those 10 dollars?
Does Bob address is a valid one?
Every ledger-keeper validates these transactions and makes sure that double spending doesn’t take place. These transaction blocks are agreed across the ledger-keepers and the same copy is maintained.
Obvious questions you might have are, ‘If any participant can become a ledger-keeper, how can I trust them to have the same opinion about the transactions on the network? Or what if the rouge ledger-keepers try to misrepresent the transactions?’
This is solved through consensus algorithms.
Consensus algorithms achieve agreement among the ledger-keepers for confirming which transaction to be represented on the blockchain.
So, what are Cryptocurrencies then?
Cryptocurrencies are interlinked to blockchain and are the incentives given to the ledger-keepers, i.e. untrusted parties over the network.
Blockchain distributes trust among the ledger-keepers and a decentralized system is created.
How does this impact the ecosystem?
I, as a user, wouldn’t need to rely on any enterprise for maintaining my balance, transaction history and be worried that it can be tampered with. So the onus is on us — the consumers — to demand blockchain for the applications we use, so as to create a decentralized ecosystem.
Enterprise can provide confidence to their customers by adopting blockchain which removes the ability to tamper the customer’s ledger.
A whopping 84% of companies are already either researching blockchain or they are already in the process of adapting it.
According a PwC survey, the hype around blockchain is growing with the vast majority of companies saying they are “actively involved” in the technology
Blockchain is a multidisciplinary field which includes economics, technology, cryptography, game theory, governance and some ideals of socialism as well. Its one of those rare fields where the gap between academic research and industry implementation is minimal. It’s exciting to understand how these fields interplay to solve the problem of the 21st century!
Blockchain’s application in different industries is as inevitable as was the growth of the internet. If you don’t understand it, you are one of those people who didn’t understand the internet initially and we all know people who understood the internet early on, only leveraged it better.
