Introduction to blockchain
Thinking about money, it’s the basic necessity for survival just like any other basic necessity, be it, air, water or food. In fact, in the current scenario, you cannot even have these basic prerequisites if you don’t have money.
Money has evolved and adapted a long way starting from the barter system. Then we had coins as currency like silver coins, gold coins, etc. These paved path to the fiat currency prevalent today more comfortable and durable ones. And now comes the next generation of currency, the future currency and that is the CRYPTOCURRENCY.
Talking about cryptocurrency, what’s the first thing that comes to your mind. Let me guess, the Bitcoin, of course. This most commonly used cryptocurrency invented by Satoshi Nakamoto is the peer-to-peer electronic payment system that solved the double spending issues. It is completely secure with increased efficiency and no possibility of fraud. But wait, who’s the one who manages these securities, accounts, transactions and records? Not a single entity. Bitcoin is actually a decentralized network with an open, distributed ledger which anybody from any corner of the world who wants to can have access to. This distributed ledger forms the backbone of Bitcoin and is named Blockchain. Blockchain is like the track on which the Bitcoin trains run or you can call the web of Bitcoin.
For all those who don’t have an IT background, understanding blockchain could have been a little tricky, however, mugging up all those programming languages and operations in not required if you want to understand Blockchain. Here, we are going to make it as simple as it could be to let you understand ‘Blockchain’.
According to a technology writer of Financial Times, Sally Rivers, ‘Blockchain is to Bitcoin, what internet is to email’. As the internet facilitate the digital transfer of information, Blockchain smooth the path of the digital transfer of value.’ It’s the coming new phase of internet.
As stated earlier, Blockchain is a decentralized open 100% public ledger that memorizes, records and oversees all the transactions right from the beginning of the Bitcoin era till now.
Firstly, talking about the 100% public open ledger system. How is it possible?
“The root problem with conventional currency is all the trust that is required to make it work. The central bank must be trusted not to debase the currency. But the history of fiat currency is full of breeches of that trust. Banks must be trusted to hold our money and transfer it electronically. But they lend it out in waves of credit bubbles with barely a fraction in reserve.”
But if you store identical data in multiple locations in the form of digital codes. That is if you download the required software you can have access to the entire collection of accounts regarding the transactions from any part of the world. This makes the blockchain technology 100% in the hands of people, A DISTRIBUTED LEDGER TECHNOLOGY (DLT).
Unlike the prevalent normal databases, the public blockchains are not owned by any central entity. The blockchain permits its users to develop units of currencies and transfer the funds without any intermediaries. Hence, cuts of the function of middle-man in the trading functions. Not any central bank or any government has any control over the system. The decentralized peer-to-peer network BLOCKCHAIN is powered solely by its users.
This feature very strongly solves the ‘double-spending’ problem in the current centralized systems. For example, nowadays, when we shop online, we normally spend unnecessary and expensive transaction fees. This procedure is controlled by a central server who controls all the accounts. In a way, we double spend for a product that we could buy at half the price.
Most of you must have gone fascinated reading all these perks of Blockchain technology. Many among you might be doubting about its functioning and truth behind it. So, let’s clear all your doubts. Let’s emphasize on how this so-called ‘Blockchain’ functions?
BLOCK + CHAIN = BLOCKCHAIN
Imagine several interlocked tiles forming a pathway in a garden where we people wander around. Here, the pathway represents the Blockchain, the people referred are the cryptocurrencies. The tiles on the pathway are the blocks in the blockchain. The blocks are actually the files that permanently record the data regarding each and every transaction. It is an ever-increasing chain that can never be shortened. Since, the new transactions are being constantly processed so the new blocks are being constantly added to the blockchain. The previous blocks get buried deeper and deeper into the blockchain and hence become more difficult to manipulate. Each block contains a record of a few recent transactions and a reference that came before it.
The process of mining
Along with the record of transactions and a reference to the block, each block also has a difficult-to-solve mathematical operation. The answer to each mathematical problem is the distinct peculiarity of the block. Once a particular mathematical operation is solved with the correct answer, only then a new block is added up to the blockchain network. This process is called ‘mining’. But in a way, since all the miners are actually competing for the correct answer of the extremely difficult mathematical equation, the word ‘mining’ is a really an inaccurate designation. It is actually a contest to get hold of a block by finding the correct answer. Once, the correct answer is found, it becomes very easy to be confirmed by the rest of the network. You can presume mining a block like winning a lottery, the more a miner has his/her share in the network hash rate (computational power), the more are the chances to mine a block.
You guys must have understood the basis of Blockchain and how blocks are identified. Now let’s bring into light the concept that how the users are identified in a blockchain.
Each user in the blockchain network is identified through a public-private cryptographic key. The public part of this key is a long thread of letters and numbers such as ‘sjei2r8t8fividov9r9r838t4289r98r4g’. Bitcoin acknowledges its users through this public key. The private part of the key is managed by the user himself. It is like the password of an account which he or she can use to manage the transactions.
Nodes in Blockchain network
A node is any electronic device be it a printer or a computer or a phone that is connected to internet, has an IP address and controls the blockchain functioning. Another name for nodes is ‘binary trees’. Each node has a complete record of all the transactions being held in a particular cryptocurrency since beginning.
Stupendous amount of computing powers and processing powers are required to process such transactions and cannot be performed on an average computer. Specific CPUs (Central processing units) and GPUs (Graphic processing units) are utilized by professional miners to cope up the processing power demand for transactions to happen. Hence, they earn their reward through this process which can be in the form of cryptocurrency. Since, the interference in the blockchain cannot be performed by any simple computer device, Blockchain provides us with a secure database for all our transactions.
How secure this open ledger network is? Let’s find out.
For this distributed database, Blockchain utilizes proof-of-work system. It is a computational power that has been applied to the blockchain to protect it against any attempt of interference. This can be simplified as following:
If in case any attacker plans to change a blockchain, he would have to apply a computational power equal to all the computational power spent on that point from the beginning till the present. Also, since the Bitcoin network keeps on adding entries to the distributed database, the attacker has to overtake the authorized Bitcoin network.
But the blockchain has a tamper proof mechanism that makes it very difficult for the miners to interfere in the system. This mechanism includes:
A cryptographic fingerprint that is distinct for each block
A ‘consensus protocol’ due to which all the nodes have to acquiesce in a distributed antiquity.
So, if any mischievous personality among you if somehow plans to add a block, you need to have computational powers more than all the combined powers of all the nodes combined or else you will land up in a conflict with the existing blocks and your attempts will be exigently declined by the nodes.
Now if you are contented with the basic knowledge of Blockchain, let’s get started with using it.
First thing first to start in investing in a cryptocurrency, you need a digital wallet. A digital wallet in terms of cryptocurrency is a software which can store your public and private keys (mentioned earlier). It can be linked to your bank account and collaborated with various blockchains. You can also trace your balances and send and receive cryptocurrencies in your wallet.
In terms of Blockchain.info, the newly developed payment channel called thunder for Bitcoin network is gaining appreciation. Moreover, the blockchain wallet is totally free in terms of creating an account.
Now if you are completely set up with your blockchain account and wallet, let’s take an example of a transaction between you and me to have a clearer picture.
Imagine yourself as an owner of a fruit shop and me as a customer in your shop. I want some nice apples and oranges but instead of cash, I want to offer you a digital coin, let’s say bitcoin, in the exchange of the fruits. But it can only be feasible if you have a blockchain wallet on your phone. You can open your wallet and easily scan the QR code shown on my wallet on my phone. I will instantly see the amount I had enumerated had been debited from my account and your account will show up being credited by the same amount. Your phone will get a beep sound. This signifies that all the nodes all around the world have conceded the transaction. Once the miners note this transaction, they simultaneously add up this transaction to the series of transactions that make up a block. But before this, the miners need to complete a difficult mathematical operation called a ‘nonce’. The first one to complete it gets a reward. It takes about 10 minutes for the transaction to be confirmed by all the nodes in the world. And once it is affirmed, there is no way for me to complete a chargeback on the money that I have sent to you.
History of Blockchain
The names blockchain, Bitcoin’s and cryptocurrency are gaining popularity from recent years since 2008. But the actual foundation of Blockchain dates back to 1969 when the first internet was created in California. It got more elaborated in the 1970s when the cryptographers discovered the asymmetric encryption. Passing out a decade, the last part of this next level game changer was formed: the blockchain. After all these discoveries, American inventor David Chain made the first attempt in field of digital cash I.e. DigiCash . It was an electronic cash system invented in 1983 based on cryptographic algorithms. In 1993, 1 more British cryptographer Adam Back introduced HashCash that used encryption tools to block email spam. The next step was taken in 1998 by Nick Szabo and Wei Dai who released b-money and Bitgold. But all of these inventions were not able to gain much popularity among the masses. It happened in 2008, that the blockchain was introduced by the creators of Bitcoin in a vision to form a clear and reliable global monetary system.
Future of Blockchain
With a clear, transparent, secure, decentralized peer-to-peer network, here is what could be the future of blockchain technology in the coming future:
Currently, across 333 funds and 75 countries, 1008 blockchain start-ups have succeeded in raising $6.2 billion venture capital funds (according to venture scanner). In the coming future, the experts suggest that the blockchain spending is supposed to grow with a 5-year compound annual growth rate (CAGR) of 81.2% over a period of 2016-2021. United states is supposed to be the highest blockchain investor with contributing over 40% of the total spending worldwide throughout the forecast. This will be followed by western Europe and then China and then Asia/Pacific. The industries that are most likely to be disrupted by blockchain technology in the coming 5 years can be Financial transactions, micro-payments, banking, supply-chain, voting, healthcare and may be many more.
Let’s try to secure everything,
Let’s try to protect everything,
That’s important to us.
- Nick Szabo