Almost everyone has heard about Blockchain. In this article we will discuss about the world of Blockchain and its working.
What is blockchain?
Blockchain is a continuously growing list of records, called blocks, which are linked and secured using cryptography. In simple words a Blockchain is a diary that is almost impossible to forge. It is “an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way”. Each block typically contains a hash pointer as a link to a previous block, a timestamp and transaction data.
“The blockchain is an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value.”
Don & Alex Tapscott, authors Blockchain Revolution (2016)
To understand the concept of blockchain you need to understand its parts first:-
Hash functions are a fundamental part of blockchain technologies. If you understand hash functions, it will make understanding other concepts such as tamper proofing, digital fingerprints and provenance easier.
What is a hash function?
The hash concept is actually quite simple. It’s the amount of technical words used that confuse people. Simply stated, a hash function takes some input data and creates some output data. To expand on this concept, a hash function takes an input of any length and creates an output of fixed length. In the context of cryptocurrencies like Bitcoin, the transactions are taken as an input and run through a hashing algorithm (Bitcoin uses SHA-256) which gives an output of a fixed length.
Let’s see how the hashing process works. We are going put in certain inputs. For this exercise, we are going to use the SHA-256 (Secure Hashing Algorithm 256).
As you can see, in the case of SHA-256, no matter how big or small your input is, the output will always have a fixed 256-bits length. This becomes critical when you are dealing with a huge amount of data and transactions. So basically, instead of remembering the input data which could be huge, you can just remember the hash and keep track.
Networks of so-called computing “nodes” make up the blockchain.
(Computer connected to the blockchain network using a client that performs the task of validating and relaying transactions) gets a copy of the blockchain, which gets downloaded automatically upon joining the blockchain network.
Suppose you realized that there were too many records and that you couldn’t keep the record like this forever. So when you wrote many transactions, you converted them to a one page spreadsheet.
Then you spread this spreadsheet over many computers, which were all over the world. These computers are called nodes. Every time a transaction occurs it has to be approved by the nodes.
The nodes referred to above are computers. Each node has a copy of the digital ledger or Blockchain. Each node checks the validity of each transaction. If a majority of nodes say that a transaction is valid then it is written into a block.
Now suppose if someone changes one entry. All the other nodes/ computers will have the original hash. So, they won’t allow the change to occur.
Block records some or all of the most recent Bitcoin transactions that have not yet entered any prior blocks. Thus a block is like a page of a ledger or record book. Each time a block is ‘completed’, it gives way to the next block in the blockchain.
Or in other words,
The spreadsheet of information is called a block and the whole family of blocks is the Blockchain. Once a block reaches a certain number of approved transactions then a new block is formed.
The blockchain automatically updates itself after every ten minutes. Once the ledger is updated, it can’t be changed thus forging it is impossible and the ledger is updated on all the nodes/ computers at the same time.
Points to ponder:-
· A blockchain facilitates secure online transactions.
· It is a decentralized and distributed digital ledger that is used to record transactions across many computers so that the record cannot be altered retroactively without the alteration of all subsequent blocks and the collusion of the network.
· Blockchain updates itself every 10 minutes.
The blockchain era is growing at a rapid pace, creating high demand for blockchain developers too.
A World Economic Forum report from September 2015 predicted that by 2025 ten percent of global GDP would be stored on blockchain technology.
“Blockchain solves the problem of manipulation. When I speak about it in the West, people say they trust Google, Facebook, or their banks. But the rest of the world doesn’t trust organizations and corporations that much — I mean Africa, India, the Eastern Europe, or Russia. It’s not about the places where people are really rich. Blockchain’s opportunities are the highest in the countries that haven’t reached that level yet.”
Vitalik Buterin, inventor of Ethereum
Defining principles of blockchain:-
There are 5 principles of blockchain.
1. Distributed database: Each node on a blockchain has access to the whole database and its complete history. No single node or computer regulates the data or the information. Every node validates the records of its transactions directly, without an intermediary.
2. Peer-to-peer (P2P) transmission: Communication occurs directly between peers rather than through a central node. Each node stores and distributes the information to all other nodes. In this way the whole network feeds itself with all the information.
3. Transparency with confidentiality: Every transaction and its respective value are visible to anyone who has access to the system. Each node, or user, on a blockchain has a unique 30-plus-character alphanumeric address that identifies it. It’s totally user’s choice to stay anonymous or provide proof of their identity to others. Transactions occur between blockchain addresses.
4. Irreversible records: Once a transaction is recorded in the database and the accounts are updated, the records cannot be changed. This is because they are linked to every transaction record that preceded them. Various algorithms are deployed to ensure that the recording on the database is permanent, arranged in order, and available to all others on the network.
5. Logic programming: The digital nature of the ledger means that blockchain transactions can be held and tied to a logical program. So users can set up algorithms and rules that automatically trigger transactions between the nodes.
Where is blockchain used?
Smart contracts define the rules and penalties around a specific agreement in the same way as traditional contracts do. However, the big difference is that smart contracts automatically enforce those obligations. Distributed ledgers enable the coding of simple contracts that will execute when specified conditions are met.
The sharing economy:-
With companies like Uber and AirBnB flourishing, the sharing economy is already a proven success. Currently, users rely on Uber for ride sharing. By enabling peer-to-peer payments, the blockchain opens the door to direct interaction between parties — a truly decentralized sharing economy results.
With smart contracts, a certain set of criteria for specific insurance-related situations can be established. In theory, with the implementation of Blockchain technology, you can receive an instant payout by just submitting your insurance claim online. Provided your claim fulfills all the required criteria. French insurance giant AXA is the first major insurance group to offer insurance using Blockchain technology. They’ve recently introduced a new flight-delay insurance product that will use smart contracts to store and process payouts. Other insurance companies will surely follow suit.
Managing digital identities:-
It takes a lot of time and efforts in identity verification. Using the decentralization of Blockchains, the verification of online identity will be much quicker. Distributed ledgers offer enhanced methods for proving who you are, along with the possibility to digitize personal documents. Computer hackers will no longer have centralized points of vulnerability to attack. Data storage is tamper-proof and incorruptible when backed by Blockchain. All over the world, the Blockchain is leading to big improvements in the verification of identity.
Know your customer (KYC) practices have a strong potential for being adapted to the blockchain. Currently, financial institutions must perform a labour intensive multi-step process for each new customer. KYC costs could be reduced through cross-institution client verification, and at the same time increase monitoring and analysis effectiveness.
Internet of things (IoT):-
What is the IoT? The network-controlled management of certain types of electronic devices is IoT. In simple words it is the network of physical devices, vehicles and other items embedded with software, sensors, software and network connectivity, connected to the Internet. All of those features enable such objects to collect and exchange data. Blockchain and its smart contracts are ideal for this. Think of Samsung, IBM and AT&T (the biggest players in manufacturing, tech and telecommunications are all vying for IoT dominance)
You can’t stop things like Bitcoin. It will be everywhere and the world will have to readjust. World governments will have to readjust.
John McAfee, Founder of McAfee