Anyone who follows FinTech news these days has at least heard of blockchain. It’s the revolutionary technology used to create Bitcoin and some other cryptocurrencies. But blockchain and Bitcoin are not the same thing. In fact, blockchain tech can affect our lives in areas far wider than just digital currencies.
Although being developed in 2008 by Satoshi Nakamoto (whose real identity is still a mystery), blockchain as a real-world technology solution emerged only in 2016 and 2017. Which means it’s really a new technology and many of us tech enthusiasts have little knowledge about what this thing actually is and what it can do. So that’s what we are going to break down today.
It’s basically what the name suggests – a chain of blocks that contain information. Well, generally it’s represented as a Merkle Tree. But we can stick to the chain idea during the process of understanding it. A blockchain is a growing list of records represented as blocks that consist of three components.
First, each block contains some data depending on the type of blockchain. For example, a cryptocurrency blockchain will include transaction details such as who it’s from, whom it’s being sent to and the transaction amount. It will create a permanent ledger containing the amount of currency transferred to and from someone, thereby solving the double-spending problem. Which means, one can only spend within the amount they own at that moment.
Secondly, in order to set a block apart from others, each one will contain a unique timestamp or hash. The hash is related to the block in a way that changing any data inside the block will change the hash. Making sure it can’t be identified as the same block anymore. This is the feature that makes data stored in blockchain permanent and unchangeable. Which is handy to ensure the inability of hackers tampering with the ledger.
Finally, every block also contains the hash of the previous block essentially linking the two. It’s how the chain-like structure is realized. This is done to further ensure that the ledger can’t be changed. Changing any information will change the hash of the block which will make all of the following blocks invalid.
But even that was not enough to stop modern computers from hacking into a blockchain, as those can perform a massive number of calculations within a fraction of a second. So a mechanism called Proof of Work was introduced where to create a new block every time, one has to prove that a certain amount of computational work has been done. And this computation can only be performed through trial and error, making it a very lengthy process. This is meant to slow down the creation of new blocks.
In a blockchain, the average time required to create a new block is called the Block Time. Although longer block time means slower transactions, it makes the blockchain safer in return. For Bitcoin, block time is 10 minutes. Making it almost impossible to break into before getting caught.
Blockchain is referred to as a Distributed Ledger Technology (DLT). In simple terms, it does not have a central entity controlling the ledger. Rather, the ledger is decentralized and distributed through a Peer-to-Peer network. Every machine that’s joined the network has a copy of the constantly growing ledger. And every node in the network can work to authenticate the data stored in the blocks.
Each user in a blockchain network has two unique keys – one public key and one private key. The public key is like an address that can be used by anyone to send the currency to. On the other hand, the private key is like a password that can be used to access one’s personal assets.
To understand how transactions within a blockchain network take place, let’s consider an example where person A is sending person B two Bitcoins.
First, A will pass his and B’s unique addresses along with the number of Bitcoins he is trying to send through a hashing algorithm where these details will be encrypted using A’s private key and form a digital signature to indicate A has sent the Bitcoins. This encrypted transaction information is then transmitted and only B can decrypt it using his private key.
But the process of adding a new transaction isn’t over yet. As mentioned before, these data need to be validated and added in blocks.
Nodes that carry the process of validating these data are called miners. You’ve heard of Bitcoin mining a lot, right?
In order to validate the data and add them to the blocks, miners need to solve complex mathematical problems. The miner who solves this problem the fastest gets to add the block to the blockchain and is rewarded with 12.5 Bitcoins.
This lengthy method of solving problems to add blocks to the chain is what’s called Proof of Work in case of Bitcoin. Other blockchains do use different consensus methods. But this is the basic structure of adding a new block to the blockchain. The new ledger is then broadcast across the network for every node to keep.
We all know about cryptocurrencies by now. Let’s talk about some other cases the blockchain technology can be used in.
Smart contracts. These are blockchain-based contracts that can be executed or enforced fully or partially without human interaction. These contracts are automated and do not need a trusted third party to mediate.
Financial services. Distributed ledgers are largely being used in banking. This technology has the potential to speed up back office settlement systems.
Video games. In 2017, CryptoKitties was launched as the first blockchain game.
Supply chain. Mining, food supply, shipping and software development are the major industries working to facilitate supply chain management using blockchain.
Healthcare. Responding to the COVID-19 pandemic, a blockchain that tracks antibody test and virus immunity is being developed.
There are various other sectors blockchain can be used in. But like most other technologies, it will take time to become a part of our daily lives. There are technical logics to be figured out, applications to be developed and users to be trained. Only time can tell what this promising technology can give us in the future.
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