What is Blockchain?

Blockchain in Simplest Terms

The internet we are using currently runs on a centralized system. Centralized simply means that the control stays with an individual/organization.

E.g. When you make a profile on Facebook, all the data that you enter goes to Facebook and stays with them. They have the power to allow your access to their platform. In recent years we have seen on Twitter and Facebook that the platform has removed/restricted several users whom they(the platform) considered as wrong.

The thing here is, the platform’s decision may or may not be correct, it depends on the situation and point of view.

Similar is the case with other day-to-day tasks like banking, data storage etc.

Blockchain is a technology that takes a different approach on these matters. Blockchain aims to take control from a single company/organization and distribute it to all its members. In this way, everyone will be involved in the decision, not just one person/organization.

Let’s learn more about this technology.

A Blockchain is a continuously growing list of blocks that are linked and secured using cryptography.

Technically speaking, Blockchain is a cryptographically secure transactional singleton machine with a shared state.

Let’s break this down:

  • Cryptographically secure means that it is secured by complex mathematical algorithms that are very hard to break.
  • Transactional Singleton machine means that there is only one instance(single occurrence) of the machine responsible for creating all the transactions in the system.
  • Shared state means that the latest state(state is simply the condition of something at a specific time) of the machine is shared and open to everyone.

What’s the most interesting thing about Blockchain is that there is no one central store or a database which stores all the data. It is decentralized(No one person/organization holds all power/data. It is divided equally among all members). You can consider it as a spreadsheet, which is cloned and given to all the users. In this way, the spreadsheet lives on all the computers connected to the blockchain network. (Note that it is not a spreadsheet, It is just an analogy)

How does Blockchain Work?

how does blockchain works
Blockchain as the name suggests is just a chain that is made up of individual blocks of data.

The working process is simple, whenever fresh data needs to be added, a new block is created and attached to the chain. After it has been attached, all the computers connected to the blockchain network update their cloned copy of the Blockchain. This is because it is decentralized and is distributed to all the people in the network, so everyone needs to have the same copy of the blockchain.

This process looks simple, let’s dive a little deep and understand how the creation and addition of blocks to the chain actually happens

There are three main concepts to understand, Nodes, Blocks, and Miners.

1. Nodes

Blockchain is decentralized, which means that no one computer or organization can own the chain. It is a distributed ledger(a database that stores all the information in the blockchain) via the nodes connected to the network. Any electronic item that is capable of maintaining a copy of the blockchain, can be considered a Node.

There is a copy of the blockchain to every node. Whenever a new block needs to be added, the network algorithmically approves any newly mined blocks for the chain. Blockchain is open so every action can be viewed and checked.

Node is a core part of blockchain technology, they keep identical copies of blockchain database and create a network. They are responsible for accepting or rejecting a transaction, as they check whether a transaction is valid or not. They are the heart of Blockchain.

2. Blocks

Blocks are the building blocks of the blockchain. (Tongue twister maybe?)

There are three basic elements in a block

  • Data
  • 32-bit number called nonce. It is randomly generated when a block is created.
  • Hash: It is a 256-bit number that is generated with the help of nonce.

Blocks can be considered as files where the data of the network is permanently recorded. Once written it cannot be altered.

3. Miners

Miners are the people/computers responsible for everything like creating new blocks, solving complex math problems.

Miners create new blocks and the process of creating new blocks is called mining.

Every block in the blockchain has a unique nonce and hash, and it also stores a link to the previous and next block with the help of the hash of each block.

The main job of a miner is to solve extremely complex math problems. It involves finding a nonce value that generates an accepted hash. This sounds easy, right?

Well, nonce is a 32-bit number and hash is a 256-bit number so roughly there are 4billion possible nonce-hash combinations (232).

When a block is created and added successfully then the miner is rewarded financially. This is the reason why there are so many people getting into mining with large and expensive setups.

Because of this complexity, it is said that Blockchain is immutable(unchangeable). If anyone wants to change any block then it requires re-mining, not just the block with the change but also all the blocks that come after that block.

Types of Blockchain

There are 4 different types of blockchain

1. Public Blockchain

Public or permissionless blockchains are the ones that are open to everyone. Anyone can take part and use them. Every node in the public blockchain is authorized to access the blockchain (single shared state).

In a public blockchain, the history of changes is visible to everyone in the network. In this, the speed of transactions can be slow as there are a lot of people, and to ensure security addition of blocks take time.

Some famous examples of this are Bitcoin, Ethereum, etc.

2. Private Blockchain

Private blockchains are like the reverse of public blockchains. They are authorized. These operate in a closed network.

You might think that what is the use of these if these are not open to all?

Well, many organizations use blockchain for their internal purpose. It is not safe to share any sensitive information on a public network. So for their personal purpose, many organizations have created their own internal blockchains whose access is given to the people the owner organization allows to.

These can be helpful in the scenario of Elections, asset management, health care, real estate, government services, insurance.

Due to their small size and the fact that only authorized people are allowed to access a private blockchain they can be faster than public blockchain in many cases.

Some examples are Hyperledger, Ripple, etc.

3. Hybrid Blockchain

Hybrid blockchain is the blockchain that tries to use the best parts of both private and public blockchains.

In this, the members can decide who can participate in the blockchain and which transactions are made public.

Companies can use both private and public blockchains to create their hybrid system.

For example, XinFin has developed a system for Ramco System for the management of Supply Chain logistics which uses Ethereum (public blockchain) and Quorum (private blockchain).

4. Consortium Blockchain

Consortium or Federated Blockchain is a blockchain technology where multiple organizations govern the platform. This is a permissioned network.

This may look very similar to a private blockchain, but there is one important difference. In a private blockchain, there is only one organization on the platform but in the consortium, there are multiple organizations. This ensures the decentralized nature of blockchain technology.

Use cases of consortium blockchain can be Banking and payments, food tracking(IBM food trust), shipping

How is Blockchain used?

Many people and organizations consider blockchain as a revolutionary technology, hence over the years blockchain has been used in several different applications.

1. Cryptocurrency

Cryptocurrencies are digital currencies that use blockchain technology to record and secure every transaction. Cryptocurrency is an application of Blockchain. Many people think that Cryptocurrency is blockchain, that is totally wrong!

Bitcoin, Ethereum, Dogecoin are all cryptocurrencies, if both parties agree then these can be used to buy or sell goods and services just like we do with Dollars, Rupees, Euros, etc.

Cryptocurrencies use a public blockchain, so the transactions are secure and transparent.

Many people and organizations believe that in the coming years cryptocurrencies will replace the current money we use(it is called fiat money).

2. Banking

Blockchain is being used to carry out transactions in fiat currency (dollars, rupee, euro, etc). Transactions with a blockchain are faster than financial institutions and can be carried out during non-business hours. The verification of transactions in the case of blockchain is also faster.

Other than transactions, it can help in fraud detection as every individual on a blockchain network has a unique identification number and the fact that cryptocurrencies operate on public blockchains.

3. Asset Transfers

Not only the transfer of money but blockchain can also be used to transfer ownership of various types of assets if not all. Recently this idea has become popular with the rise in popularity of NFTs(Non-Fungible Tokens) which are a representation of ownership of digital arts and videos.

Organizations are working on implementing blockchain technology to include the transaction of assets like real estate, vehicles, etc which will reduce a lot of paperwork involved while buying these assets. In such a scenario, both parties will use blockchain to verify if the seller owns the asset and if the buyer has enough money to buy the asset. If the conditions match then the transaction can be carried out.

This method will eliminate brokers and will increase the rate at which these transactions occur, and the transaction can actually be paperless.

4. Smart Contracts

A nice analogy to understand smart contracts is Vending Machine. When certain conditions (money and drink choice) are met, the contract gets executed (you get the drink!).

A smart contract is a script, when called with certain parameters, performs some action or computation if certain conditions are satisfied.

Smart contracts are very useful because they are secure and trustworthy. With smart contracts two or more parties making the deal does not have to involve a middleman, smart contract works as a trustworthy mediator to execute the transaction.

Smart contracts can be used in the deals of assets, like if someone wants to sell a house, then a smart contract can be written that will receive the payment from the buyer and transfer it to the seller once the ownership of the asset is transferred.

5. Supply Chain Monitoring

A supply chain is a complex system, which involves several external intermediaries. Blockchain can have many benefits in supply chain monitoring.

It can reduce the cost of transactions, and make the transactions transparent. In a supply chain, many transactions need to be made overseas and this can be made fast and less expensive to execute with the help of a blockchain.

It helps to reduce the fraud in the chain, and thus makes the supply chain more reliable.

It helps in auditability as data cannot be changed once entered into the blockchain. So the authorities’ work is reduced and also a lot of paperwork is reduced.

Walmart has been working with IBM since 2016 to create a blockchain for its food supply chain.

6. Elections

Elections is a field with the potential for a lot of fraud. There have been incidents in the past where people were found guilty of modification of votes. Votes are changed in the ballot boxes and so on.

Blockchain has a great potential to be used in voting as it will be impossible for any one party to change the information on a blockchain.

Several countries are working with companies to create a blockchain solution that will be implemented in the near future.

Let’s take down some jargon of Blockchain

Blockchain is a technology and every technology has its own jargon. Here I will tell you about some jargon that you might hear often,

1. Consensus

Consensus is a method that is used in blockchain to prevent faults in the system. It is a method of providing verification to the data uploaded in the blockchain. There are several different types of consensus that are being used, some of them are;

  • Proof of work
  • Proof of stake
  • Proof of activity
  • Proof of capacity
  • Proof of elapsed time

2. D-Apps

D-Apps is the abbreviation for decentralized applications, these can be considered as applications that run on a blockchain network. These have become popular with the rise of the Etherum blockchain.

Examples include Tor, Bittorrent, Popcorn Time, etc.

Blockchain: Decentralization, Security, and Scalability

Decentralization, security, and scalability are the three pillars of a blockchain project. These are also called ‘blockchain trilemma’, this term was given by Vitalik Buterin (Founder of Ethereum).

Let’s talk about the Blockchain Trilemma in detail by understanding the good and bad about it.

1. Decentralization

Decentralization means there is no single point of control. The decisions are made collectively with the help of consensus by all the nodes on the network.

Decentralization comes with a drawback of speed. Transactions take more time as they need to be verified by multiple nodes, hence there is a decrease in speed.

2. Security

Blockchain is considered secure as there needs to be a consensus if anyone needs to add something to the blockchain database.

In past, however, some source codes have been hacked, these mostly include the code written by the smart contract creator.

3. Scalability

Scalability is the ability of a system to handle the growing number of transactions. Blockchain solutions need to be scalable because more and more people will join the network and use the network.

Current blockchain networks like Bitcoin and Ethereum are capable of handling much much lower number of transactions per second compared to centralized solutions like VISA

Advantages of blockchain

  • Establishes trust among the parties involved in transactions
  • Higher security
  • Removes the need for third-party intermediaries.
  • Allows participants to check the authenticity
  • Transparency
  • Create a tamper-proof record
  • Greater transparency
  • Automation

Disadvantages of Blockchain

  • Limit on number of transactions per second
  • High energy costs
  • Can be used for illegal purposes
  • Risk of asset loss (You need to remember the key of your wallet)

Investing in Blockchain

Blockchain is not an asset but a technology which means that you cannot directly invest in it. There are several other ways to invest in blockchain, the easiest one being buying a cryptocurrency. This has become a popular choice nowadays and many people are getting involved in buying, selling, and also mining crypto.

Another way to get involved in the blockchain is through buying digital assets in the form of NFTs(Non-Fungible Tokens). Buying an NFT is buying the ownership of an asset.

From a business point of view, you can buy the stocks of the companies which are creating their own blockchain solutions or using blockchain for their use.

You can also work for these companies as a software developer and can create smart contracts or d-apps for them.

Conclusion

We have talked about almost everything about Blockchain. What it is, to its use cases, advantages and disadvantages.

Blockchain is a new technology that aims at solving many real-world problems.

It is a decentralized solution that adds data in the form of blocks, and those blocks are linked to each other to form a chain with the help of cryptography(math).

It is very secure and removes the need for many intermediaries.

I will leave you with a beautiful quote…

“Whereas most technologies tend to automate workers on the periphery doing menial tasks, blockchains automate away the center. Instead of putting the taxi driver out of a job, blockchain puts Uber out of a job and lets the taxi drivers work with the customer directly.”

Vitalik Buterin, Co-Founder of Ethereum

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