Blockchain Technology - Explained

Formal definition of blockchain is a publicly distributed, decentralized ledger. Let’s break down the terms for better understanding:

• Publicly Distributed – All the data of the ledger is stored and available to all the nodes (entities) in the network
• Decentralized – There is no single authority that collects or manages the data. All the participants in the network are data validators and are awarded the network token as an incentive to make the best efforts to manage network for everyone’s advantage.
• Ledger – Ledger is nothing but a store of records.

Hence, blockchain is a method of storing data in such a way that the data is available to be seen and verified by all the players of the network rather than being stored in silos in the servers of mega-corporations or any other singular authority. This data can be of any form like transaction details, photos, files, identities, etc. All this data processed on the network in the past few minutes is clubbed together to form a block and a chain of such blocks linked together is called a block-chain.

The most popular blockchain is that of Bitcoin, that has an eponymous token. Apart from bitcoin, other popular blockchains are Ethereum, Ripple, etc.

But what is all the fuss about blockchain being today what internet was in the 1990s?

For that let’s have a look at some of the features of block-chain and compare them with our current ecosystem.

• Peer to Peer – Blockchain technology lets people connect with each other without the need for any intermediary to act as the facilitator between the two parties. This is safe enough to let two people who do not know or trust each other to connect and complete the transaction that they intend to do.
• Transparency – All the nodes on the network can see the data that is being added to the blockchain. Any transaction that has ever been done on the network, up until the genesis block (the very first block of the chain) will be visible to all the participants.
• Immutability – It is nearly impossible to change the data once the block is added to the chain. The use of public-key cryptography and hash functions (topics for future articles) makes it nearly impossible to go back to data in any previous and make changes to it because that requires the whole chain to be re-defined.
• Decentralization – The data is run on all the nodes present in the network rather than on the servers owned by big corporations or governments. This drastically reduces the risk of shut-down, data loss, hacking, etc.
• Anonymity – Although the blockchain is transparent, the true identity of the participant can be kept anonymous to all other members of the network. Blockchain uses public-key cryptography, which is a form of asymmetric cryptography, in which every member is given a private key, and until this private key is shared with other network members, the identity of the person remains anonymous.

Example – Let’s suppose that we have a library that uses blockchain technology to maintain records rather than our usual centrally managed library. Let’s call this B-library. Since this B-library uses a decentralized, publicly distributed ledger to maintain records, every member of that library will be able to see all the books that have ever been lent, borrowed, and returned to the library. Whenever a person borrows a book, it marks a transaction, and many such transactions are clubbed together in a block. All such blocks are linked to each other in the form of a chain such that every new block created is added on top of the previous block and so on.

Suppose Mr. A, a member of our B-library, wants to who has currently borrowed the book “blockchain explained”. So, he can enter the latest added block and find out the issuer of the book. If Mr. A wants to find out all the people who have ever borrowed the book “blockchain explained” then he can follow the chain of blocks to get the required information. But all these things can be done with the current centrally controlled library system also, so why use blockchain?

Suppose Mr. A has borrowed “blockchain explained” and likes it so much that he does not want to return the book back. Now with the current centralized system, it is easy to manipulate the data entered. There are various ways to do this. Mr. A can bribe the librarian who handles the data entry so that records show that Mr. A never has returned the book within time, or he can take help from his hacker friend to enter the system and change the record. But with our B-library it is not possible. Since B-library runs on blockchain, its database is both immutable and transparent which means that once it is entered that Mr. A has borrowed the book from the library then neither of his friends can help him to alter that data. Also, as this data is visible to all the members of the network, they know exactly when and who borrowed the book and hence whom to apprehend when the book is not returned back in time. Now change the scenario from borrowing a book from library to borrowing Billions of US$ from a bank and the use of blockchain technology will automatically start making sense. We are talking about a democratized solution for Billions of Dollars’ worth of frauds done every year, and much much more.

It is not to say that this is a perfect solution to deficiencies in current system, far from it. But the scope and potential for this technology for sure is promising. In this article, we primarily discussed bitcoin blockchain, but this technology is not limited to it. Many other blockchains and protocols like Ethereum and Zero Knowledge Proof are increasing the scope and potential use of blockchain technology in the real world.

That’s all for the basic understanding of blockchain technology and its potential. In the next article, I will try to explain the procedure of how a block is mined and added to the blockchain.