What is Blockchain Technology? Explained for Beginners.

What is Blockchain technology?

The first thing that the average layperson probably associates Blockchain with, is Bitcoin and Cryptocurrency. While that was the initial and still the most widely known usage of Blockchain, Blockchain technology is evolving and will have much wider usage in the near future. For instance, the ‘blocks’ in blockchain can contain information related to identity, chronology, finance, and almost any other thing.

In simple terms, Blockchain can be described as a Digital Ledger that can be used for various record-keeping purposes, independently. What makes it such a huge phenomenon, is that it is not restricted to a particular place or system. It can be accessed from thousands of systems, which makes it a close second to the Internet itself.

The basic Blockchain mechanism can be explained as below:

• It’s a record for data exchanges. These exchanges are referred to as ‘transactions’ and every single verified transaction is added to the ledger as a ‘block’.
• The verification process uses a distributed system consisting of a network of users (known as nodes).
• Once signed and verified by each node, the new transaction becomes a new ‘block’ in the blockchain and cannot be altered.

Why is it called Blockchain?

It is a self-explanatory term. An incremental list of records that are forming ‘blocks’, with each block being linked to the preceding block creating a ‘chain’.

As a data structure, blockchain has a lot of potential for enterprises and Governments across the globe. It can be a secure, transparent, and a decentralized database with open access. Each node in the network has access to all exchange, making the possibility of any dubious activity almost nil, without involving a third-party audit.

Who created Blockchain?

The conceptual building blocks of the Blockchain technology is widely attributed to an individual (or group of individuals) known as Satoshi Nakamoto. Nakamoto (whoever he or they are) laid down the design blueprint in 2008.

However, much before Nakamoto, Ralph Merkle had patented the first known theoretical form of Blockchain – the hash tree or the Merkle Tree – in 1979. The Merkle Tree could verify and handle data between various computer systems but the functionality was rather limited.

The first attempt of using a secure cryptographic blockchain is credited to Stuart Haber and W. Scott Stornetta. In 1991, the duo made an attempt to put in place a system, in which document timestamps could not be tampered with. The very next year,  Haber and Stornetta along with another fellow Blockchain enthusiast Bayer used the Merkle tree concept for their design, improving the system’s efficiency by letting multiple document certificates to be formed within one block.

After a lull of more than 15 years, Nakamoto burst upon the scene renewing the Blockchain fervour. Some people even believe that Haber is at least one of the core members of the Satoshi Nakamoto cult (for the lack of a better term). Nakamoto improved upon the blockchain design by incorporating what is known as the Hashcash (proof of work) -like method to add blocks to the chain.

This improved framework was used by the group, the following year, to lay the foundation of the cryptocurrency bitcoin, a term most of us are familiar with. All transactions on the bitcoin network was recorded here, as it served as a public ledger as well.

By January 2017 the Bitcoin Blockchain file size had grown to a massive 100GB from a moderate 20GB in August 2014. The term ‘blockchain’ became popular in 2016 although in Nakamoto’s original paper, the terms ‘block’ and ‘chain’ were used separately.

How does Blockchain technology work?

We have already established that blockchain is a journal that is foolproof and cannot be forged. But how exactly does this technology work?

Since Nakamoto used the hash function to create the latest blockchain, let’s take a look at what is a hash function first.

A ‘hash’ is a string of letters and numbers. A hash sequence is a mathematical function that converts a variable number of characters into a string of fixed number of characters. A slight change in a hash string results in a completely different hash.

Hash – Making entries safe and secure

Say, a group of people decides to build a currency. One person decided to keep track of all the daily activities related to flow of funds in a diary. Another person in the group intends to steal money and tamper with the data entries. This is where the hash string comes to the rescue.

The person in charge of keeping the records straight, inserts a ‘hash’ after each new entry, which basically turns texts into a unique set of numbers and letters. Not willing to give up so soon, the unscrupulous member of the group changes the records by generating a new hash. So the record-keeper goes a little further and inserts a hash with the functionality ‘record+last’ hash. Each entry, therefore, becomes dependent on the previous, and to insert a new hash would mean having to change the hash in each previous entry.

Nonce – A further layer of security

To add a further layer of security, the record keeper adds something called ‘nonce’, a number, after each entry. Anyone wanting to forge the entries, would have to spend hours trying to figure out the nonce. And the interesting bit about nonce is that it’ll need a machine and not a human mind to figure out the number, making the ledger of entries impenetrable.

Nodes – Where do they come in

When the record keeper has accumulated, say 10,000 entries he puts all of them in one spreadsheet and validates it with another member in the group. They then spread it across thousands of systems across the globe known as ‘nodes’ in that particular network. Every time an entry is made, all these nodes will be validating the entry, thus making the data safe and yet decentralized.

How does the peer-to-peer model work in Blockchain?

Blockchain is built on the idea of the non requirement of third party to access data, and making use of the peer-to-peer interaction model. The P2P protocol ensures that all network participants – nodes – hold identical copy of all transactions. For instance, if a person wants to make a transaction from one corner of the globe to another, they can do that with blockchain in a jiffy without interruptions, paper work or extra charges for transfer

How is Blockchain different? How can Blockchain help?

What makes Blockchain different from other forms of data-keeping and ledger is accessibility and security. It increases the transparency of transactions manifold. All one needs to do is register themselves with the ledger and they can do transactions.

But, why this sudden need for blockchain, when the banking system seems to be improving year on year. Blockchain enthusiasts scoff at the idea of banks acting as third parties and unnecessary delays in cross-border transactions owing to formalities. Additionally, they believe that a ‘transaction fees’ is just another name for pilfering money from individuals. Real-time transactions, even cross-border, are a possibility with Blockchain. Some Blockchain developers also question the inherent flaws in the banking system such as the possibility of people losing money in the event of robbery, natural calamity, or even bankruptcy (although that is a little too far fetched).

What are the applications of Blockchain and who will benefit from it?

Now, let’s look at some of the potential beneficiaries of blockchain.

Payment processing and money transfers

The basic and most logical usage of the blockchain technology. If third parties, banks, are indeed removed from the picture, most transactions on a blockchain can be settled within a matter of seconds.

Supply Chains Monitoring

If paper-based trails are removed, businesses can gain immensely from Blockchain by addressing the gaps within their supply chains quickly. Additionally, blockchain may even give consumers a chance to view the origin of products to how they are being sold to them, from a quality-control perspective.

Digital Identity

Identity crisis is one of the biggest challenges of the modern world. Refugee influx, war, insurgency is responsible for more than a billion people suffering from identity challenges. Plus, faking and hacking of digital identity is another not so uncommon. Blockchain can solve this problem. In fact. Microsoft is working on creating digital ids with its Authenticator app to help users control their digital identities. This can help people buy supplies, get access to financial services, among other things in areas of unrest easily, among other things.

Copyright and Royalty Protection

Content creators are wary of piracy. The internet is rife with music, stories, photo repositories, and what not with lines blurring when it comes to copyright. Blockchain can ensure that artists get due by providing real-time and transparent royalty distribution data.

Digital voting

Blockchain can create a system that supports digital voting with transparency. It combines the ease of digital voting with the immutability (i.e., unchanging nature) of blockchain to make your vote really count. With economic migration and alleged voting fraud on the rise, digital voting may well be the solution for democracies to stay functional.

We are just scouring the tip of the iceberg with the possibilities that Blockchain can let us explore. But it certainly is a good start.