Everyone has heard the term Bitcoin in the past few months as its value continued to increase until December 2017. While most investors jumped into Bitcoin to make some quick money, very few are aware of the core technology behind Bitcoin or for that matter Ethereum, Ripple, or any other cryptocurrency. The technology powering the digital currency is called Blockchain. It was first invented by a person nicknamed Satoshi Nakamoto. The real identity of Satoshi Nakamoto still remains a mystery.
What is Blockchain?
In simple terms, Blockchain can be defined as a ledger which maintains a record of the transaction which is available publicly. Instead of the ledger being in a single place which can be targeted, Blockchain is a distributed ledger ensuring that a tamper-proof and permanent data of the transaction is maintained. The information about a transaction is not stored on a single computer but sent out to a network of computers. This decentralized peer-to-peer network maintains a copy of the ledger and updates it when new transactions take place. The blockchain is capable of recording not just financial transactions, but anything and everything of value.
The core functionality of the Blockchain depends on the “Nodes.” Nodes are nothing but computers that are connected to the network using a client and perform the task of validating & relaying transactions. These nodes create a truly decentralized network as each joins the network voluntarily. Each Node will act as an “administrator” and as an incentive will have a chance to get Bitcoins. In a nutshell, higher the number of nodes, more secured is the network.
How Does Blockchain Work?
The foundation of any Blockchain transaction are the Blocks, hence the name Blockchain. All the news transactions have to be verified by the nodes before they could be accepted and converted into a new block. This new block will use the previous block’s hash to calculate its own hash, thus maintaining a chain of all the transactions. Hash is an alphanumeric string created using the block’s timestamp. So practically everyone in the network can see the transaction and a record is available with all the computers in the network.
Since each block is made using all the previous information, it is impossible to double-spend or change the past blocks. If the majority of the nodes do not concede the transaction, then it is declined and not added to the block. In case of such a scenario, the block at the centre of the problem is discarded, and the consensus process is repeated. Since this consensus model works in a decentralized manner, no single authority can impact the network.
Blockchain For Dummies
Well, all that was an entirely technical process that goes on behind the scenes. Let us take the most renowned example of Blockchain technology, the Bitcoin. So, how to send or receive Bitcoins?
Before you can receive any Bitcoin, you need a wallet to store your Bitcoins. There are several online wallets available which allow you to store, send, and receive Bitcoins. The other essential two components are the private key and the public key. Private key to prove that you are the rightful owner, the public key to verify that the rightful owner is making the transaction and whether there is sufficient balance to carry out the transaction. Let’s look at an example to understand the process of an actual transaction.
Let’s assume you do not have any Bitcoins. So, you open a new wallet and ask your friend ‘A’ to send you 0.1 Bitcoins and Friend ‘B’ to send you 0.2 Bitcoins. So, the total balance in your wallet would increase by 0.3 Bitcoins which, however, will show as two distinct outputs ready to be spent. If you have to send 0.3 Bitcoins to a friend ‘C’, you will have to enter your private key. Your private key and the message will form a digitally signed transaction which will be broadcasted to the entire network.
The nodes will use the public key and the digitally signed transaction to verify and eventually approve the transaction. The transaction request that you sent has the information about your previous incoming transactions, which will be used to confirm if you have the balance to send the money. The network is decentralized, and there are no customer service representatives on the other end. So, if you send the money to the wrong address, it is not possible to recover the lost Bitcoins. While we saw the example of Bitcoin, the transaction on Blockchain is it ERC 20 or XDC Hybrid protocol take place in a similar manner.
Applications of Blockchain
While Bitcoin and other Cryptocurrencies are being seen as a way to make quick and huge returns on investment, Blockchain at its core has huge potential to solve real-world problems. Before we look into the application of Blockchain, here are some of the most important benefits of the Blockchain.
Decentralized & Distributed
No single point of failure
No susceptible to hacking
With so many innovative benefits offered by the Blockchain, its applications are also endless. One of the most common benefits that many are already aware of is the crowdfunding using the Initial Coin Offerings. Using ICOs, companies have been able to raise money more quickly. Companies have raised millions using the ICO, which otherwise would have taken years using the traditional mediums of funding.
A smart contract is yet another application of Ethereum Blockchain which has the capability to revolutionize many industries. Besides, Blockchain is being used for sharing economy, file storage, supply chain, copyrights, Internet of Things, Identity Management, and many other applications. Companies have started applying Blockchain to all sorts of things just to increase the value of the projects. The blockchain is no doubt an amazing technology, but maybe not required in everything. A cautious approach here could help in preventing the technology from being declared a failure.