Decoding Blockchain: Introduction
Tags: Smart Contracts, Cryptocurrency, Decentralization, Technology, Blockchain

What Blockchain is and how does it work?

Blockchain technology as it says is both a revolution and disruption capable of changing the way industries and companies operate within. This technology brings a high level of accountability, transparency and minimizes both human and machine errors. It validates the transactions by recording on distributed databases instead of central authority (which limits access and control).

The concept was first introduced by Satoshi Nakamoto in 2008 and implemented in 2009 in the form of digital currency called bitcoin. The currency uses a blockchain system to solve double spending and the need for a financial intermediary.

The Blockchain is more of a sharing economy where it enables peer to peer payments and opens the door for direct interaction between parties. An example of it could be AirBnB and ride-sharing services by Uber. It is more of no rules kind of work area where personal reputation is important to business interactions.

Blockchain technology isn’t just a more efficient way to settle securities, it will fundamentally change market structures, and maybe even the architecture of the internet itself. ~ Abigail Johnson, CEO, Fidelity Investments

What is Blockchain for a layman?

It is a chain of blocks which is simply meant as a computer file used for storing data. The best way to understand Blockchain is a file which has date and time and is publicly accessible to everyone in the network. Each file contains a timestamp and a link to the previous file and this is how a chain is formed. Now old files are stored, new pages are added and nobody in the network can manipulate and change any part of the information in the file. The blocks are kept secretly in such a way that even if everyone has access to it, only authorized individuals can add a new record to the chain. The security is in the form of key and the person with access to it can only change it.

Take an example for an educational institution, the university administration uploads certificates of students through private key and students with a public key can access those certificates anytime. This method makes the data secure and accessible.

Now how it is different than online databases without Blockchain. We often hear cases of a data breach, malware attacks, hacking in banks, organizations or social media which results in data loss. There are also cases of forgery, reproduction or loss of certificates. Here comes the solution to these problems in terms of the Blockchain. Now you might be wondering who is interested in hacking students’ data. But there are cases where students have made changes to their certificates online or offline to get a job in organizations. With Blockchain in place, organizations can request to access the certificates and check for authenticity.

Understand Blockchain with Simply Explained

What are important components in Blockchain?

Distributed database — An important feature and benefit of Blockchain is that it is a distributed database. There is no single server or central authority controlling it. The database is held on hundreds and thousands of computing devices all over the world which is called peer-to-peer distributed database. There is no way a hacker can hack all those devices at one point in time. With this, the technology disrupted the conventional processes institutions follow and control data. With Blockchain data is democratized without any central authority.

Nodes — Now when multiple users are involved and are responsible for risk and management of the blocks, they are called as nodes. Nodes can also be computers which are connected to the blockchain network using a client and perform the task of validating and relying upon the transactions. The node also gets a copy of the blockchain which gets automatically downloaded upon joining the blockchain network.

Cryptography — Also called as cryptology, the protection of information and communication through the use of codes so that authorized users can read it. The information in the blocks cannot be read without a key and it doesn’t get changed even during transit and at the time of storage. Also, it entails disavowal, which means sender and receiver confirm the block.

Hash — The information in the block is used to calculate the encryption for the entire block. This encryption or security is called hash. Each block on the chain contains the hash of the previous block as part of its content to form a link. If there is any change in the information stored on any block, the hash value of the block also gets changed and the hash of the following blocks in the chain.

Private and Public Blockchain — A private blockchain is based on the aspect that who is allowed to participate in the network, execute the consensus protocol and maintain the shared ledger. Whereas a public blockchain network is completely open and allows anyone to join it. In public blockchain, it requires a huge amount of computational power to maintain and distribute database at a large scale. Also, each node in the network must solve a complex and resource-intensive cryptographic problem which is called a proof of work to ensure all nodes are in sync.

The Blockchain is not about Fintech only — The first digital currency or cryptocurrency or decentralized digital currency “Bitcoin” allows electronic cash to transfer online directly from one participant to another without the need of any financial institution to store and move money. It uses the rules of cryptography for regulation and generation of units of currency. Completely virtual money or coin (as better known) designed to be self-contained for their value. Lately, people are using bitcoin to trade for goods and services online. But the capacity of blockchain is far more and is able to disrupt the way we secure documents, certificates and businesses transact. As is also explained in the above example how universities can store student info. There are several uses in healthcare, stock trading, packaged food, automobiles, travel, and others.

Wallet — A small personal database or better known as e-wallet that allows users to store cryptocurrencies. It provides a Wallet ID which is unique. Users with the account can access their wallets either through blockchain website or mobile app. Wallets also come with 3 levels of security prevent unauthorized access and loss of cryptocurrencies stored in it.

Supply Chain Auditing — Another benefit of blockchain technology from consumer point is that they can verify whether the ethical and quality claims organizations make about their products are real and to what extent. Distributed ledgers provide an easy way to audit the complete chain from start to end, like in terms of manufacturing to delivery. The food they consume comes from which farm and how it is procured and packaged.

Prediction Markets — In blockchain, prediction markets are based on events that either will or won’t happen. In the stock market, players trade with contracts where the payoff will vary depending on the future result. As opposed to this, prediction markets make the result of future event tradeable. It is like predicting the election result, stock price, derivates, futures or like when is the new iPhone launching? This is not to be confused with the conventional betting as the value of a bet reflects the probability of an outcome materializing. On the other hand, the payoff in prediction markets depends on how accurate is the prediction of an outcome of an event. Therefore, players will try to come close to an accurate conclusion. The possibility of merely predicting without any solid base would fade away. And there will be much more efforts putting in by the players to do research on different aspects of the entity under prediction to come to a favorable conclusion.

Smart Contracts and Protection of Intellectual Property — In the digital world, information can be easily reproduced and sold over the internet for financial benefits while the originator loses. Smart contracts protect copyright and eliminate the risk of unauthorized copying and selling. Land registry and title transfer can be made easier by smart contracts. As information is recorded on blockchain which keeps record keeping efficient and secure.

Source: World Economic Forum

Challenges with existing systems

It becomes clear from the above features and examples the benefits of blockchain in different areas. The existing system works entirely different than blockchain. It relies on a central authority in a more complex, rigid and controlled manner allowing little to no access to the participants involved. On the other hand, blockchain is decentralized, flexible and less complicated though secure technology. It moreover aims to provide strength to the existing technologies and systems eliminating manipulation, replacing paper documents/certificates, keeping information transparent. It doesn’t require third-party validation to store and move funds which impact business activities during off days. The decentralized peer to peer network prevents individuals or groups to control the underlying infrastructure or manipulates the information. All participants in the network are equal and follow the same protocol. These participants could be organizations, state, nations, individuals or a combination of any of those.

Benefits for Businesses in Blockchain

In the business world, different parties maintain their own set of data which causes duplication, inconsistency and increased server space. The result of this system often leads to disputes, manipulation leading to more difficulties such as lawsuit and, waste of time and money. However, in blockchain based systems, ledgers are shared among the participants and transactions cannot be altered once validated and written by consensus.

Blockchain system minimizes the error and ensures consistency of data with near real-time reference data and flexibility to the participants to change the information of the assets they own. Now when the transactions being executed on business networks using blockchain technologies are shared, automated and final, this results in the speed of execution and audit at a reduced cost and risk. This opens up new opportunities for businesses to focus on new revenue streams and development.

However, Blockchain is being embraced as a technology since initial days, but at a larger level, governments and organizations are figuring out ways to put it to use in future. Although there are organizations as well as nations already tested the application of technology and are successfully transacting. Blockchain system provides technically a new way to transact business. It focuses on the shared system and transparency giving rise to the next generation of application and technological development.