The most significant technological advancement since the internet is said to be blockchain technology. Within a few decades, according to enthusiasts of the technology, it will disrupt numerous industries and directly affect people's lives.
In this article, we will provide a simple and direct explanation of what blockchain technology is and how it functions. But before we delve into that, let’s start from the very beginning:
When was blockchain invented?
A blockchain is, as its name suggests, a chain of blocks containing information. In order to prevent backdating or tampering, this method was first proposed by a group of researchers in 1991.
It was originally meant to timestamp digital documents, similar to a notary. But it remained largely unused until Satoshi Nakamoto adapted it in 2009 to launch the virtual currency Bitcoin.
What is blockchain?
Blockchain is a digital ledger or database.
This straightforward explanation, however, falls short of the ingenuity of how this technology stores values and transactions. Up until recently, customers had to rely on third parties (including banks, governments, and companies) to keep their assets and the details of their transactions.
For instance, you put your trust in the bank and the credit card company to protect your personal information and transaction details when you use your credit card to make a purchase. This trust in institutions extends beyond just business transactions.
For example, a car rental company keeps your personal information, your address, the cars you've rented, and the due dates for returning them are all kept in their central database. You presume that they will keep all of this information secure and secret.
In these institutions, information was always centralized, and each one had to have its own books and systems. With blockchain, that’s no longer the case!
Trust issues and the blockchain
People are supposed to have faith in the institutions involved when doing a transaction. Imagine the interactions mentioned above without the influence of institutions.
Would you accept a piece of paper from a stranger that read, "I owe you $50"? Most likely not.
Additionally, banks can fail, governments can halt withdrawals (particularly in developing nations), and car rental businesses can close. For these reasons, blockchain technology can be very helpful.
Where is blockchain used?
Centralized organizations and databases become unnecessary when decentralized databases are created on the blockchain. Transparency and trust are established since everyone can examine and verify transactions on the blockchain.
Blockchain does away with the requirement for an intermediary in these transactions.
Some examples of organizations or institutions that use blockchain are:
- Goldman Sachs
How the Blockchain works
Our car rental example is a wonderful method to acquire a clear understanding of how the blockchain functions.
Every time someone leases a car, a transaction is created, and the car rental company serves as the intermediary in these transactions. The car rental company maintains a database with all the details of the vehicles it rents out as well as the individuals who do so.
If someone else had rented it and you also wanted to rent it, you would need to wait until they’ve returned the car. You would need to receive it straight from the car rental after it would have been returned, even if this person would be living in your building (you won't have this information).
Imagine a decentralized car rental system where customers can rent straight from you and to other customers without returning your car to you. At the same time, there would also be a public listing of who has owned it originally and who has rented it.
Anyone can sign up for and examine the records under this new car renting system. All databases are updated and a fresh transaction is logged each time a car is rented.
Without the need for a third-party institution to centralize the records of what happens with the cars, this new car rental is run by everyone who joins it.
The blockchain functions in this manner.
Why do they call it blockchain?
Going back to the car rental example, each time a car is rented, a new transaction is made. At the same time, many people are renting cars.
A block of new transactions for various cars is grouped together. On top of the previous block of transactions, this new block of data is organized.
A link is established between each new block of transactions and the one before it. All the blocks are connected to one another, forming a chain of blocks.
Anyone may keep track of all the cars that have been rented and by whom in our example. To find out who owns a certain car, it is even possible to return to the very first block, also referred to as the "genesis block."
Modifying already-added blocks and transactions
A block of data that is added to the blockchain cannot be modified once it has been registered. Technically, changing a block of data is practically impossible.
A "confirmation" occurs each time a new block is added to the blockchain.
It is estimated that after six confirmations, it is mathematically impossible to modify any of the transactions in that block. Because of this, some businesses require six confirmations before accepting a payment made using a cryptocurrency based on a blockchain.
Approving the addition of transactions to the blockchain
The majority of the network must concur that a transaction is valid in order for it to be added to the blockchain. Distributed consensus is the term for this.
A transaction is only considered valid if it is approved by more than 50% of people on the network.
Let's imagine that a man (let's call him John) joins the automobile rental network. When John rents a car, he receives one CarCoin, the network's currency (assuming that every car is rented for one CarCoin). He immediately tries to rent a car from Julia, and then a second one from Marcia.
Two transactions will result from this.
The initial one is broadcast to everybody in the network, verified (John pays Julia one CarCoin), and then the transaction is added to a new block.
The second transaction is sent to the network after the first one has been completed. They confirm that John's CarCoin balance is zero and decide that this transaction is invalid, therefore they reject it.
Participants who help to validate transactions and upload legitimate blocks of transactions to the blockchain are rewarded for their work.
This is what mining is.
The computers connected to the network need to figure out a puzzle in order for a transaction to be verified and added to a block.
Proof of work is what this puzzle is called.
The transaction is added to a new block by the computer that successfully solves the problem. The currency (also known as a token) used on that network—in our case, the token was the CarCoin—is used to pay the prize for finding the answer first.
This process is called mining since they are only taking small amounts out of a block.
- A blockchain is a distributed ledger that is entirely accessible to everyone.
- Blockchain has an intriguing quality: it makes changing data exceedingly challenging once it has been recorded inside a blockchain.
- Blockchain establishes a reliable, uncensored, and accessible global data and information repository. This quality will guide the development of the third generation of the internet.
Is blockchain the future of the internet? Stay tuned for our upcoming blogs on blockchains!
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