Bitcoin has been in the news for quite some time now, and so is the revolutionary technology supporting its existence, the Block chain.
None of the other investments ever performed like the cryptocurrencies have. And now many industries are thinking to use the Blockchain in real-world applications. But the truth is, no one knows much about this virtual currency and the background technology.
So, today read what the Bitcoin blockchain is and how does it work.
What is Blockchain?
The blockchain explained in simple words, is a decentralized ledger of transactions. It is an ever-growing list of records (in blocks) which is secured from any modification, using cryptographic methods. Along with the transaction data, each block has a hash pointer to link it to the previous block.
The blockchain is a public, distributed ledger managed by the peers in the network. This peer to peer network follows a protocol to validate new transactions and add it to the blockchain database.
Once the verification is complete and a block gets attached to the chain, there is no turning back without approval by the network majority.
The identity of its inventor is still hazy and goes by the pseudonym Satoshi Nakamoto, who released this to the world in 2009 along with the Bitcoin.
The presence of Blockchain enables Bitcoin, the new digital currency, to exist without the need of a third-party. Two people can digitally send payments without verification from a central authority.
Although designed to facilitate the transfer of Bitcoins and other cryptocurrencies (termed altcoins), blockchain is an excellent example of distributed computing with a decentralized consensus.
So, the technique can also find usability in medical records keeping, identity management, processing of various transactions and maybe in voting.
But how does it work? Read next.
How does blockchain work?
Satoshi designed Blockchain to be the Bitcoin core, and it records each transaction that takes place in the network. Each node in the network owns a ledger that keeps track of the transactions. Think of a spreadsheet available across all the computers in the system, something like Google Docs.
Whenever a transaction happens, the blockchain, everyone’s spreadsheet, gets updated. The data is available to everyone, and anyone can verify it. There isn’t any central version of the database which a malicious node (a hacker) can alter.
Apart from storing the ledger, the nodes also solve puzzles, complex ones, and why would they do that? Let’s take an example to understand.
If X wants to send five bitcoins to Y, every node in the network, the users, get the message. They make the changes in their respective ledgers (it’s automatic, by the way). But how does anyone know if the transaction is valid if X has enough money? This validity check is the job of miners.
This public ledger does not keep any record of user balance, all it has are transactions, broadcasted to the network.
To know how much a user has, you need to check all the verified transactions taken place with his/her Bitcoin wallet. The miners are the high power computers which solve mathematical puzzles to verify the transactions.
The unverified block (of transactions) passes through an algorithm until the solution is found. This is the Proof of Work algorithm in the Bitcoin environment.
One who got the hash (the solution), adds the block to the previous chain and the transactions are permanent.
The ledger is now secure, and the public can trust it. Miners get (new) Bitcoins (in this case) as a reward for solving the puzzles. That’s why this process is called mining. In the Bitcoin network, everyone is a miner, but the one with more CPU power succeeds.
Benefits of using Blockchain
Now that you know how the blockchain technology works let’s see how it is an improvement over the current FinTech in use.
The first advantage it has is that the blockchain is decentralized. There is no central hub to hold data, and you have full control over your assets.
You can transaction as much you want without any daily/weekly limits (But not more than the amount you own). This decentralization has another benefit that it keeps your account safe from cyber-attacks.
Also, the absence of any financial institutions reduces the cost of transactions which means smaller transaction fees. You only pay a fraction of dollar whether you transfer to your neighbor or someone in the other part of the world. The absence of intermediaries also results in fast transactions.
While the banks are closed on weekends and process transactions only during the working hours, blockchain transactions get validated 24 hours a day, and every day.
The bitcoin transactions take around 30 minutes to complete, but many other blockchains offer a reduced time of few seconds. This is a lot less than the time it currently takes for international transfers.
Real-world application of Blockchain
Well, those were the advantages of Blockchain over the current financial system. And its transparency and distributive nature can also facilitate many uses other than financial transactions.
You can use this concept to manage information in multi-step processes where you need transparency such as in supply chains. It is of more value in the shipping supply chain, where many borders are involved.
Each participant in the chain can check the progress with the help of the shared ledger. The transit status, status of customs clearance, bills, and other data are available in real-time.
And the records are secured from any illegitimate modification. The technology can also find a place in voting systems and managing titles and deeds. To ensure transparency, banks around the world are already working on creating a blockchain ecosystem.
Blockchain can prove to be a gift to healthcare also. Different healthcare institutions can access the electronic records of a patient in real-time. And only the authorized personnel can make the changes in the ledger.
That would be all for now. If you can suggest other uses of the blockchain, do so in the comments. Let’s make the world more secure.
P.S. One Satoshi is also the smallest unit of Bitcoin, the tiniest fraction currently available to trade. The unit equals 0.00000001 BTC.