“Blockchain” is one of the buzzing term that the tech industry is hearing every now and then. If you have been in finance domain, I am totally sure that you might have heard this term. If yes then you might be already aware about Bitcoin even. So to put it in simple terms, Blockchain is the underlying record-keeping technology behind bitcoin. But blockchain has always been associated with dark and scary cryptocurrencies.
“Blockchain is a distributed, decentralized, public ledger.”
Like one other buzzword “cloud”, the term “blockchain” is pretty trendy and oftentimes used incorrectly. So if you want to understand what exactly is blockchain then you are here at right post.
Consider if this technology is so complex, what is the reason for calling it “blockchain?”. At the most rudimentary level, as the name suggests blockchain is just a chain of blocks. When you say the words “block” and “chain” in this context. We are actually talking about digital information (the “block”) stored in a public database (the “chain”).
Blockchain has a list of transactions that’s stored across many different machines across globe. Any modifications to this transactional list are replicated to all connected machines across globe very quickly. One of the essential and functional quality of blockchain is the maintaining its consistency of its list across all peers. Any change in list should be notified to all of its connected peers so that all maintain the same data.
One of the most important feature of blockchain for which is renown is that it can also provide permission systems for who can read and write transactions. Blockchain can cryptographically guarantee the validity of transactions, making malicious modifications either glaringly obvious or outright impossible.
Simply understand the fact that there is no single blockchain like there is no single cloud. A blockchain is a peer-to-peer network with it’s distributed ledger that’s created by running the same software across many different computers.
What About Bitcoin?
Now that you understand a bit about blockchain, you can clearly imagine that a blockchain as a decentralized ledger can guarantee the validity of each transactions. It fits the right use-case for financial payments.
You won’t be surprised to know that Bitcoin is built on top of has the same architecture as blockchain: many individual computers run official Bitcoin software and have identical lists of every past bitcoin transaction.
As new transactions occur, such as when one user sends bitcoins to another user, the transactions are validated independently by each computer running the software, using complex, computationally-expensive algorithms.
These validation algorithms verify new transactions using cryptographically-secure techniques that rely on all previous transactions. So just because each peer independently and concurrently verifies new transactions and of the verification is done using cryptography, it’s very difficult for any single peer to maliciously create, destroy, or modify transactions. Because a modified transaction will be flagged as invalidated but all the other peers. This mathematically-guaranteed security is why every bitcoin transaction ever made can securely be viewed publicly.
Where do bitcoins come from?
It’s very critical to understand the working of blockchain, so that you can answer this question: “Where do bitcoins come from?”
So whenever a computer running the bitcoin software verifies the validity of the new transaction it is rewarded with a fractional amount of bitcoin. This process of verifying the transaction and putting it onto the list of blockchain is known as Mining For Bitcoins. This complex computation involves the steps of adding and verifying the transactions. It is a very high computation intensive process which requires high end hardware and large amount of electricity. This important fact, coupled with inevitable investor speculation, directly drives the fiat value of a single bitcoin.
Blockchain in Business
Bitcoin’s promising method for transfer doesn’t involve banks also the transaction records are permanent, and transactions can be proven. Blockchain has some potential business advantages: decentralization, immutability, and provability.
Currently most of the businesses rely on a centralized service model where data is stored or processed by a single entity. Think of popular social media services users are totally reliant on the social media service for the integrity and longevity of their data. Consider a situation, if the service ceases operations, experiences a data breach, or inexplicably removes user content?
By serializing certain data and storing it as transactions on a public blockchain instead of in a traditional centralized database, risks of malicious data tampering could be greatly reduced.
One of the most admiring feature of blockchain which have been actively investigated in the context of distributed ledger technology is an immutable record of events. This type of technology is far more common than it may sound; for example, consider a book sharing service where users pay to read books. Considering our traditional database architecture, records of who have taken which book is stored in a database table. What happens if a hacker takes multiple books, never returns them and instead erases the data related to it. While we do have safeguards in our current system but a distributed blockchain can mitigate this risk almost entirely. It is because a record of old transactions is required to verify new transactions in blockchain.
Similarly to immutability, the architecture of a blockchain-based system inherently lends itself to a notion of provability: it can be proven that a particular transaction took place at a given time. In the context of distributed ledger technology, transactional provability isn’t just nice, it’s game changing. But the advantages offered by the ability to prove that transactions took place extend beyond finance. Consider a simple fishing supply chain that connects fisherman to fisheries and fisheries to restaurants.
How can the restaurant owner be sure that they’re paying a right based on what the fisheries paid? If all parties involved were part of the same blockchain-based network, and all transactions were recorded on a collective blockchain. So now the restaurant owner could be guaranteed that the price they pay is accurately derived from a provable transaction on the blockchain. Some blockchains even support the ability to write code that’s executed when certain transactions occur. This same use case can be applied to track the funds donated to an NGO. So that donors can be totally assured that their money is not going into some wrong hands.
While the benefits of blockchain technology sound promising, the successful and widespread application of blockchains outside of the financial sector simply hasn’t happened yet. Industries have been operating using traditional, centralized, database-driven models for years despite data breaches and service shutdowns. The promise of decentralization also comes with philosophical caveats: if middlemen are removed from common services like ride sharing, who takes responsibility when inevitable subjective issues occur? By design, data decentralization using blockchains necessitates multiple computers or “peers” to verify transactions independently of one another.
Exciting blockchain-based research is focused on areas such as legal contracts, supply chain dynamics, medical records, and microeconomic industries
Despite rampant cross-industry attempts at using blockchain technology to solve problems no one has, the story of the blockchain is only beginning. Exciting blockchain-based research is focused on areas such as legal contracts, supply chain dynamics, medical records, and microeconomic industries that traditionally involve middlemen, including home sharing and data storage. While most current usage of blockchains for non-financial problems is investigatory and forced, as with any new technology, experimentation must be conducted before a technology can be correctly applied.
JS Foundation: Interledger.js
We have tried to provide you a shallow explanation of blockchain technology and has glossed over an important and limiting architectural aspect of distributed ledgers: transactions between two participants, such as when one user sends bitcoins to another user, can only take place only on the same blockchain network. For example, if a user is in urgent needs to send 10 bitcoins to a friend, but the friend only uses another cryptocurrency like lite coin, the transfer isn’t possible. This is because the bitcoin network is made up of a different set of peer computers, each running different software than those on the bitcoin network: the networks are independent and know nothing of one another. In a world where multiple cryptocurrencies are becoming more and more common and reliance on centralized banks is becoming less appealing, the ability to easily send value between architecturally-siloed networks like blockchains is essential.
The Interledger standardization effort defines a set of open protocols and provides tools for transferring value between payment networks, including two completely independent cryptocurrency blockchains. It’s agnostic to the underlying payment network and enables interoperability between any two value stores even if those stores are completely incompatible, such as sending bitcoin to a wallet on the ethereum network. Interledger shields users from having to manage value exchange rates when transferring assets between disconnected networks.
The excitement related to the potential benefits of blockchain technology has sparked in almost every industry and maintaining a concrete understanding of new concepts in such an emerging landscape can be difficult. Projects like Interledger open a door to new type of payment applications that must no longer be confined to a single payment network. Just like the dot-com boom of the ’90s, the question for blockchain technology has shifted from “what if” to “what’s next.”
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