A Guide to Understanding Blockchain
Blockchain has been around
for over ten years and there has been so much progress from the moment it was
first introduced. When blockchain was first introduced, a lot of people didn’t pay
attention to it.
This could easily be
attributed to a lack of trust in a system such as blockchain, one that was different
from what has always been known by people. It was understandable for people to
be uncertain about how genuine it is.
Over time, as it grew and
expanded there has been much acceptance and it has proven to be reliable, giving
people reasons to trust and rely on its systems.
Blockchain is not rocket
science as many people try to make it seem, it can be understood and the reason
some people have not come to accept it is that they don’t know what blockchain
is all about.
Some feel it is too complicated for them to understand, so whenever they hear about blockchain, they immediately lose interest. One can’t blame anyone for the loss of interest when they don’t understand certain terms.
Here you will get an overview
of what blockchain is, to aid your understanding.
How did Blockchain come
about?
From its inception, the
person or people behind blockchain have not been known. But when it was invented
far back in 2008 it was by a person/group of people with the name Satoshi
Nakamoto. From the point of invention till this very moment, the identity of
Satoshi Nakamoto remains unknown.
What is Blockchain?
This is probably what you’ve
been waiting to understand all along. Blockchain which is sometimes referred to
as Distributed Ledger Authority (DLT), is based on a peer-to-peer (P2P)
topology which allows data to be stored on a global scale on various servers,
giving everyone liberty and access to all entries entered in real-time.
With a democratized
system such as this, it is difficult for anyone to gain absolute control of any
information that is being shared.
Blockchain is a
technology that gives individuals and organizations the benefit of making
instant transactions on a network without the barrier of middlemen.
Blockchain is a secure
way of passing information from one place to another, and the process is
completely automated.
There is still more to
the blockchain technology and just like every new technology, there are always
new updates and changes to be made. We can’t tell for sure that all we know
about blockchain now, is all that will always be.
Though blockchain is gaining
ground already, a lot of people are still skeptical about it. Over time, it is likely
there would be more to what we have today.
Blockchain consists of
three important concepts that can’t be overlooked. They are;
1. Blocks: Every chain is
made up of multiple blocks and these blocks have three basic elements which are;
- The “data” in the block.
- A 32-bit whole number called a “nonce”. The
nonce is randomly generated when a block is created, which then generates a
block header hash.
- The “hash”, which is a 256-bit number
linked to the nonce. It has to begin with a huge number of zeroes.
2. Miners: New blocks are
created on the chain by Miners, through a process called mining. Every block
has its unique nonce and hash in a blockchain, but the previous block in the chain
is always referenced. Mining a block is not entirely easy, and it is even much
difficult when it is a large chain.
Miners make use of particular software
to solve the problem of discovering a hash, it is a very complex process of
trying different nonce-hash combinations and there are a billion possible
combinations for this. With the actual combination found, miners are said to
have found the “golden nonce”.
For any change to be made on any
block, it has to go through a process of re-mining not just the block with the change,
but you’ll also have to work on the blocks that come after it. This process
further proves why it is difficult to manipulate blockchain technology
3. Nodes: These are any
kind of electronic device which maintains copies of the blockchain and ensures
that the network is functioning. Each node has its copy of the blockchain and any
newly mined block has to be approved algorithmically for that chain to be
updated, trusted, and verified.
How does Blockchain work?
Like the name implies “blockchain”.
In a simple explanation, you can get the whole idea of what it is about. Blocks
are like digital information, and the chain is like the public database.
The blocks store information
about transactions, which includes dates, time, and amount of any purchase that
is made. Those involved in the transaction are also stored in the blocks.
Also, when a piece of
information is stored on the blocks, it distinguishes each block from another
with the use of unique codes called “hash”, the hash helps to differentiate each
block. For instance, you purchase an item from an online store, while the transaction
is in the process, and you feel you need more of it.
You can make another
order, and it will be stored with a different unique code from that of the
first transaction, and you can still identify both transactions differently.
To get more details of
how blockchain works, let’s get an idea from Willian Mougayar who is a Blockchain
Specialist.
“The traditional way of
sharing documents with collaboration is to send a Microsoft Word document to
another recipient and ask them to make revisions to it. The problem with that
scenario is that you need to wait until receiving a return copy before you can
see or make other changes because you are locked out of editing it until the
other person is done with it. That’s how databases work today. Two owners can’t
be messing with the same record at once. That’s how banks maintain money
balances and transfers; they briefly lock access (or decrease the balance)
while they make a transfer, then update the other side, then re-open access (or
update again). With Google Docs (or Google Sheets), both parties have access to
the same document at the same time, and the single version of that document is
always visible to both of them. It is like a shared ledger, but it is a shared
document. The distributed part comes into play when sharing involves a number
of people.
Imagine the number of
legal documents that should be used that way. Instead of passing them to each
other, losing track of versions, and not being in sync with the other version,
why can’t all business documents become shared instead of transferred back and
forth? So many types of legal contracts would be ideal for that kind of
workflow. You don’t need a blockchain to share documents, but the shared
documents analogy is a powerful one.”
For a block to be added
to the blockchain, four things must happen. They include;
-
A transaction must occur.
-
The transaction must be verified. After initiating
a transaction, it must be verified. For offline transactions like we have in
traditional systems, there are people whose job requires them to verify transactions,
but with blockchain, such verification is done by computer networks to ensure
that your transactions go through just the way it should. Details of the
transaction, such as the amount, time, and the participants.
-
The transaction has to be stored in a
block. Once the transaction has been verified to be accurate, then it is
cleared to go through.
-
The block must be given a unique
identification code. After verification, the block must be given a unique code
known as “hash”. When the block is given a “hash” it can be included in the blockchain.
With the new block added to the blockchain, it is available for anyone to view
and that includes you also.
Advantages of Blockchain
1. Transparency: Even though the personal
information on blockchain is kept secret, the technology is open. Users on the
blockchain network can make changes as they feel it should be done, but this can
only be when they have a strong backing of the network’s computational power. Data on blockchain are open source, and it would
be difficult for anyone to think of tampering with data because there are
millions on computer networks connected.
2. Decentralization: There is no storage of information
in a central place with blockchain. One key thing here is that, when there has
been an addition of a new block, every computer which is connected to the network,
goes through an update and effects the change that has been made. This feature
also makes it even difficult for information to be manipulated or tampered with
because it is spread across the computer network.
3. Reduction of Cost: Blockchain takes away the
need to pay third-parties an amount for verification and other costs that they
charge in carrying out their duties. Those charges that are paid to the banks
for carrying out certain transactions are eliminated, thereby reducing cost. For
blockchain, due to the absence of a central authority, those charges are
eliminated.
4. Accuracy: The
absence of human involvement in the verification process makes it less likely
for error to occur. The transactions on blockchain are approved by a network of
thousands of computers, and this makes room for more accuracy in the record of
information. Likely, an error could also be made on the computer network, but
the error would only be to one copy of the blockchain, if that error was to
spread, it would need to have been made by at least 51% of the computer network
which is almost impossible.
5. Transactions are Efficient: With regular banks
and other financial institutions, there is often a delay in transactions, as
they don’t operate all day and are only open for five days a week. For blockchain,
transactions go on for 24 hours and seven days a week. In just a few minutes,
transactions can be processed without any form of delay. For international
transactions which could be altered by time zone related issues, blockchain is
very helpful.
Disadvantages of Blockchain
Though there are lots of advantages
beyond what has been listed above, one can’t deny the fact that there are disadvantages
as well, this could be some of the reasons why there has been a slight delay in
people accepting blockchain. Some of the disadvantages are;
1. Complexity: For a start, it can be
quite complex to understand, seeing that some of the terms like hash, nodes,
and the rest are not familiar terms to people. It would take some time for someone
to understand what blockchain is all about.
2. Susceptible to Hack: Though the blockchain technology
is safe to an extent, it is still susceptible to hack. The attack on blockchain
might be difficult to execute because of the computational power that is required
to execute it. For hackers, renting the required computational power could be
more preferable instead of spending a huge amount of money to acquire them.
3. Illegal Activity: Blockchain is highly confidential
and also ensures that the privacy of the users is maintained and they are safe
from hacks. But it gives room for some illegal activities to be carried out.
4. Lacks Regulation: Because
blockchain has not been fully recognized all over the world, it is clear that
not everyone has bought into the idea of it. Organizations and the government are
probably still getting an idea of what it is all about, with that there is no
clear regulation of blockchain, and as far as people still reservations concerning
blockchain, it will take more time before people get to accept the idea.
Areas of Blockchain Application.
Though some organizations
are working towards adopting blockchain into their system, some are still not
clear about the whole processes involved in blockchain. Blockchain would be beneficial
in some certain areas, they include;
-
Bank Use
-
Healthcare Use
-
Supply chain Use
-
Voting Use
-
Property Records Use
-
Use in Cryptocurrency
-
Use in Smart Contract.
Blockchain can be used in
these various areas and is most likely to make these processes easy, secure,
safe, and responsive, unlike with the traditional way in which it has always been
done.
Blockchain and Bitcoin
For those conversant with
blockchain to a little degree, one can always see the link between blockchain
and Bitcoin, this is because Bitcoin relies on the technology of blockchain. The
person/group of people behind blockchain, Satoshi Nakamoto referred to it as “a
new electronic cash system that’s fully peer-to-peer, with no trusted third
party.”
For payment and
transactions, Bitcoin doesn’t rely on any third-party or any sort of regulation.
It is different from what we have with physical cash which is regulated and
verified by a central authority, this could be either a bank or the government.
Bitcoin transactions, which
are in line with blockchain technology are verified by a network of computers
and this further reveals its decentralized system of operation.
For a transaction to be
conducted on the Bitcoin network, one must complete transactions using a
wallet. Anyone who decides to make use of Bitcoin can make fast and secure
transactions to anyone in any part of the world and at any given time.
As it stands, some businesses
already receive payment in the form of Bitcoin and it seems to be getting acceptance,
it is arguably the most common cryptocurrency and it has helped some businesses
in different ways.
As we look at the
concluding part of this guideline on the basic things you need to know about
blockchain, here are some words from Peter Mead who is the Head of Marketing
for Bitcoin Australia;
“Businesses mainly think
of cryptocurrency or blockchain as an alternative to money and assume it’s just
a way to pay suppliers, retailers, etc. However, one of the biggest advantages
and most useful aspects of blockchain for businesses is it can handle agreements
such as financial contracts and insurance policies. All parties on the
blockchain are privy to a shared ledger that cannot be changed. Clients
and companies can easily verify any agreements added to the chain. Smart
contracts can also use blockchain to verify that the terms of the contract meet
the benchmark criteria. All handled in a programmatic way with the blockchain
software.”
One may not know the future
of blockchain entirely, but it has shown promising signs which if properly regulated
and given critical attention, can serve the general populace a greater good.
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