The term blockchain was created in 2008, after the introduction of Bitcoin. The first application of the blockchain technology is Bitcoin. In this blog post, we will tell you about blockchain.
Blockchain
The internet has changed the society in many ways. Sharing information and communication has become easier. You can send information within seconds to the other side of the world. However, the mechanisms used for value transfer and payments did not change.
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For instance, if you make a payment through a website, your bank is usually contacted. So, usually, there are multiple parties are involved. It gets even more complicated with international payments. As the system gets more complex, the transaction costs get higher and the transaction times get longer. So, sending money digitally is not as easy and simple as sending an e-mail.
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Have you noticed that when e-mail is sent with a picture attached, the recipient receives it almost immediately? Even though you attach the photo, it still remains on your computer. This would have been a very unfavorable situation. Scientists have spent years trying to solve this problem, also known as the double-spending problem.
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Many solutions were proposed but they were based on a central database. So, there needs to be a party, like a bank, which maintains the balance of the accounts. This is not exactly an ideal situation because the user depends on this party. Apart from that, a central database is susceptible to attacks by hackers.
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During the financial crisis, people grew suspicious about banks. The citizens lost confidence in banks. They were not only dissatisfied with the way banks work but also with the organization of financial systems. So, Bitcoin was introduced, which is a money system which is based on peer-to-peer technology.
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Blockchain As A Solution
In 2008, a previously unknown person published a document which described Bitcoin. The person remains anonymous till date because of the projects in the past with digital money that is based on a central data system. These were terminated and the inventors were imprisoned. The reason cited was that only governments have the right to create money.
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Bitcoin described blockchain. The concept was put in writing for the first time ever. In a concise report of 8 pages, Satoshi described how money can easily be transferred in a decentralized environment. The blockchain is based on many technology components which are not new. So, it is a clever combination of components that already exist.
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A Peer-To-Peer System
It is based on peer-to-peer technology. Napster and BitTorrent have previously used this technology. It lets you share data with people without the need for a central party. For instance, you can download media via BitTorrent from other people. While you are downloading, the media is also updated to others from your device. So, this creates a network of devices which keep the media alive.
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This is how the blockchain works as well. It keeps a shared database in the network, along with balance sheets of accounts. So, everyone in the network knows who has what. So, the system cannot be hacked or disabled easily, like a central database. If someone in the network tries to allocate more coins, others in the network will not approve of the change. They will be able to see in all the other copies that the change is incorrect.
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Transactions should take place to transfer value from A to B. To achieve this, the database has a specific structure: blocks. An extra block is added to an x amount of minutes or transactions. The blocks are given transaction information like receiver, sender, time, and amount. Apart from that, the block has a reference to the previous block. So, the blocks are linked to each other and form a chain. This is what we call the blockchain.
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It is imperative that when there is a transaction, all the people on the network have the same exact copy of the database. For this, a consensus mechanism has been made. This makes sure that everyone in the network agrees with the current situation of the blockchain. The mechanism is arranged in a way that it is possible for any random person in the network to add a new block. After that, the other users can validate the block and subsequently add it to their copy. After a block has been added to the chain, the transaction cannot be reversed or changed. The network then moves on to processing the next block of transactions.
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Consensus On The Blockchain
Many consensus mechanisms have been made for the development of the blockchain technology. The one that Satoshi came up with is still the most widely accepted and is called the Proof of Work or PoW. In PoW, the computers (people) in the network are solving a complicated puzzle which is based on cryptography. The first person to solve the puzzle may add a new block of transactions. As a compensation for the work done, the person gets some coins, like Bitcoins. This is just like people working or chopping stone to get new coins or gold, making them miners and signaling a process of mining.
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A dice can be used to explain the process. When the number 4 is displayed as the solution for the last block, the number needs to be less than 4 for the new block. If you successfully get it, you share it with other people in the network. They will validate if it is correct.
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As far as Bitcoin is concerned, every 10 minutes a new block of transactions should be added. However, it can take longer to find the solution. If this happens, the software reduces the difficulty level. Basically, the difficulty level is related to the number of people in the network. As the number of people working in the mines increases so does the difficulty level.
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What Can Be Done With Blockchain
Bitcoin is the first application of the blockchain technology. As per expectations, it will produce as much as the internet did since the nineties. The first application of the internet was e-mailing. People have now moved on to social media and trading platforms. Blockchain can help with a lot of things. Here are some examples:
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Decentralized Trading Platforms
Trading platforms we see today as an intermediary. Through a decentralized system, these can be taken over by the blockchain technology, so the costs such as commissions are eliminated or minimized. This will let you trade directly, instead of having to depend on third parties. Such platforms are currently being made for taxis.
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Digital identity
A number of large parties such as Facebook and Google have data. This data is our digital identity. It means a lot of companies hoping to understand consumer behavior. We share this data for free just because they make it easier for us to remain in touch with friends and family. We also prove details when we make a purchase online, such as our phone number and address. Wouldn’t it be cool if we were the in charge of our identity? The blockchain can make it possible. For instance, our digital identity on the blockchain can be verified by regulatory authorities and be used in the future for purchasing products and traveling. Governments and companies can then communicate with our identity and make requests for data. This way it will be verified and the data will remain in our possession.
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Blockchain For Companies
Various industries can also use blockchain. For instance, the logistic chain. A scandal in China caused a controversy. It seemed that someone had poisoned baby powder but it was difficult to point out where in the chain it came from and which batches were affected. If data is shared about the origin of the products throughout the chain, we have a solution. So, Chinese companies are now making these platforms. The batches can be identified easily from raw materials to end product. As all parties share the data and it can not be adjusted, there will be no trust issue.
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Types of Blockchains
There are three types of blockchains: private, public, and hybrid. Apart from the rights to these blockchains, the type of consensus is also different.
Public Blockchain
The popularly known blockchains right now are public. Anyone can create an account and do and view transactions. Some examples are Ethereum and Bitcoin.
Hybrid Blockchain
It is also called the consortium blockchain. It is a closed environment, where many parties work together to share transactions and data. For example, a logistic chain or group of banks which do transactions with each other.
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Private Blockchain
It is used within companies. It enables the sharing of information with affiliates and departments, with the certainty that the data can be trusted because it has not been adjusted.
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A blockchain has many forms and applications. It has some basic characteristics. It can be defined as blocks of transactions which are connected with each other, so a chain is formed. A network is needed to perform transactions without needing a third party. The data can’t be adjusted, which ensures trust and confidence in the data. Reaching a consensus is required to update the blockchain. There are three types of blockchain: private, public, and hybrid.
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We hope that you now understand what a blockchain is. Stay tuned as we explore cryptocurrencies in more depth in the upcoming blog posts!
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