Currently, Bitcoin is leading the charts among all coins. So what exactly is the technology that makes Bitcoin so special and why do so many people, including me, thinks that cryptocurrencies are going to change the world.
The answer is Blockchain.
In layman terms, blockchain is like a public immutable document which can record any type of transaction happening anywhere. By public I mean, instead of having one authority looking over it’s working, a large network makes sure everything works in an efficient and secure way.
A good analogy is, instead of keeping all your important documents in a locker, you keep one copy at each of your friend’s place. This way no single authority works as source of trust, rather the whole network provides security for your docs.
This method has the potential to remove all the middlemen from our transactions. Payment portals, ecommerce websites, banks and even governments, no central authority will be needed for our daily transactions.
But how does blockchain record a transaction?
The network I mentioned earlier is actually a community that takes care of a blockchain. This community of nodes are poeple that maintain the blockchain and not the people actually doing the transactions. For every transaction, there is a corresponding block. A block can have 4-5 transactions. Any node of the network can add the block to the blockchain. But many nodes can add a block at the same time and hence for avoiding this conundrum, we add the concept of Proof of Work (PoW).
For adding a block, every node has to perform high level computation which involves resources. Therefore, in Bitcoin, a block is made in an average of 10 minutes. Given the level of computation, there is a very small chance that two nodes will develop a block at the same time. Still if something like this happens, it gets corrected along the way as the longest blockchain created is considered to be the valid one. As the blocks are encrypted there is no way of changing its content later but it is available for review. Also as every block is linked with the next block through a hash, a secure uneditable chain of encrypted data is created.
Also the processing time involved in the computation required for the block can be outsourced and those people can be paid in digital currencies. This is called mining.
Bitcoin did this with the way we handle our money. It is a peer to peer decentralized digital currency. What that means is, a Blockchain is maintained to record it’s transactions and no bank or government is responsible for it. It is the first and most popular example of usage of Blockchain.
But it’s not limited to money. Blockchain can be used for everything. From crowdfunding to maintaing health records, it can be implemented for various use cases and eliminate all the in between authorities. Here is an amazing example of how it was used for raising money just the way Kickstarter does:
Just like a crowdfunding happens on Kickstarter, this funding used Ether (instead of dollars) , a digital currency for Etherium. Ethererum played the host for the crowdfunding. People payed money to it which it then transferred to the fundraising party. Every transaction was governed by Etherium i.e. just by a piece of code. Isn’t that cool?
Realising it’s potential most of the major banks of US have come together to make the use of blockchains to keep track of their records. It’s applications are not limited to the finance sector. Healthcare and legal are some of the many fields where the use of blockchain can change the complete architecture.
How the non financial sectors you asked? The answer is Smart Contracts. Smart contract is a misnomer because it’s just a computer protocol that governs a contract but it’s not really a contract. There’s no authority you can complain to if someone doesn’t abide by the laws of a smart contract. But it’s still awesome because it takes into consideration all those cases. Let me explain:
Earlier, for every different application, a different blockchain was needed. For trading digital currency a different blockchain and for trading weed a different one. Another problem was how to make sure you’ll get your pack of weed if you paid the money? What if he doesn’t abide by the rules. Smart contract solved both of these problems.
Through them you can add blockchians to a blockchain i.e. instead of creating a separate blockchain for every use just make a new chain attached to one block of the original blockchain. For maintaing this new chain either the old or a new network can be used.
Now let’s discuss the second problem. When we buy something from Amazon, we pay money to Amazon which it then transfers to the seller and in return we get our desired product. In case the seller is not able to ship the product, Amazon pays our money back. Similarly if we don’t pay the money, it doesn’t ship the product. In this case Amazon acts as the central authority governing the process to operate smoothly. The same thing happens with a smart contract. Both the parties trade according to the rules of a smart contract which are public and can be read by anyone. If the transaction fails the money is returned back to the parties concerned. If the transaction succeeds, an irrefutable record is added to the blockchain which can’t be edited in future but can surely be accessed as proof. This is why Smart Contracts can be (and will be) used in future for document purposes from property buy / sell to judiciary use.
I hope this post gave you an idea of the working of a blockchain. Though a lot of research has to be done for this potent technology, the future surely looks bright!