Blockchain Explained: Step-by-Step Guide For Beginners
Unless you’re hiding under the rock, you must have heard at least something about blockchain technology. And everything else that comes with it (Bitcoin or Ethereum, for example). Blockchain is a fascinating invention that combines seemingly unrelated branches of knowledge. This knowledge includes peer-to-peer networking, cryptography, economics, game theory, and monetary incentives.
Yes, blockchain is usually described in relation to Bitcoin, distributed ledgers, and open ledgers. But it is actually much broader than that. So, give this blog post a quick read if you want to know what is so special about blockchain technology and why there is so much hype around it.
What Does Blockchain Technology Stand For?
Blockchain is technically the Bitcoin Consensus Protocol (or BCP). Blockchain is a computational system that keeps track of all kinds of transactions and modifications, made in a particular system. Similarly to the way an accounting ledger operates, everything that happens in the blockchain system is kept in a ledger. This is then stored in every computer (called the nodes) that is part of the network.
The blockchain contains 3 basic things:
- Block (basic unit of a network);
- Miners (a process that creates a new block on the chain);
- Nodes (points from where all the information comes out or into which all information goes in for a user within a blockchain).
What’s so special about blockchain technology? This is the billion-dollar question. Blockchain technology provides a very innovative approach to re-thinking and creating new technology because, at its core, it offers a very important solution in the modern digital age – guarantees data integrity in an insecure/untrusted network environment.
So, why do we need blockchain anyway? This is a very useful technology and approach for developers and entrepreneurs who want to create new applications and digital tools that can deal with the security threats out there on the Internet.
Here are more reasons why this technology is awesome:
- Blockchain technology rules out the involvement of the third party. So, it is a highly cost-effective and fast way of exchanging assets.
- The system is decentralized. Hence there is no common point of failure in this system. This means malfunctioning at a single point will not affect others on the network.
- The whole process is immutable. This means that no one can alter or delete the data once written.
- Any changes made in the Blockchain will be visible to all its participants. This makes it highly transparent as well.
Blockchain’s solution applies to anyone who wants to share some information or solve a very complex mathematical puzzle called block. Each block contains a hash (a string of characters) that has to refer cryptographically to the hash of the previous block (to guarantee the chronological order). Together, this series of blocks, up to the genesis block (the only block hardcoded into the blockchain’s core script), form the blockchain.
A copy of the blockchain database for the Bitcoin blockchain is continuously growing as more blocks are appended. As well as the core script that contains the rules of what should be considered a valid blockchain is stored on every computer called full node. In addition to the hash, each block stores a large amount of information called transactions.
Basically, blockchain is essentially a really big list or database of data that is distributed to a bunch of computers all over the globe. Different types of blockchain technology include:
- Private blockchains. This blockchain is small and does not need a token. It is an invite-only network whose membership is closely controlled. It is suitable for a network of organizations that want to utilize this technology without having to make the data accessible to the public.
- Public blockchains. A public blockchain is an open network where anyone can download, write, and participate. Exchange of value runs through its native token. One primary example is Bitcoin where it has an open-source code for anyone and maintained by the community.
- Permissioned blockchains. Permissioned blockchain is like a mix of the public and private blockchain. It is controlled but anyone is allowed to join after some identity verification.
An example of this blockchain is Ripple. Roles are allocated to each participant and may even grant special permissions for specific members to do in the blockchain.
How Does Blockchain Technology Work?
In 2008, Satoshi Nakamoto first conceptualized a peer-to-peer decentralized cryptocurrency and named it Bitcoin. The digital currency would use a public ledger and blockchain technology to verify and add newer transactions respectively. The ledger would contain a secure history of data exchanges and transactions among nodes in the network. This is a very similar process to bitcoin when you make a transaction:
- Your transaction is broadcasted to the world (distributed) on a blockchain;
- This transaction mixed with a bunch of other transactions into what is called a block;
- The world competes at a very fast speed, tastes this block to say: “Yup, it is a valid transaction!” This can be then proven mathematically.
After transactions are clubbed in a block, miners verify and add these transaction blocks to the main chain. Every block has a timestamp to verify its authenticity. The longest chain in the network is referred to as the main chain.
There are four things that need to happen before a block is added to the chain:
- A transaction must be completed first.
- The data will be verified through a network of computers. It will confirm all details of the purchase.
- After verifying, it will be stored in a block together with other people’s transactions.
- It will then have a hash as its identification code. Once this is completed, the block will be added to the blockchain.
Whenever you synchronize the bitcoin blockchain to your computer, you’ll get every transaction from the network including the one made 10 minutes ago. This can go all the way to the genesis block which has the first bitcoin transaction from Satoshi (a blockchain creator) himself.
If you change any single transaction in any of the blocks, you change the generated key from that block. And any following block will have a different outcome invalidating any of the blocks following the network and throwing out any blocks you present.
A quick list of means by which blockchain enables transactions to occur:
- Blockchain utilizes open and private keys to shape a digital signature guaranteeing security and assent.
- When the validation is guaranteed through these keys, the requirement for approval emerges.
- Blockchain enables members of the system to perform scientific confirmation and arrive at an accord to concur on a specific worth.
- While making an exchange, the sender utilizes their private key and declares the exchange data over the system.
- A block is made containing data, for example, advanced signature, timestamp, and the collector’s open key.
- This square of data is communicated through the system and the approval procedure begins.
- Miners everywhere throughout the system start understanding the scientific riddle identified with the transactions so as to process it. Settling this riddle requires the miners to contribute their computing power.
- After explaining the riddle first, miners get rewards as bitcoins. Such sort of issues are alluded to as evidence-of-work mathematical issues.
- When most nodes in the system go to a consensus and consent to a typical arrangement, the block is time-stepped and added to the current blockchain. This block can contain anything from cash to data.
- After the new block is added to the chain, the current duplicates of blockchain are refreshed for every one of the hubs on the system.
What Good Does It Do For Industries?
Why is everyone talking about blockchains? Well, for several reasons. One of the main reasons is that bitcoin gained mainstream attention. Today, it incorporates some clever economic, cryptographic, and monetary properties. These properties motivate people to participate in a financial model which is different and based on cryptocurrency.
Blockchain technology is freely distributed now as an open-source software application. It incorporates a unique set of characteristics that appeal to many digital enthusiasts and entrepreneurs. Since blockchain is a database that relies on a decentralized network of operators, this means that it is not actually concentrated in the hands of a single entity. As a result, there is a good number of unique properties come into play:
- Access to the most current view of records;
- Access to both public and private properties;
- Quick adaptability to many operators;
- Can be either very cheap (inefficient consensus) or expensive (inefficient);
- Either a very low throughput or a relatively high one.
All these properties have some significant value to many industries. This attracts developers, entrepreneurs, and investors to learn about Bitcoin’s blockchain technology, experiment with it, build applications on top of and share it with others who might be interested in it.
Since cryptocurrencies always rotate in the circulation of market capitalization, they alone have well over a dozen of billion dollars in value. Lots of new start-ups and blockchain wallets are relying on the blockchain and get funded every day. Therefore, blockchain technology is fulfilling the thirst of venture capitalists for the technology.
Blockchain technology is filled with many opportunities for innovation and integration in businesses.
For example, financial institutions are interested in how the database can facilitate synchronization across ledgers (i.e. settlement for financial transactions).
The artists can really benefit from this technology in the music industry by cutting the hefty cuts of financial brokers and creating a possibility of dealing directly with the consumers. It means a user can directly pay an artist upon downloading their song instead of indirectly paying it through the third party.
Other industries where blockchain technology is applied:
- Banking sector
- Web designing/development
- Government sector/elections
- Life science
- Automotive industry, etc.
Blockchain technology has been very useful to the healthcare industry since it is able to create a secure platform for storing patient’s medical records. Also, it also prevents healthcare payment-related frauds.
No secret, in our modern digital world we often experience regular data breaches and online attacks. The global financial system was already exposed to many weaknesses that may cause some trust issues in regards to the modern digital financial systems. And since the timing of blockchain and Bitcoin almost coincided with the global financial crisis, it helped to breach with the technology enthusiasts who were looking at alternative financial transaction models. The whole system was designed as a decentralized financial model and transaction system. This is an obvious alternative to the existing centralized global monetary system.
Blockchain systems incorporate sophisticated cryptography to prove and validate the data it holds, and distribute this data securely across a network. It is able to minimize the risk of data tampering, interference, corruption, surveillance/interception. It provides a new way of sending secure data directly over a network with some potential security issues. All this generates new opportunities for technologists and entrepreneurs to use this technology. And, in turn, this helps to develop new business models based on blockchain technology.