A Beginner's Guide To Blockchain
Blockchain is not difficult to understand. This guide will give you all the fundamental knowledge you need to know about this ingenious technology.
Blockchain is often described as ‘a type of a distributed ledger’. However, this definition may sound a little “unclear” to beginners. In this article, we strive to explain blockchain in the simplest way, putting aside complex technical terms.
What is blockchain?
In its most basic level, a Blockchain is simply a chain of blocks of data that everyone can inspect, but no single entity controls. Each block contains a certain number of transactions that are validated by a cluster of computers distributed around the network in a given timespan. Each block is identified via a cryptographic hash and a timestamp.
When a new block is added, it carries a hash of the previous block, linking one block with another to create a chronologically ordered chain. The data in a blockchain isn’t stored in a single location but instead, it is distributed across the network of multiple computers. This makes it impossible to be altered retroactively without having to alter the entire chain.
How does blockchain work?
The creation of blockchain has simplified the process of passing data from A to B in a fully automated and secure way.
Let’s think of the e-commerce market nowadays. There are hundreds of billions of U.S Dollar worth of trade occurring online over the years and mostly done via giants like Amazon, Ebay, Alibaba and Etsy.
Whenever users make a purchase via these platforms, they will be charged additional fees on each transaction. These fees are often applied directly on the sellers using their platform, sellers cover the fees by increasing the price, and buyers are the one who indirectly pay for these fees as they have to buy the product at a higher cost. Additionally, the credit card provider also takes a cut for processing the transaction.
Blockchain technology cuts down these costs by removing middlemen and enables people to engage in trading directly with each other. The technology allows a peer-to-peer, transparency trading process between traders in which the negotiation or a performance of a transaction are enforced by lines of cryptographic code.
In a blockchain, information exists as a shared and continually reconciled database. The transaction information is encoded. The true parties in the transaction are the seller and the buyer. Once you make a purchase on each product, your transaction will be verified by a network of computers called ‘miners’. These ‘miners’ will use their computing power to solve complex computational math problems, in order to confirm the information of your purchase, including the transaction’s time, transaction value and public addresses of participants. If the information is valid, your transaction will be executed automatically and securely. The data of your transaction will be stored in a block which is given an identifying code called a 'hash'. This new block then will be added to the blockchain.
Is blockchain private?
It's interesting that there are many of us misunderstanding the concept of “transparency” in blockchain. Some people say blockchain gives you privacy while others say that it is transparent. Why do you think this happens?
In a blockchain, your identity is hidden securely via complex cryptography and represented only by your public addresses. As an example, this is what you see while looking up a person's transaction history in the Ethereum blockchain:
Instead of seeing "Tom sent 1 Ether", you will see a series of letters and numbers such as “0x90Ceb0F8E08E52f435d6cb885Dd1692E sent 1 Ether”.
Even though the person's true identity is secure, you can still see all the transactions they have done via their public address. If you know the public address of a certain company, it's easy for you to pop it in an explorer and look at all transactions the company has engaged in. This forces companies to be honest, something that they have never had to deal with before. This level of transparency has offered an extra, and much needed level of accountability which the current traditional system is missing.
Is blockchain decentralized?
Aforementioned, the blockchain database isn’t stored in any single location but instead, it is distributed across the network. In other words, everyone in the network owns the information.
Each computer in a blockchain network has its own copy of the blockchain that is updated automatically whenever a new block is added. This is sort of like a Facebook News Feed that gives a live update whenever a new status is posted.
Although each copy of the blockchain is identical, spreading that information across various computers makes the information almost impossible to be manipulated. With blockchain, there isn’t a single, centralized version of this information for a hacker to corrupt. Instead, a hacker would need to manipulate every copy of the blockchain simultaneously.
In a centralized system, the information is owned by a certain entity and you would have to interact solely with this entity to get the information you required. Centralized systems like banks store all your money and whenever you want to transfer money to someone, you have to go through the bank.
Since they are centralized, all the data is stored in one spot, which easily becomes a target for potential hackers. If a centralized system was to go through a software upgrade, it would halt the entire system. What if they somehow shut down their services for whatever god-knows reasons? That way nobody will be able to access the information that it possesses. Worst case scenario, what if this entity gets corrupted and malicious? It's not that these issues haven't happened before.
Games that are run by centralized servers can easily be manipulated. Game publishers can abruptly terminate their services anytime due to low revenues or lack of content. When that really happens, gamers who have poured a considerable amount of money into these games, and those who want to keep the data as a memory of their experience, often feel like the world has come to an end.
In 2017, the cost of an extremely rare sword item in Lineage fell from $100,000 to $30,000 due to an influx of cash items brought in, resulting in the dramatic drop of the game currency.
Instead of a data controlled by a centralized server, games built on a blockchain is non-manipulable and transparent. No one can take away your digital assets, even when the game has been shut down. These assets can be anything from game skins to virtual cards that are scarce. The authenticity of these items is guaranteed by smart contract standards such as ERC-721 non-fungible token standard. With blockchain, gamers have the ability to prove the provenance of specific virtual items while in other centralized games platforms, fraud cases are inevitable.
Is blockchain secure?
After a block has been added to the end of a blockchain, it is extremely difficult to go back and alter the data of the block without alteration of all subsequent blocks, which requires consensus of the network majority.
Since each block contains its own hash, along with the hash of its previous block, editing a block equals to having to change all the hashes of the previous blocks. Hash codes are created by a math function that turns digital information into a string of letters and numbers. If the data is edited, the hash code changes as well.
Imagine a hacker attacks block 3 and tries to change the data. Because of the properties of hash functions, a slight change made in block 3 will change its own hash and the hash that links it to block 2, which will result in changes of block 2 in its data and its own hash. This will, in turn, lead to the changes in block 1 and so on. Eventually, the activity will completely change the entire chain, which is virtually impossible since recalculating all those hashes in millions of instances would take an enormous and improbable amount of computing power. This is the technique that makes a blockchain amazingly secure.
How can we use blockchain?
Blockchain technology gives internet users the ability to create value and authentic digital information. A blockchain not only transfers and stores your money, but also replaces all the trading processes and business models relying on middlemen. What practical applications will result from this?
Blockchain technology is the solid foundation of cryptocurrencies like Bitcoin or Ethereum. Fiat currencies like the U.S. dollar are regulated and verified by a central authority, usually a bank or a government. Under the central authority system, users technically don't have full control over their data and assets. If your bank collapses or the government where you live is unstable, it will have a huge impact on the value of your currency.
Because of its properties, blockchain allows Bitcoin and other cryptocurrencies to operate without the need for a central authority. The technology eliminates many of the processing and transaction fees and gives those in countries with unstable currencies a more stable currency, along with a wider network that they can do business with, both domestically and internationally.
A smart contract is a computing code that can be built into the blockchain to facilitate, verify, or negotiate a contract agreement. Smart contracts operate under a set of conditions that participants agree to. When those conditions are met, the terms of the agreement are automatically executed.
With smart contracts, renting an apartment will become much easier. We can send our portion of the deal to a smart contract. For example, I agree to give you the door code to the apartment as soon as you pay me your security deposit. The smart contract will hold onto these conditions and automatically exchange my door code for your security deposit on the date of the rental. Otherwise, it will refund your security deposit if I don't give you the door code. This eliminates the fees that typically includes in using a notary or third-party mediator.
Banking is the industry that benefits the most from the implementation of blockchain. Financial institutions only operate during business hours. If you try to deposit a check on the weekend, you will have to wait until Monday to see that the money hit your account. Even when you make your deposit during business hours, it can possibly take 1-2 days for your transactions to be verified depending on the banks. Blockchain, on the other hand, never sleeps.
By implementing blockchain into the banking system, consumers can see their transactions processed in seconds. Banks also have the opportunity to exchange funds between institutions more quickly and securely.