Blockchain Dummies Inspiration
Before we dive into what a blockchain is and how a blockchain works, let me tell you how a normal document would be created, modified by multiple users in the real world.
The technology likely to have the greatest impact on the next few decades has arrived. And it’s not social media. It’s not big data. It’s not robotics. It’s not even AI. You’ll be surprised to learn that it’s the underlying technology of digital currencies like Bitcoin. It’s called the blockchain.
— Don Tapscott
Suppose we have a document that needs collaboration. One from the team would draft it and then send it across to the other team members. The team member would need to make changes on the received document and send it across for review or confirmation.
This means that the document is locked to the user who is not editing it at the moment because changes are being made by the other user and the changes are not visible to him unless he receives a copy.
This is exactly how databases work today – two persons who own a record can’t edit it at the same time. It is unlocked for one and locked for the other. This is also how banks make transfers and maintain account balances.
Now imagine there are thousands of such documents that requires collaboration across members of a team in an organization. Imagine the mess in terms of losing track of versions, not maintaining sync!
How about a network where all these documents can be shared instead of transferring it back and forth. The network is so designed that it would regularly update the documents. Well, we do not need a blockchain to transfer documents but this was an analogy to understanding what a blockchain does.
A blockchain is a distributed database and digital ledger that can be used to record any transactions – financial or non-financial.
A blockchain is a magic computer that anyone can upload programs to and leave the programs to self-execute, where the current and all previous states of every program are always publicly visible, and which carries a very strong crypto economically secured guarantee that programs running on the chain will continue to execute in exactly the way that the blockchain protocol specifies
— Vitalik Buterin
Understanding Blockchain for Dummies
In simple words, a blockchain is a chronologically maintained, ever growing chain of blocks. It is a public ledger. As a transaction gets complete, it gets added to the chain.
A block is nothing but a record. Each of these blocks or records are interlinked. Every block carry a time stamp and a link to its previous block or record.
However the most important feature for a blockchain that makes it so indispensable to the future of computing and transactions is its decentralized nature. It provides a technology through which transactions of value can be done in a secure manner without the need and involvement of a third party.
Normally if you have to transfer money to someone, you would need the bank to do it for you. The bank’s network is connected to a centralized network which is insecure and prone to hacking. Blockchain’s decentralized network provides this security.
Blockchain technology implements cryptography to secure the network. The network is normally a chain of computers that must all approve the exchange before it can be verified and recorded.
Cryptography ensures that the users will be able to edit only the parts of the blockchain that they own. This would mean that the user would need to have keys to decrypt a certain block which they intend to edit.
In simple terms, blockchain is a –
- distributed network of computers (nodes)
- where each node contains a chain-of-blocks
- where each block contains a ledger with a list of transactions
- where each transaction is secure and unchangable
- and is linked to the previous transactions
Blockchain is Important Because…
As more and more exchanges move from papers to digital, there is a growing clamor over how secure our data is. Blockchain comes into the picture promising security.
Also, applications of blockchain can be applied to almost anything that requires transaction of value – from money to goods and property. It’s potential can include collecting money, digital contracts, incorporating business online, identity management, sending money to places where banking is difficult. It can also be employed for anti-counterfeit measures.
Blockchain technology fills up three very vital roles – recording transactions, establishing contracts and establishing identity. This ensures that the role of “middle man” is no longer required.
How is the Bitcoin and Blockchain Connected?
More people have heard of bitcoin than they have of blockchain. Bitcoin was made famous in 2008 as a peer to peer electronic cash system that made online payments possible without the requirement of a third party.
While the concept was innovative for sure and exciting, the more interesting aspect was how it worked. This technology behind bitcoin is what we call blockchain today.
[Blockchain] is to Bitcoin, what the internet is to email. A big electronic system, on top of which you can build applications. Currency is just one.
— Sally Davies, FT Technology Reporter
How Does the Blockchain technology work?
Nodes and Ledgers
The blockchain technology maintains a ledger (digital record) which is nothing but a record of the amount of asset that the user owns (in reality the ledger keeps a copy of the transactions made and not the balance as we will see later). Let’s call this asset as bitcoin.
This ledger is not stored in a central database. But it is distributed all over the network in computers across the world. Each of these computer is called a node. Each of these nodes contain a copy of the ledger.
Now suppose, Rakesh wishes to send Sarah 10 bitcoins. He would broadcast a message over the blockchain network saying that his balance should go down by 10 bitcoins and the Sarah’s should go up by the same amount.
Each node on the network receives this message and does the necessary computations to update the amount on their copy of the ledger.
Once a node on the network has updated its copy of the ledger, it passes on the message to the next node.
Blockchain Wallets, Cryptography and Keys
You can make transactions on the blockchain by using a wallet. Each wallet is protected to ensure that only the owner is able to spend from the wallet. Cryptography is used to protect the wallet through connected keys – a private key and a public key.
If a message is encrypted with a specific public key, only the owner of the paired private key will be able to decrypt and read the message.
If you encrypt a message with your private key, only the paired public key can be used to decrypt it.
For the above example when Rakesh sends 10 bitcoins to Sarah, Rakesh sends it across the network as a message that is encrypted using the private key of his wallet.
While encrypting, a digital signature is generated which is used by the computers to check and verify the source and authenticity of the transaction. This digital signature is a combination of the transaction request or message and the private key. This ensures that the same digital signature cannot be used for any other transaction.
Each node on the network can verify that the message is coming from Rakesh using the paired public key that can be used to decrypt his message.
The public key of a wallet can be considered as the address to which a transaction can be done. In our example, the public key of Sarah’s wallet is used by Rakesh to send her 10 bitcoins. For Rakesh to send money he needs to know Sarah’s public key and also prove that he has the private key of his wallet.
Blockchain Records Transactions and Not Balance
Please note that the blockchain system keeps a track of the transactions and not the account balance. In order to know the wallet balance, a user would need to analyze and verify all the transactions that has ever occurred over the network to which the wallet is connected.
For our example, when Rakesh wishes to send 10 bitcoins, he has to generate a transaction request that includes links to previous incoming transactions. These incoming transactions, known as inputs, needs to be verified to check that they have not been spent.
The total balance of all of these inputs needs to be equal to or more than 10 bitcoins. This is automatically done by Rakesh’s wallet and verified by the nodes of the network.
Blockchain for Dummies – Features Explained
Let me now explain to you certain features of the blockchain technology.
Durability and Robustness
Blockchains cannot be controlled by any specific party because blocks are identical and present across the network.
Also blockchains do not have a single point of failure.
Transparent and Incorruptible
Data is available to the public and embedded in the network. Because the blockchain lives in a state of consensus and it checks in itself after regular intervals, it acts as a self auditing ecosystem of a digital value.
Also a blockchain cannot be corrupted. Altering any unit of information would require massive computing power to override the entire network.
Perhaps the most important feature of the blockchain technology is its decentralized network. With no central authority to control transactions, the forms of mass collaboration than can be made possible over blockchain are many and are currently being studied and investigated.
Blockchain comes with enhanced security. Users currently use username-passwords to protect their identity and assets online.
Blockchain uses the concept of keys – which is basically encryption technology. A Public Key is a user’s address on the blockchain. So anything that has been sent to the user over blockchain resides here.
Users are armed with a Private Key which gives them ownership and hence access to the bitcoins or other assets.
What Makes Blockchain Incorruptible?
Everything on the blockchain is encrypted but that does not provide full security or make it incorruptible. Below are three concepts that work together to make blockchains incorruptible
It is a function that takes an input and provides an output of a fixed size.
For example, SHA 256 hash algorithm provides an output of a fixed length of 256 bits. That means, if you provide one word to the function, the result is a 256 bit output.
And if you provide the entire content of a book through the hashing function, the result is of the same length.
There are two important features of a hashing function. Firstly, it should not be possible to get back the input from the output, that is it should be one-way.
Secondly, outputs for any two given inputs can never be the same. But they will be of a fixed length. For example, ‘a’ and ‘A’ are different inputs and will give two different outputs.
Signatures in digital form that can be signed by the owner only but can be verified by anyone else. That is where the concept of keys (public and private) comes in.
Hash pointers do two things – firstly, it is an address of the data stored.
Secondly, keeps a cryptographic hash of the of the data itself thus validating if the data has been corrupted or changed.
So what happens here is that if someone changes the data in the block, the hash of the block will not match with what we have in the hash pointer and that would mean that the data has been change.
A Word of Caution
The code to perform transaction is open sourced. So any one with a laptop and internet connection can operate transactions. Bitcoins can be permanently lost in case there is a mistake in the code during any transaction.
Also there is no customer support in case you need help because the network is distributed
The total number of possible Bitcoin addresses is 2¹⁶⁰ or 1461501637330902918203684832716283019655932542976. This large number protects the network from possible attacks while allowing anyone to own a wallet.
Future of Blockchain
Concluding this guide on blockchain for beginners; you might agree with me, blockchain is a highly disruptive technology that promises to change the world. It is not just shifting the way we use the internet today but also revolutionizing the global economy.
We are currently at the internet of information where we can instantly view information, exchange and communicate it. Blockchain is helping steadily and effectively shift from this internet of information to the internet of value where can instantly exchange asset.
Blockchain is enabling digitization of assets where big intermediaries no longer play a major role. It is promoting an economy where trust is build on consensus and complex computer code.
The most profound of blockchain’s success would be the democratizing and expansion of financial system. Other areas where blockchain is expected to leave its mark include academics, real estate, insurance, legal and health care among others.
Expect potential impacts of blockchain technology on society and global economies. This is just the beginning.