Your friend has requested 1000 bucks to her PayTM account. Now if you are attending this session and do not know what PayTM is, no worries. It is just something like the Paypal.
Now when you send her the requested amount and she receives it, what happens? Does a plane take out the amount from a metal box having your name, loads it and unloads it in another metal box having her name? No.
So your money is just an information that is maintained in a digital record which we call as ledger. The information is data.
Now does it really matter whether the PayTM receipt is green or blue? Or it has an image of yours on it? It does not.
What really matters is what it contains – ownership, identity, value. These are the things that are maintained in the record books.
Now for these record books to be maintained there is a central authority. The accountant would not give you access to these record books. If he did, I would add millions to it, sit back and enjoy my favorite shows on TV. Of course there would be someone who could then take it away from me in a similar fashion.
Thus we have institutions. The PayTM ledger lives in a PayTM computer. The bank ledger lives in a bank computer. These computers are also called servers.
This ledger is maintained, updated and secured centrally. And we trust these institutions with their job.
Now imagine a magic ledger – one which is not centrally secured, updated or maintained and yet does the job that banks did all these while.
This magic ledger is what we call a blockchain.
Now think about the potential and importance of blockchains –
With PayTM and banks which you trust there is an issue. When you are sending a payment today, you are not the person changing the PayTM or bank ledger. You are requesting the central authority to change it. This central authority has full power to either grant or deny your request.
This central authority has complete power to change terms and conditions, block payments, reject or freeze your accounts.
- Now with blockchains, there is no middle man. The central authority who had all rights to change terms, block payments and freeze your accounts is gone. You can send or receive payments from anyone and anywhere. This can mean financial freedom to a lot of people. For good or for worse.
- This actually means that it is closer to a physical transaction. For example, when you buy some chocolates for Rupees 10, the shop keeper does not ask you who you are. Both of know that once you hand over the money to him, he has full authority over the money. There is no paper trail as well no account for the transaction.
Suppose you have an orange and you give this orange to your friend. Physically you have put your orange in your friend’s hand.
Both of you know what happened. You do not need a third person to be a witness to this event.
This orange now belongs to your friend. You can’t give your friend another orange because you do not have any.
Your friend however, can give it to anyone – a passerby, his friend, teacher, anybody!
That’s exactly how an in-person exchange would take place – be it a chocolate or a hundred rupee note.
Now, let’s move ahead and say that you have a digital orange.
You give this digital orange to your friend.
Now the interesting part is how does your friend know that the digital orange that he just received is only his and not yours.
Think for a second!
How does your friend know that you haven’t sent it to another friend of yours or kept a copy to yourself or did not post it online to be downloaded by hundreds of people.
Doesn’t it look complicated? Sending a physical orange was easier. But with a digital orange it is complicated.
The problem that you just witnessed is called as “double spending problem”.
Let us try to solve this problem. Maybe track oranges using a ledger. A ledger is similar to a accounting book to used to keep a track of transactions.
This ledger in the digital world needs someone to keep a track of it. We can keep someone – say Mr T (T for Tracker) to keep track of it digitally.
Awesome! We solved the problem.
But there is an issue with it as well – what if Mr T adds 10 digital oranges to his name. He can always do that since he is in charge of the digital ledger.
Secondly, having a Mr T to keep track of the digital ledger is like having a third party watching the transactions take place.
But we would like to replicate the environment where you could give an orange to your friend without the need of any third party being an witness to the transaction.
How can you hand over the digital orange to your friend in the usual way you handed over a normal orange.
What if we give this ledger to everyone. Like instead of Mr T being in sole charge of the ledger, we can allow the ledger to live in everybody’s computers.
All the transactions that have ever happened, from day 1 till today will be stored in everybody’s computers.
It would also be difficult to cheat. You can’t give a digital orange to your friend if you do not have one. Because if you did, it would not sync up with everybody in the system.
It would be a tough system to beat if the number of computers are big in number.
Also it is not controlled by one person. So you can’t add more digital oranges to your account.
For the first time in the digital world, this is the same thing. All thanks to blockchain.
Now because blockchain is open, anyone with an internet connection can connect to it. There is no restriction on who can and who can’t. A 7 year old kid can. A terrorist can. Anyone can make a transaction of any amount. Ranging from 0.00005 paisa or 0.00023 cents to 10 lacs or 1 million.
Anyone can own and transact on the blockchain. It can be a human being or a thing. It can be a car, a fridge or a piece of software.
In the real banking world, an Air Conditioner cannot open an account with the State Bank of India or ICICI Bank. But in the blockchain world, it can hold a bitcoin address. If you are wondering what a Bitcoin is; it is a digital currency that is encrypted and follows the blockchain protocol.
That is how important the blockchain is.
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. In real world, a block can contain hundreds of transactions but to start with and to make it easier to understand, you can assume that a block is 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 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.
By now you must have understood what a blockchain is and why it is important.