Blockchain is one of the most trending topics in the world believed to conquer most of the industries in coming future. An effort is made to put in the simplest words possible. We all have heard the saying “Necessity is the mother of Invention” So, what could be the necessity here?
Story behind the invention
Blockchain came into the picture due to Bitcoin, a digital currency which is generated unit wise and is transferred over the network. The necessity arose when the picture stuck to identifying the units of Bitcoin in a way that they are not repeated in the transaction. Any third-party application could have been used to monitor and manage the repetitive units of Bitcoin but the challenge was to find a way without involving third parties.
Another necessity was to keep an immutable proof of existence which was difficult to an extent in the centralized networks which is home to most of the transactions.
To meet these requirements, Blockchain came into existence.
Blockchain has become such a trending topic that it is easy to learn about it anywhere on the internet. It can be considered as an accounting method for Bitcoins. The first transaction of Blockchain was performed on October 24 worth $35,000 brokered by the Commonwealth Bank of Australia and Wells Fargo & Co (WFC).
However, the effort is paid here to understand blockchain with the help of its building blocks. If these concepts are clear in your head, you’re more than halfway through understanding Blockchain.
1. Private Key cryptography:
Remember the concept of ‘shared secret’ among the communicating parties? Private key cryptography as the name suggests enables a secure, private information sharing among the communicating parties with the help of a private key whose access is with the owner and is shared only with the receiving party. It uses both, private as well as the public key to make the transfer.
2. Peer to Peer architecture:
The kind of architecture of a network that allows one to one communication without involving the centralized authority. In case of Blockchain, elimination of the third party is also involved.
3. Distributed Ledger Technology (DLT):
Remember paper-based ledgers created, maintained and used for accounting? DLT is innovation in the logistics of these paper-based ledgers along with its registration and maintenance. A Distributed Ledger is created by each node adding data independently without the involvement of any centralized authority. Variety of algorithms are applied to the cryptography to create a secure Digital Ledger. This way, DLT encourages developing more of a record management system than a mere database.
4. Data Mining:
The process of examining the existing database and creating new information out of it. After understanding these concepts thoroughly, the meaning of Blockchain can sum up in a single statement: The blockchain is a Digital Ledger that records transaction of cryptocurrency added in the chain after mining, secured by cryptographic methods in a decentralized manner.
Working of Blockchain Technology
To understand how Blockchain Technology works, let us consider this: as the name itself suggests, Blockchain is nothing but a chain of blocks. What are blocks made up of?
Each block in a Blockchain consists of:
- Digital signature: It is formed by the combination of sender’s public and private key.
- Timestamp: Records the time of sending the information into the chain
- Relevant information: Consists of the additional data to be transferred
Steps of working:
- A want to send data to B
- A encrypts data using its private key attached with B’s public key forming a block and sends it to all nodes in the network.
- All the blocks will come to a decision powered by the Blockchain’s protocol expressing agreement or disagreement on the added data and considering the conclusion of majority in the network. The block will be added to form a chain in case of agreement, while it will be rejected and not added to the chain in case of disagreement.
- Data will be received by B decrypting with the required key. The block will be present on all the nodes for immutability and proof of existence eliminating the chances of fraud.
Hence, a Blockchain can be considered as a record of Bank’s entire transaction system where each block acts as an individual bank statement.
Types of Blockchain:
- Public Blockchain:
As the name suggests, anyone with internet access can send and read the transaction on public blockchains. It is possible for an individual to download the code and form a node beginning the transfers in the network and participating in the consensus. All the transactions are transparent but the authority is kept anonymous. The biggest example of Public Blockchain is Bitcoin.
- Federated or Consortium Blockchain:
Federated or Consortium Blockchain comes with added privacy in Public Blockchain. Unlike Public Blockchain, Federated or Consortium Blockchain is run by a group that leads the consensus process by pre-selecting nodes that will be participating. While anyone can add the data, but a selected group of nodes will enable the working of these blockchains. It is highly scalable and offers better privacy which makes it ideal for use in Banking sectors.
- Private Blockchain:
Private Blockchains follow the similar procedure when it comes to the consensus i.e. by preselecting a few nodes to participate in the decision making with the only difference being its centralized authority control. The biggest example is Ripple.
Pros of Blockchain:
There lies a drawback in the current system that gives birth to the new system. Blockchain comes with many benefits with some of them listed below:
- It helps in establishing a digital identity.
- It makes data immutable.
- It serves as a platform.
- It is efficient, speedy & accurate
- It helps to reduce allover cost.
- It comes with ease of auditing
- It facilitates greater transparency
- It is beneficial in cross-border trades
- It comes with lesser amount of errors
- It eliminates repetitive confirmation steps
- Reduced financial fraud
- Requires only internet for use.
Cons of Blockchain:
While every invention comes with some voids, so has Blockchain come with certain voids that put its acceptance and implementation in dilemma.
- Interfacing DLT with other operational processes can sometimes be rough
- Maintaining equilibrium between using DLT and enabling a centralized authority to protect the system from attacks
- Difficulty in creating single digital identity passport authorizer.
- Complex implementation
- Storage and synchronization issues due to increasing network size
- Data can be distributed, copies cannot be created
- Other Social, Legal and Financial issues that may arise
Application of Blockchain:
It is nearly impossible to list down the application of Blockchain as there is a wide area of practice with customization. However, some of the main areas where it can be used includes Voting system, Weapon or vehicle registrations by state government, Medical record, Ownership of various commodities, Collection of tax, Immigrant’s money transfer, Financial institutions, Govt. agencies like defense/police, Logistics, Insurance, Enterprise solutions, Medical industries, Mobile network operators, Cyber security, Power plants, Private communication networks, etc.
Hence, Blockchain is here to create the Internet of value. Ask yourself if your work needs an open ledger. If it a yes, then Blockchain is for you.