What is Blockchain? A step-by-step guide

What is Blockchain? A step-by-step guide

What is blockchain? The Blockchain system is a significant invention, the brainchild of a person or group of people who known as Satoshi Nakamato. Blockchain is kind of a new type internet, it allows digital data distributed along the network. It was first invent for digital currency but then people found other potential uses of this technology. So we are going to explain what the blockchain technology is? And what are the properties that make it unique.

Don & Alex Tapscott, authors Blockchain Revolution (2016): “The blockchain is an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value.”

The simplest definition of Blockchain is a time-slamped series of immutable record of data that is managed by group of computers not owned by a single authority. Each of these blocks of data is secured and chain to each other using cryptographical rules. The blockchain system has no central authority, similar to democratized system. The information in the system is open to everyone and everyone can access to it because it is a shared immutable and secured ledger. There is no fee costs in blockchain but we have an infrastructure cost that is being paid. Someone initiate the process of a transaction and create a block then millions of people by their computer confirm and verify that block. The confirmed block is added to a chain that not only it is being distributed among the system but also it has its own history of transactions. So if someone want o cheat the system and falsify a transaction, he or she has to falsify all the blocks that are distributed among the world. It is impossible.

Bitcoin first use this technology for monetary purposes but the blockchian system developed by days. For example a railway company. You buy tickets on the web, the credit card company takes fee on your purchase process. With blockchain you system you connect to railway company directly.  So in other words to answer what is blockchain, It is just the railway company and passenger, it is completely peer-to-peer. It cut the middle man and other agencies between passenger and Railway company. And there is also a record of all tickets history is stored in the last ticket. But the key here is this: it’s free. Not only can the blockchain transfer and store money, but it can also replace all processes and business models which rely on charging a small fee for a transaction.

Another use of blockchain system is that you can charge your videos or articles for a small amounts, like 0.01 cent. Why should I have to pay a third parties cutting into my profits? Blockchian may make selling music more profitable by cutting out music companies or distributers like Apple and Spotify. The music you buy could even be stored in blockchain by cryptographical code and be encoded whenever you want. And you can make a cloud archive for any song you bought, then every subscription will become irrelevant.

How Does Blockchain Work?

Imagine a spreadsheet that is copied thousands of times and distributed among the people. Then think of it that these spreadsheets are design to be updated every period of time. Here you are, you have basic understanding of blockchain. Information held on blockchain exist as shared.

The blockchain database isn’t stored in a single computer or an authority. It is stored publicly in all computers among the network. So if a hacker want to falsify anything, he has to hack everyone like a millions of people in the network. It is hosted by millions of computers simultaneously, its data is accessible to anyone on the internet. I would like you to read this piece from a blockchain specialist.

William Mougayar, Venture advisor, 4x entrepreneur, marketer, strategist and blockchain specialist: “The traditional way of sharing documents with collaboration is to send a Microsoft Word document to another recipient, and ask them to make revisions to it. The problem with that scenario is that you need to wait until receiving a return copy before you can see or make other changes because you are locked out of editing it until the other person is done with it. That’s how databases work today.

Two owners can’t be messing with the same record at once.That’s how banks maintain money balances and transfers; they briefly lock access (or decrease the balance) while they make a transfer, then update the other side, then re-open access (or update again).With Google Docs (or Google Sheets), both parties have access to the same document at the same time, and the single version of that document is always visible to both of them. It is like a shared ledger, but it is a shared document. The distributed part comes into play when sharing involves a number of people.

Imagine the number of legal documents that should be used that way. Instead of passing them to each other, losing track of versions, and not being in sync with the other version, why can’t *all* business documents become shared instead of transferred back and forth? So many types of legal contracts would be ideal for that kind of workflow. You don’t need a blockchain to share documents, but the shared documents analogy is a powerful one.” 

The significant features of blockchain are:

  • It is not own by a single authority and it is decentralized
  • The data is coded cryptograpically
  • It is immutable and no one can tamper the data inside the block.
  • The blockchain is transparent and everybody have an access to it.

The three main features of Blockchain technology

  • Decentralization
  • Transparency
  • Immutability

Decentralization product of blockchain

Before bitcoin and blockchain we were used to centralized system. Centralized system is a system which every data is stored in a centralized base so you should contact the authority of that system to get whatever information you want. For instance, banks. They store your money and if you want to transfer money to anyone you have to go through their system. Centralized systems have several vulnerabilities:

  • Because the data is stored in one spot, hackers can target them easily.
  • If the centralized system want to upgrade its system, the whole system will go offline.
  • If they suddenly shut down the system and disappear, what could we do?
  • What if this system gets corrupted.

In the decentralized system, the information isn’t stored in one entity. In fact, everyone in the network owns the information. In a decentralized network, if you wanted to interact with your friend then you can do so directly without going through a third party. That was the main ideology behind Bitcoins. You and only you alone are in charge of your money. You can send your money to anyone you want without having to go through a bank.

Transparency of blockchain

In blockchain, we say it gives you privacy but what do you mean by transparency?

Well, a person’s identity is hidden but they have a public address that everyone can look through their history transaction. But once you take a look, you won’t see for example Alex sent 1 BTC, instead you see “1nt5ulsFLkBzfz9vpFYEmhwT2TbyCt7NLO sent 1 BTC”.

So, the identity if users are secure but you still see all the transactions that were done by their address. If you have a public address of a big company then you can analyze and review all their transaction. This forces them to be honest, something that they have never had to deal with before.

Immutability 

It means when something inserted in the blockchain system you can never be able to tamper it. This is because of a function called cryptographic hash.

In simple terms, hashing means taking an input string of any length and giving out an output of a fixed length. In bitcoin system, transactions are input and a 256 bits string is output. It is done by a function called SHA-256

For example:

Decentralization product of blockchain

Even a small difference is considered:

Transparency of blockchain

The blockchain is a linked list which contains data and a hash pointer which points to its previous block, hence creating the chain. What is a hash pointer? A hash pointer is similar to a pointer, but instead of just containing the address of the previous block it also contains the hash of the data inside the previous block. This one small tweak is what makes blockchains so amazingly reliable and trailblazing.

If a hacker wants to attack block 3 and tries to change it, a little change will cause change the hash drastically. Then he has to attack the block 2 because it contains hash in block 3 after that he has to attack block 1 and so on. This will completely change the chain, which is impossible. This is exactly how blockchains attain immutability.

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