Everyday your hear about Blockchain technology, Bitcoin, ICO, Ethereum but do you understand what blockchain, cryptocurrency and Smart Contracts are? How does it all work? How can blockchain be used in business? How will blockchain change the world? This article is aimed to answer all these questions.
The Blockchain is a technology based on the virtual digitized decentralized network with “blocks” of information. When you add any information in the network (e. g. transaction), you add it in all computers in the network. But if another user in this network adds his information and make a new block after yours, you can’t modify your block. However, you can edit your block if you make it editing from all computers in the network and make similar changes in one moment only. It makes Blockchain one of the best technology for saving and structure information.
An everyday scenario, what happens when you send money from your bank account to someone else’s bank account? Your bank acts as a middleman, it verifies and approves the details of sender and receiver through its ledger (a book or other collection of financial accounts). In this case, you must trust your bank to have such transaction.
If you could remember, there was a major financial crisis in 2008. The subprime mortgage crisis which led to the collapse of the Lehman Brothers, an investment bank, which again led to an international banking crisis. Imagine, when banks are collapsing, will you send your money through banks? Will you be able to trust the middleman?
Very obviously, common people started distrusting the banks, and there lies the birth of Blockchain. A mysterious person named Satoshi Nakamoto created a whole new currency. He built the whole system on the principle of decentralization. He created a shared (public) ledger, which is synchronizing continuously and everyone is able to witness the process.
How does Blockchain work?
Suppose, you are an Indian and you want to transfer some money to your friend in the USA. You will initiate a transaction, each online transaction will be referred as ‘Block’. Because it is a public ledger, there will be a broadcast to everyone in the network about the block. Constant synchronization of the ledger will be going on. If the people in the network would approve the transaction, then the ‘block’ would be added to the ‘chain’ which is a transparent record of transactions. Hence the name ‘blockchain’. This is how the money would be transferred. Satoshi Nakamoto carefully designed it to prevent the double spending of money.
Is it only about currency?
NO. There are a lot of uses of blockchain technology. Bitcoin or cryptocurrencies is just one application of blockchain. We have Ethereum, which is a platform where different applications can be built, it is more like an Operating System. We have been introduced to Siacoin and Stroj which are decentralized storage platforms. Today, if you want to store your data in the cloud, we use Google Drive or Dropbox and many such applications which are controlled by one single company. With Sia or Stroj, you will have your own personal, decentralized space. We have the future technologies like IOTA. The transparency and decentralized nature of blockchain have given it an irresistible appeal.
Nowadays popularity of this technology in different spheres growing up at a great pace. And it’s all about Blockchain advantages:
One of the reasons why your business should use this technology is about its open source structure. It means that other users of the network can read and confirm (or unconfirm) the information. The essential thing of being open source is that it can’t save logged data without majority Blockchian network users.
Next prime blockchain reason is lack of a central data hub. Instead of running a massive data center you save your information in decentralized net, where any user can read, check and (un)autorizate any of your actions.
3. Faster transaction settlements
Blockchain technology works 24 hours a day, seven days a week, which means blockchain-based transaction process is quicker.
When you send transaction to traditional banks, it's a common thing for transactions to take days to be completely settled. This is due to protocols in bank transferring software, as well as the fact that financial institutions are only open during working/business hours, five days a week. You also have financial institutions located in various timezones all around the world, which delays processing times, but it`s not about blockchain.
4. User-controlled networks
This advantage is rather a consequence of the decentralization of the network. Instead of holding a third party for data processing, stakeholders decided to control each other and decide what to do next. For example, the inability to achieve 80% consensus on the update, tied to the bitcoin block, lies in the fact that more than four months ago it was necessary to develop a plug into two separate currencies (bitcoin and bitcoin in cash).
5. Reduced transaction costs
As you remember, blockchain allows you to execute transactions without the need for a third party, which is often a bank or a central server. Since the intermediary is absent, then you do not need to keep it, which allows you to get rid of impressive expense items.
How can we be sure that the last blockchain element stays intact, and is never tampered with?
When a blockchain block is created and filled with information, miners will put it through the process. They take the information in the block and apply a mathematical formula, turning it into something else, a hash. Hash is short and consists of letters and numbers in the first eye with random consistency. Hash will be stored with the block, at the end of the chain, any next hash contains all previous hashes.
Hashes have some properties. It’s easy to produce a hash from a collection of data like a bitcoin block, but it’s practically impossible to work out what the data was just by looking at the hash. And while it is very easy to produce a hash from a large amount of data, each hash is unique. If you change just one sign in a bitcoin block, its hash will change completely.
Miners don’t just use the transactions in a block to generate a hash. Some other data pieces are used as well. One of these data pieces is the hash of the last block stored in the blockchain.
What lies in the future?
The technology is extremely powerful and can disrupt many existing organizations. No matter what happens with Bitcoin, Blockchain technology is here to stay, in more refined and sophisticated manner.