The ABCs of Blockchain Technology

The ABCs of Blockchain Technology

You keep hearing about blockchain all the time, isn’t it?

Someone has adopted it.

Everyone around you is trying to adopt it.

And, if you are no one still trying to figure what the hubbub is all about, here’s a brief account about the origin and growth of this revolutionary, futuristic technology that’s already creating ripples in the financial sector and is dominantly gaining grounds in other sectors too, such as supply chain, land registration and more.

So, let’s first start with the origin of blockchain:

The Origin of Blockchain

The origin of blockchain is not exactly clear.  A story doing rounds on the online web says that an individual or a group of people known by the pseudonym Satoshi Nakamoto invented and released the tech in 2009 to send payments, digitally and anonymously, between two parties minus any third party verification.

It was originally designed to facilitate, authorize, and log the transfer of bitcoins and other cryptocurrencies.

How Blockchain Works

The blockchain is basically a globally distributed database. Imagine a giant Google doc spreadsheet stored in the cloud that runs across millions and millions of computers.  It’s distributed.  It’s open source. It’s peer-to-peer. And, in the case of the blockchain, it’s highly encrypted and verified. And each participating member is entitled to have a first-hand account of the workings of the spreadsheet. Not to mention, there’s no third party involvement when it comes to authorizing or settling the transactions.

How Blockchain works In the Financial Sector 

How Blockchain Works In the Financial Sector

What else could be recorded on blockchain?

Well, it could record any sort of structured information. Not just who received and paid money, but also who tied the marital knot or who owns the land among many things. In short, blockchain facilitates collaboration and tracking of all kinds of transactions and interactions.    

An example of how Blockchain’s Distributed Database Can Be Leveraged for Land Registration Deals 

Land registeration through Blockchain

 

Going forward, it won’t be easy for banks to settle trillions of real-time transactions between things. Blockchain has been designed to offer secure, digital alternative to banking processes that are typically bureaucratic, expensive, cumbersome and paper-heavy.

The technology is being labeled as the biggest innovation in computer science—the idea of a distributed database where transactions happen through mass collaboration and clever coding rather than getting it done through a powerful institution (clearing house or central bank) that does the authentication and the settlement.

But before we dive deep into this revolutionary technology, let’s talk a tad bit on bitcoin as well, given that this cryptocurrency, referred to as digital currency in popular terms, is uttered in the same breath as blockchain.

So, here’s a brief take on Blockchain and Bitcoin and their symbiotic relationship.

Blockchain and Bitcoin: How Are They Inter-Connected 

For the starters, Blockchain powers Bitcoin. In other words, bitcoin has been built on the blockchain’s shared platform. The platform enables the moving of bitcoins from one individual to the other, connected to the same blockchain framework. There’s no middleman (read: financial institution) involved in mediating the exchange.

And both parties get to keep a record of the transactions that’s happened.

*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

Ok. Let me explain it with an example how Bitcoin (cryptocurrency) leverages Blockchain (sharing software platform) for money transfer

 Say, for instance, if A in the U.S. wants to send $200 home in the Philippines.  Now, in case we are using the traditional mode of money transfer, there’d be a third party involved, who’d act as a mediator who’d help you in the transfer of money. And for offering this money transfer service, the third party will be charging some commission in exchange.

Meaning, B won’t receive the entire amount, because the mediating party will eat away some in the form of commission. In this case, it would be $12.  Not to mention there’d be a delay in money transfer as well, maybe 3 days or more.

Enter blockchain.

  • The first issue the blockchain attempts to address is that it removes the third party involvement altogether. The transaction happens directly between two people or more.
  • The second issue that blockchain gets a handle on is that it transfers the money on an immediate basis. Zero days lost.
  • The third issue it solves is that it doesn’t charge any commission for this transfer. Zero commission charged.
  • The fourth issue it’s configured to address is that the entire transaction will be synchronized given that it follows a distributed ledger policy.

What’s more? Bitcoin, also referred to as the digital gold, is doing phenomenally well and today the total value stands close to $112 Billion.

For your information, different blockchains have different digital currencies associated with them, like we have ether for ethereum blockchain. However, the bitcoin blockchain is the biggest.

bitcoin and blockchain financing trend

How Blockchain has Branched Out of Bitcoin  

No doubt, blockchain, and bitcoin are inextricably linked up; but you need to know there’s more to blockchain than just bitcoin.

Sure, bitcoin has been built on the blockchain framework and the technology was originally designed in 2008-2009 to devise bitcoins, but then it’s just one of the several thousand applications Blockchain has come to be associated with.

Blockchain Beyond Bitcoin

Image source: static.seekingalpha.com

Since then the technology has witnessed exponential growth and is not just used for transferring digital coins. Today, the technology has the potential to disrupt every industry in some or the other way.

Today, the tech world is busy finding many other potential uses of this technology.

Among the many discoveries the tech community is uncovering, blockchains can be used for anything that holds digital value, from money to music to votes, to be managed, transacted and exchanged in a secure way on this shared platform.

How could blockchain be harnessed for land registrations?

Haiti a nation without land titles

When Haiti was struck by an earthquake most people lost their land titles, given that were held in one building that collapsed. Now you have a nation now that doesn’t have access to their land titles. Blockchain technology could meaningfully change that.

Summary: 4 Fundamental Principles That Blockchain Leverages  

1st Fundamental Principle of Blockchain – Open Ledger

As I discussed above, each individual in the transaction will have access to the records of the transactions.

Say, for instance, if A wants to transfer $15 to B, the transaction gets represented in the block form. And the block is then broadcasted to each and every party in the network. Once all the parties in the network approve the validity of the transaction, the block is added to the chain. Only then money exchanges hands.

Open Ledger - First Principal of Blockchain

 Image source: www.b2bnn.com 

As per blockchain rules, each and every transaction is entered in an open ledger, which is open for public viewing and scrutiny. And given that there’s a chain of transactions happening in a linear line, between all the four parties involved, the entire process has come to be referred as Blockchain.

Everyone involved in the blockchain network can see for themselves, where the money is coming from and how much money each person is having.  Nope, there’s zero scope for manipulation given that all the transactions are happening openly and are recorded in open files called blocks. Nothing is hidden. Every participant could view the ledger simultaneously (imagine Google docs) when changes are being made.

So, if you have hidden agendas in mind, keep it in your pocket. It won’t work in the blockchain world.

2nd Fundamental Principle of Blockchain: Decentralized and Distributed Ledger 

Each participant in the network is entitled to have a copy of the ledger, from A to B to C to D. That ways, the whole thing gets decentralized.

Distributed Ledger - Blockchain

Image source: http://www.capco.com

There’s no concept of centralized “official” copy and every user is trusted equally. Every transaction is broadcasted to the network using the software.

Now, given that there are so many copies involved in the network, it becomes extremely important to make sure that all the copies are synchronized and look the same. This brings to the 3rd principle of the blockchain.

 

3rd Fundamental Principle of Blockchain:  Harmonizing the Ledger through Validation

This is where *Miners* come into the picture.  One of the nodes or participants in the network is given the additional responsibility of miners.

It’s miners’ responsibility to add and verify new transactions before they are added to the ledger, which ensures that the data stays common in all the ledgers. 

For performing validation work, miners are rewarded financially. Currently, that reward is 12.5 Bitcoins.

4th Fundamental Principle of Blockchain: Immutable Ledgering

Immutable simply means you cannot go back and make changes in the ledger once the participants have agreed on the records as data is secured through cryptography.

 

What’s Next?

Blockchain has completed a decade-long journey so far. And primarily it has been used in the financial sector. Initially, people were skeptical about the entire process. However, the scenario has changed now. Several top companies have started expressing interest in this technology, and these include HP, Microsoft, IBM, and Intel. Now even the banks are open to it. For instance, R3, a financial technology firm has joined hands with top 25 banks in the world and are trying to set up a crypto-technology-based platform.

You can even refer bestcoins.co if you are interested in investing in blockchain startups. These startups range from Infrastructure, Finance, Gaming & PR to Real Estate, Drugs and Healthcare, Trading to Investing and more.

Jini Maxin

Jini Maxin

Jini Maxin is a prolific tech writer who’s constantly juggling and struggling to keep pace with the Usain Bolt’s of the cryptocurrency world, who are leaving no stone undisturbed to make cryptocurrencies the commoners’ currency in this digital era.