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Blockchain: A Detailed Guide for Beginners

In trying to learn about Blockchain, you’ve probably encountered a definition like this:

“Blockchain is a distributed, decentralized, public ledger.”

The good news is that Blockchain is easier to understand than its actual definition sounds. When we talk about the words, “block” and “chain” in this context, we are actually talking about the digital information (the block) stored in a public database (the chain). “Blocks” on the Blockchain are made up of digital information.

What Exactly is Blockchain?

The Blockchain is a simple yet smarter way of passing information from A to B in a fully automated and safe manner. By creating a block, one party to a transaction initiates the process. Millions of computers verify this block. The verified block is then added to a chain that is stored across the internet. Every Blockchain has not just a unique record, but a unique record with a unique history.

Counterfeiting a single record would mean falsifying the entire chain in millions of instances. Bitcoin uses this blockchain model for financial transactions, but it can be deployed in many other ways as well.

The best thing about Blockchain is that it carries no transaction cost, but it does take infrastructure cost. For example, Fiverr charges a 20% commission from the seller. Using the blockchain model the transaction is free, which means Ergo, Fiverr will cease to exist and so will auction houses and any other business model based on market-maker principle.

The Financial institutions take a small cut of your money to facilitate the transaction process. Blockchain model will make the banks limited to mere advisors, and not gatekeepers of cash anymore. The stockbrokers will not be able to charge commission and buying/selling of shares will disappear.

The “blocks” accurately store three types of information:

Time and Date of Transactions

Blocks store the information about transactions like the time, date, and the amount involved in the transaction process.

Transaction Participants

Blocks store the information about the participants involved in the transaction process.

For example, if you purchase something from Amazon. Your name and Amazon.com both will be stored in a block as participants of the transaction. Instead of using your real name, your purchase will be recorded without any identifying information using a “digital signature”, sort of like a username.

(Note: This Amazon example is only for illustrative purposes; Amazon retail does not work on blockchain model)

Blocks Distinguishing Information

Each block stores information which makes it distinguished from other blocks. Just Like You and I have different names that separate us from each other; similarly, each block stores a unique code called a “hash”, this code makes it different from other blocks. Hashes are cryptographic codes created by unique algorithms.

For example, you have just made a purchase of a t-shirt on Amazon, while it is still in transit, you made another purchase of the same t-shirt. Even though the details of the new transaction are similar to the older one, but we can still say that they are different blocks because of their unique codes.

How Blockchain Works?

Blockchain consists of multiple blocks attached together. When a new data is stored in a block, it is added to the Blockchain. For a block to be added in Blockchain, however, four things must happen. Let’s take a look at how Blockchain works with the help of an example. Following four necessary steps are involved in this process:

Transaction Occurrence

A transaction must occur. Let’s understand it using a simple example. Suppose you purchased something from Amazon, after clicking through multiple checkout prompt. In many cases, blocks can store thousands of transactions, which means your Amazon purchase will be stored in the block with other users’ transactions.

Transaction Verification

Your transaction must be verified. Like in the Securities Exchange Commission, there is someone in charge of vetting new data entries. Similarly, in this model, your information is being monitored and uploaded, but this job is left up to a network of computers. When you make a purchase, this network of computers verifies whether the transaction occurred in the prescribed manner or not. Moreover, this network of computers stores all the necessary information about your transaction including date, time, and participants. It seems like a process, but it actually occurs in seconds.

Transaction Stored

After your transaction verification, your block gets a green signal. Your digital signature, Amazon’s signature, and the transaction amount is then stored in the block. There, the transaction will likely join hundreds or thousands of other transactions.

Unique Code

After all the transactions in a block are verified, it is then allotted a unique code called a hash. The block is given the hash of the most recent block added to the Blockchain. Once this process is completed, the block will successfully be added to the Blockchain.

When a block is added to the Blockchain, it is publicly visible to everyone –means everyone will have access to the information of Blockchain. If you see a Bitcoin blockchain, you will see that you can view the transaction information, along with information about when, where, and by who, the block was added to the Blockchain.

The Three Pillars of Blockchain

The three main pillars of Blockchain helped this model to gain widespread acclaim. Following are the three main pillars of Blockchain:

Decentralization

Before BitTorrent and Bitcoins, we were using centralized services. It is a straightforward service like all the information is stored in a single central server, network or computer and you have to solely intact with the entity to get whatever information you want.

The client-server model is the best example of it. When you search for something on Google, you send a query to the server, and it shows you all the relevant information.

The centralized systems have many vulnerabilities which include the following:

  • Firstly, all the information is stored in a single entity, which means there is a greater chance of hackers’ attack.
  • If a system is undergone an up-gradation, the aggregate data will not be accessible to anyone.
  • If a centralized entity shuts down for some reason, nobody will be able to get access to data in that case.
  • What if the entity gets malicious or corrupted? If that happens, all the data in the entity will be compromised.

However, in a decentralized system, the information is not stored in a single entity. In simple words, everyone in a network owns that information. All the data is spread across the network on hundreds or thousands of computers.

In a decentralized system, there is no concept of the third party. It is the ideology on which bitcoins work. You don’t have to go to banks for a transaction or in simple words; there is no role of the bank in bitcoins transactions. You and only you are in charge of your money.

Following are the main benefits of the decentralized system:

  • All the information is stored in multiple entities. There is almost zero chance of hackers’ attack.
  • If one entity is undergone an up-gradation, the data will be available on other entities.
  • If one entity leaves the network, there will not be any problem because all other entities will provide the same data.
  • If any entity gets corrupted, the information won’t be comprised because all the information is available on other entities within the network.

Transparency

One of the most misunderstood concepts is, Blockchain is “transparency”. Some people say that your identity is private, and some say that your identity is publicly visible to everyone. Why do you think people say that?

A person’s identity is hidden via complex cryptography and represented by their public address. So, if you see any person’s transaction, you will not see “Blake sent 1 BTC” instead you will see:

“1MF1bhsFLkBzzz9vpFYEmvwT2TbyCt7NZJ sent 1 BTC”

However, a person’s real identity is hidden, but still, you can see the transaction information of that person based on his public address. This level of transparency has never existed in any financial information.

Immutableness

It means that anything stored in Blockchain cannot be tempered. The reason why Blockchain contains this property is its cryptographic hash function.

In simple words, hashing means inputting a string of any length and get the output of fixed length. Let’s understand it using a simple example given below:

The Blockchain is a “hash pointer” linked to the previous block. Here the question is “What is a hash pointer?” Well, a hash pointer is just like a pointer, but it not only contains the hash of the previous block, it also contains the hash of information stored in the last block.

Imagine this for a second, if a hacker attacks block 4 and tries to change the data. Because of hash function property, the data in block 3 will also be changed, and that will change the data of block 2 as well and so on. It will change the whole Blockchain, which is impossible. So, this is how Blockchain attains immutability.

Peer-to-Peer Network

The Blockchain works on a peer-to-peer network model. People generally use this network for torrenting. If they use the client-server model, it will take so long to download the files from a single entity, and there’s always a risk in this model.

However, in the peer-to-peer model, there is no central authority. All the data is spread across different peers within a network and accessible to everyone using that network. This model provides more fast sharing of data and ensures security. If any peer gets out of the network, the data will still be intact on other peers and will be available to users.

The Use of Blockchain Model

The Blockchain model can be used in many fields and activities. Some of the significant uses of this model are explained below:

Smart Contract

A smart contract is a computer code based on the blockchain model to facilitate, verify, or negotiate the terms of a contract agreement. Smart contracts work on a set of conditions that users agree to.

For example, I’m renting you my apartment, and we have agreed on some conditions under a smart contract. I agreed to give you a door code against your deposit. We both have to fulfill our terms to close the deal. We would both send our part of the deal to the smart contract, and it will automatically exchange my door code with your deposit. If I do not send my door code to the smart contract, it will refund your deposit.

This type of contract eliminates the fee usually charged by third parties or negotiators.

Uses in Voting

The Blockchain model can eliminate the fraud factor from the elections during voting. It was tested in November 2018 midterm elections in West Virginia. Each vote would be stored as a block in the blockchains, making it impossible to tamper with the votes.

Supply Chain Use

This model can be used by suppliers to maintain the record of their inventory. It would allow the companies to ensure the authenticity of their products. Moreover, they can record the time, date, storage location, and labels of their products using this model.

The food industry is moving into the use of Blockchain. It would allow them to track the path and safety of food throughout the farm-to-user journey.

Healthcare Uses

The Blockchain model will provide the facility to healthcare providers to ensure the safety of their patients. Every patient’s detail will be recorded in the Blockchain secured by a specific signature to ensure the safety of data. These personal health records could be stored on the Blockchain with a private key so that they are only accessible by specific individuals, and hence ensuring privacy.

Advantage and Disadvantages of Blockchain

Blockchain Pros

  • Transparent technology
  • Less paperwork, faster delivery
  • Absolute accessibility
  • Cost reductions by eliminating third-party verification
  • Transactions are secure, private and efficient
  • Improved accuracy by removing human involvement in verification
  • Decentralization makes it harder to tamper with

Blockchain Cons

  • Low transactions per second
  • Insufficient infrastructure
  • History of use in illicit activities
  • Significant technology cost associated with mining bitcoin

The Verdict

We have covered all the essential information of Blockchain, including how it works, in this article. If you have any queries regarding Blockchain, you can freely contact Two Runs experts. Our team is always willing to answer your queries in the most satisfied manner.

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