Blockchain everywhere! — Part 1
If you are someone who has always wondered what Blockchain is, how it works, what cryptocurrency is, what mining is, and how to make your own crypto, this series of articles may help. In this first article of the series, we will unravel the mystery behind Blockchain and how is it used in cryptocurrency.
Blockchain, as the word indicates, refers to a chain of blocks. But what’s in a block? What is the idea behind a chain of blocks? Most of us have used or heard of apps that help split expenses with someone. These apps basically maintain a plethora of records that track who owes who, how much, and what is it for. It’s basically a ledger that has details of the people who will be splitting the expense, the amount the person owes or gets, and what that expense is for. The problem with this approach is that there is no way to verify if a person indeed owes money to whoever makes the entry. To explain blockchain, we are going to use a simple example.
Let’s say Matt went to dinner with Sarah, Ashley, and John. The total cost of the dinner is $100 and they all decided to split the check equally.
To make it easy, Matt is paying the total bill, and later, he would let everyone know how much others owe him. Matt tells the group that everyone needs to transfer $25 and if everyone transfers the money, everything will be all good. John says he transferred the money, but Matt can’t see the money credited into his account. There is only one way to fix this. John has to look at his bank transactions and call his bank to figure out what went wrong.
What if there is a way the transfers of money from John, Ashley, and Sara are transparent to everyone in your dinner group, to begin with? With this, when John transfers $25 to Matt, Ashley and Sara will know. And when Sara transfers Matt $25, John and Ashley know. This basically means they are all not going to rely on silo transactions recorded at their bank, but rather they will share a decentralized database, which is open and transparent. This is the entire premise that the Blockchain concept is built on. Distributed Ledger Technology, often referred to as DLT, lays out the foundation for such architecture.
Now, let’s look at our restaurant scenario in a different way and apply DLT principles, which should shed more light on how Blockchain works. If we make ledger entries after every transfer, it would look something like this.
After every transfer, a ledger entry is created in a block that contains details about where the money comes from, where it goes, and how much. But notice, the block has few additional details. It also shows the account balance every individual is left with after the transaction. Now comes the tricky part. To calculate the total amount Matt has after every transaction, we should know how much Matt has before that transaction. So there is a requirement to make sure we link or associate every block. If we redraw the above sequence it would look something like this.
Every block is basically a record of a transaction and they are immutable. That means once a block is created, there is no way to go back and change it. In a way, we can say the data is engraved inside the block and closed. This raises many questions like who creates the block, where is it created, and how is it secured. We are going to explore all of that soon. But before that, let’s take a look at some of the basics, Blocks, Hashing, etc.
First, let’s talk about a block. A block is nothing but a container that has information about a transaction. New transactions are recorded in the block and it represents the ‘present’ work. A block is ‘completed’ to close the transactions and make it a work of the past. A new block is created for newer transactions. The key concept here is every time a new block is created, it is based on the previous block. This means that a new block has information about the previous block and it goes on for every new block, thus resulting in a chain of blocks. The completed block represents a permanent record of transactions of the past and it is impossible to modify it.
In simple terms, hashing is a process of applying certain mathematical functions to some data to produce more data that can only be produced by the same combination of functions and input. For a given input data, hashing always produces the same output, as long as the same hash function is used. Without getting into details of actual block contents, it is sufficient to say that a hash value on a block is derived by applying a hash function on a combination of transactions recorded in the block with hash data from the previous block. This makes every future block have a dependency on the current block’s hash value and altering data from one block will make all the subsequent blocks invalid.
But who decides if a newly added block is good or not? This is where the concept of consensus protocol comes in to picture. Looking back at our example, if Matt says everyone owes him $25, a majority of the people in the group must agree with him. The same applies when John says he paid Matt, the other people in the group should notice and validate it. Similarly in the world of Blockchain, when a new block of a transaction is added, the majority of the nodes in the blockchain network must validate the proof of work by the node that is adding a block and agrees with it.
We talked about blockchain used for a decentralized ledger to record financial transactions, but what about cryptocurrencies? How are they different? They aren’t different. Cryptocurrencies are built using blockchain. The level of difficulty in solving mathematical problems and calculating the hash value for blocks and the amount of hashing power required to make a block differs for each crypto. Anyone can come up with a new algorithm and hashing requirements to define a new currency.
If you have heard the word ‘mining’ in the crypto world, it literally means mining. Except that you wouldn’t use a pickaxe or a shovel. Instead, you would use powerful computers. Some are specially built for this purpose to solve very complex cryptographic equations in order to mine the next block of the chain. Hundreds of thousands of powerful computers compete in solving a problem or verifying a solution submitted by a computer, often called a node. A variety of equipment is used in mining from mobile phones, laptops, NVIDIA’s GPU cards, to specially built ASIC(application-specific integrated circuit) miners that use special lightweight operating systems and stripped-down interfaces to focus only on solving a problem. In addition to this, many nodes join together in mining and form what is called ‘mining pools’.
It is only possible to create blocks with wrong information if 51% of the nodes in the network are compromised. Taking control of 51% of the nodes is close to impossible in a blockchain network although it has happened before with lesser-known cryptocurrencies. The enormous hashing power required to take over a majority of the nodes in an overall network imposes a monumental task. With copies of records stored around all the nodes, there is no one database to breach in order to mess with the data. If a hacker breaches into one node and alters data, eventually that change will have to be submitted for validation and it will be rejected by other nodes immediately based on the hash values.
Now that we know what is a blockchain and some of the concepts around it, the future article of this series will cover the following:
- How blockchain is used to solve problems in major industries like finance, healthcare, telecommunication, supply chain, etc.,
- What the major business opportunities are around Blockchain.
- And how to mine a coin and how to make your own cryptocurrency.
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