With all the fuss going on about “blockchain technology” and “cryptocurrencies” in the IT industry and the general market as a whole, it has almost become impossible to turn a blind eye. People have taken to investing into these cryptocurrencies without knowing how they work. So, I decided to write this comprehensive blog on “what is blockchain” where I’ll explain the concepts underlying this revolutionary technology.
I’ll be going over the following topics:
- Why we need Blockchain Technology?
- What is Blockchain Technology?
- Problems solved by Blockchain Technology
- How does Blockchain work?
- Future of Blockchain Technology
So before I tell you what exactly is a “blockchain” let’s go through a little bit of history to understand the need for such a revolutionary technology!
Why we need Blockchain Technology?
Our story dates back to early 2008 when the world was going through a miserable financial crisis. At this time a , person or group of people(no one really knows!) under the pseudonym of “Satoshi Nakamoto” realized the terror of the centralized nature of our current financial system. Whenever you need to transfer money or even commit a simple transaction you need the help of a third party like a bank or even Paypal.
These centralized third parties have an absurd amount of power in their hands, for eg:
- They have all your information
- They have the power to freeze your accounts
- You have to trust the system
In lieu of this centralized system, Satoshi Nakamoto proposed a decentralized peer-to-peer financial system involving a cryptocurrency called Bitcoin. The underlying technology of Bitcoin is called Blockchain.
Now that we know why this system was invented, let’s get to know what exactly is this “blockchain”, which has taken the world by a storm!
What is Blockchain Technology?
Simply put blockchain is a permanent record of “who holds what”. Advanced cryptography in conjunction with computer science ensures that nobody can change these records without anyone knowing. Once information is added to the blockchain it is impossible to remove it from there! Thus due to its immutable nature, the blockchain serves as a trustworthy database of information which anybody can check at any time. This allows strangers to trust the validity of transaction without having the need of trusting each other.
Problems Solved by Blockchain Technology
Blockchain technology’s breakthrough was so revolutionary, that it provided a solution to the double spending problem which has plagued our financial system since its dawn. Digital money (like Bitcoin) is just like a simple computer file. so it would be easy for somebody to just “counterfeit” it by copy and paste it into a different system. Before blockchain, the solution was for banks to keep track of the money in everybody’s accounts so that nobody could spend money twice. What the blockchain does it make these “transaction books” or ledgers public so that everybody can verify that nobody is spending more than what they have!
Aside from addressing the double spending problem, blockchain technology also completely disregards the middle-men involved and directly executes transactions by connecting affiliated peers. Not needing a third party (like a bank) to handle accounts and transactions has a lot of benefits:
- Transactions can be faster and cheaper since there is no middleman
- Plus, your personal information becomes more private since no bank has to store it
You’re probably beginning to see why blockchain is such an important technology.
How does Blockchain work?
Now that we understand why blockchain was invented and what kind of problems it solves, let’s take a broader look at how exactly it solves these problems.
For this, let’s imagine a scenario where there are four strangers in a room sitting at a table. Each person has a notebook in his hand.
- Strangers are analogous to the participants of the blockchain network
- Notebooks are analogous to the transaction list (ledger) maintained by the participants of the blockchain
- Every time somebody spends some money, it is publicly announced to the rest of the strangers
- The strangers compare their notebooks to decide whether a transaction is valid or not
- If all four books don’t match up after a transaction, it is considered invalid and rejected
Blockchain technology works exactly like the notebook example. Each blockchain user has an identical copy of the blockchain “notebook” which publicly records all transactions. All notebooks get constantly compared to make sure they match. Additionally, the blockchain stores all past transactions permanently so that there is a record of where all digital property (like Bitcoin) currently is. This proves who owns what. In short, the blockchain knows where all digital property recorded on it is at all times. This is very powerful since it proves ownership without needing a third party.
Future of Blockchain Technology
Blockchain technology can be used to remove the middle-men and centralized third parties that handle transactions in various industries. This may result in lost jobs in the future but the pros heavily outweigh the cons. Let’s take a look at a few industries that blockchain promises to drastically change
The Entertainment Industry – With blockchain implemented in the entertainment industry, people could directly pay authors and artists without the need of record label or third party firm handling them. At this moment services like Spotify and Amazon take 95% of artist revenue.
International Payment – With blockchain, international payments by individuals and companies become cheap, fast, and secure. Blockchain technology can automatically ensure that money changes hands fairly, and since it removes the middle-men too transaction costs become cheaper too
Identity Verification and KYC – KYC has become a tedious job to do, as we have to do it a number of times for different parties whether it be your different banks and digital asset providers. With KYC on the blockchain, a person has to do KYC only once and can be assured that whenever his identity proof is needed it’s just a few touches away.
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