What is a blockchain?
Summary: Blockchain is a digital protocol that cryptographically links records or transactions through digital signatures using identifiers for each block of data which is called a 'hash'. The chain created is therefore immutable and secure. With a decentralized architecture, additional level of security can be achieved. Blockchain technology has the potential to remove intermediaries in many industries and enable more people to partake in the global financial system.
There are three important emerging digital technologies that is bound to disrupt many industries that are in existence today. These digital trinity holds so much promise, yet we have not really experienced their impact. Most of the projects involving these three technologies are still in its infancy. What are these three technologies? It is Artificial Intelligence, Internet of Things and yes, you guessed it right: Blockchain technology.
So, what is Blockchain technology? Well, it is simply a method of creating digital records of virtually anything in the physical world with each subsequent record connected to the earlier ones through a sequence of digital signatures. These digital signatures are cryptographically programmed to link all the records in a string of chain that propagates forward as new records are added.
How does it work?
Here is an example. Suppose that you have a set of coloured beads and you decided that the first bead should be the orange one. You then get your programmer to assign the value 11 to this bead in the blockchain record. Next, you decide the green bead should be next in sequence followed by a blue bead. Suppose the value of the green bead and blue bead is 14 and 16 respectively. Therefore, on the blockchain record, this will be reflected as 111416. Now, you could place any variation of colour to the string of beads, but this will not change the colour sequence of the previous string. Well, the blocks in this example is the coloured bead and they are linked together by a string of numbers that represents each coloured bead. A real blockchain would follow this scheme with transactions represented by the coloured beads and the numbers represented by the hash number.
With this simple example, you could see the power of the blockchain in the following ways. First, once the records are added they cannot be altered at a later stage. Immutability of records are achieved. Second, as the chain gets longer it would be extremely difficult to alter previous records.
But how do we achieve this level of security? The records are not kept on one server or computer but with the power of the Internet, it is distributed to multiple computers around the world. The software that maintains the blockchain records requires that a predefined number of computers to verify and validate the new records that are added to the chain. This is also called 'consensus' in blockchain terminology and when achieved, the entire process starts over with a new record or transaction. Now, wouldn’t you agree that it might be virtually impossible to alter the records without having control over all these computers across the planet?
Important concepts
In fact, this is what gives immutability and security to the blockchain. Furthermore, with this system in place we remove the need for a third party to validate all the transactions that is taking place. We will discuss what this can do in today’s financial system in this section. The role of the financial system is now replaced by a piece of software that is running on multiple computers across the world which no party can have control over (autonomously). Voila...we have just achieved decentralization by removing the control of the records from one centralized party and distributing it to many others who have committed to maintaining the system without the capacity to tamper with it.
But why would any other party be interested in maintaining any such records? Here is where the software which we will refer to as the 'protocol' is designed in incentivize all the parties that contribute to this decentralization process. By enabling these parties to obtain reward for the work that they accomplish, a fair system that benefits all is established by the protocol.
Why it matters to me?
Now that we have given you a good idea of what a blockchain is, let’s explore further on how this technology can improve your life.
We are currently living in a world that is very much dependant on several agencies to facilitate many routine transactions. Think of all the banking, registrations and other transactions that you do. You will need to place trust on a third party like the government, banks, companies, service provider and multiple other parties to achieve a desirable outcome. What if we could completely remove all these intermediaries and replace them with a piece of software that does the same thing? Wait a minute, that's a terrible idea as lot of people are going to lose their jobs!
Not to worry. Eventually, we will need to move the labour force to a higher level of value creation than just menial tasks like validating transactions. This is going to be crucial to improve the productivity of the world in general.
Blockchain technology frees you from these agents as it does not discriminate your access to services based on any demographic or socio-cultural makeup. Anybody could have access to value that comes along with this technology without having to appeal to any central authority. All you must be able to do is understand how the technology works and adopt it because it is the future of-course!. The end-goal for blockchain technology especially in financial services would be to help the more than 2 billion un-banked population around the world to get access to basic financial services.
In addition, the fees that you are going to be paying for transactions is going to be a lot lower than when dealing with traditional intermediaries. As on now, the transaction fees on Bitcoin network is not the cheapest especially when dealing with small value transactions. But it is well suited for the transfer of larger amounts. Also the innovation did not just stop with Bitcoin, as there are other blockchain protocols being developed which potentially carries zero fees! Imagine that, zero fees for transferring money across the globe. No wonder you have every imaginable investors and companies flocking to the blockchain.
Security is another reason why more retail and institutional investors are adopting blockchain. Established blockchain protocols such as the Bitcoin network makes it impossible to hack and therefore is a more secure system than storing your wealth with a third party agent like the banks. With blockchain, no other entity could confiscate your records or wealth especially if it is stored on an open-sourced, public decentralized blockchain network.
Convinced yet?
Don’t just believe in what CryptoDurian is saying, try it out for yourself and experience the freedom that comes along with the blockchain technology. Read the next part on ‘What is Bitcoin?’.
You are going to be amazed with what blockchain technology can do for you.
First published on 20th August, 2019
