Sometimes I don’t get why it is difficult for people to understand blockchain. In fact, it has become too common these days to understand it. So let’s understand it. There are two things- A block and a chain as well as it is just a chain of blocks at a very high level. We can rule out the physical stuff since it’s inside computers. Here digital information is divided into blocks and linked together. Bitcoin and blockchain technology is growing so rapidly such that people are investing in and exploring the field even when they haven’t heard of cryptocurrency or know about its working.
Today blockchain technology and cryptocurrencies have become a parallel platform as many people are performing their standard transactions. There must be some issues with the current system then only a new system is replacing an existing system. Before we will begin to understand the blockchain for beginners, let’s understand the problems of the current banking system. Let us look at some of the most common issues being faced by the banking system:
1. High transaction fees
If a person wants to send money to another person then it must be passed through a trusted third party such as a bank or financial service company or a bank. Along with it, transaction fees will also be deducted, and it will be high when we transact a big amount say 1, 00,000.
2. Double spending
In digital cash scheme, a double spending is an error in which the same single digital token is spent twice or more, for example- when a person wants to initiate two transactions simultaneously to two different persons, but he has less amount such that he can’t send them money together due to an insufficient amount in his account. However, the transactions can be completed without the needed balance as with every digital transaction duplicated digital tokens is associated, and this is known as double spending.
3. Net frauds and account hacking
In India, we all know that there are various credit/debit cards and internet banking fraud cases occurring every single day. In the year 2106, it was about 14, 824 cases. In these frauds, the total amount involved was Rs 77.79 crore.
Also read:Blockchain technology in telecom
Now, let’s look at some of the ways through which the blockchain tackles the above issues:
1. Decentralized system
As compared to banks and financial organizations, which are controlled and governed by Central authorities, a decentralized system is followed by blockchain technology. Here, for the growth and downfall of the system, everyone who is part of the system becomes equally important or responsible.
2. Low or no transaction fees
Certain variants of this technology do implement certain minimal transactions fees, but usually, no transaction fees are applicable. When compared to the fess implied by banks, these transactions fees are however relatively quite low.
3. Verification of every individual transaction
By a cross-checking the ledger and the validation signal of the transaction, every transaction is verified when sent after a few minutes. The issue of double spending is eliminated through the use of several complex encryptions and hashing algorithm.
Introduction of blockchain
Being the latest buzzword in financial services, blockchain for the beginners has the potential to revolutionize in such a way transactional information is used, shared, and stored. To invest millions of euro in the development of the technology, here are the driving factors causing companies to do so:
1. Cost and speed – This can be used to automate manual tasks as well as can reduce or eliminate the need for certain intermediaries.
2. Security – Due to the complex cryptography employed, interfering with transactions on the blockchain is extremely difficult, and also every participant can view any changes because of the distributed nature of the ledger.
3. Provenance and traceability – The entire ownership history of an asset is stored in a distribute ledge stores. Today, mostly bitcoin information on other assets can be stored.
The barriers to tempering or deleting information are the most powerful aspects of the technology, which has been added to the chain. Today, it is the most cost-efficient, quicker as well as a secure technology than various others technologies in use. However, over the past 12 months, the potential of the blockchain has really taken over. There are many potential uses, which are being explored such as Know Your Customer (KYC), smart contacts, trade surveillance, Anti-Money Laundering (AML), settlement and clearing, collateral management, and the ability to capture historical and current ownership of high-value items. By allowing digital information to be distributed, this technology created the backbone of a new type of interest. The tech community is now finding other potential uses for the technology, originally devised for the bitcoin, digital currency.
Bitcoin, for a good reason, has been called “digital gold” as the net value of the currency is near to $9 billion US. The technology can also make other types of digital values. A growing list of ordered records is maintained by blockchain, called blocks. Each block is connected to a previous block as well as has a timestamp is included in each block.
By design, blockchains are secured database and are served as the public ledger for all bitcoin transactions. With the use of distributed timestamping server and peer-to-peer network, the security is built into a blockchain for the beginners. Also, the result is a database that is managed autonomously in a decentralized way. Medical records transactions, proving provenance, and identity management are such recording events, which makes the following technology excellent.
This advanced technology is used not only to transform the financial services but many other businesses and industries. By owning the parts of the blockchain, cryptography ensures the users that they can edit them by possessing the private keys necessary to write the file. As the technology principle, it was developed that sits behind the first cryptocurrency to go mainstream, Bitcoin. Everyone wants to access it just like a giant interactive spreadsheet. Building a platform capable of making bitcoin payments is the only aim of blockchain that is efficiently and securely transferred without the need for central control.
History of blockchain
Many of the technologies were quite revolutions in their time, which we now take them for granted. Blockchain for beginners is a distributed database maintaining a continuous list of ordered records, called blocks. Let’s just think once what’s happened before 10 years. So, before getting started with the history of this technology, let’s discuss the bitcoin as you can’t discuss its history without bitcoin.
- Bitcoin was the first major blockchain innovation, which was a digital currency experiment. The market cap of bitcoin was used by people for payments and they are still using it for the same, including a large and growing remittance market as well as it hovers between $10-$20 billion dollars. In 2009, bitcoin was offered up to the open source community just after Nakamoto’s whitepaper was released.
- Blockchain was the second innovation, and it was realized that the underlying technology through which bitcoin was operated could be separated from the currency as well as they can be used for all kinds of other inter-organizational cooperation. At this moment, almost every single major financial service organization and banks are doing blockchain research, and it was expected as well that 15% of banks be using blockchain in 2018. People started to invest in and explore when they realized that bitcoin could be used for more than cryptocurrency, and how it could alter many different kinds of operation. Without needing the third-party authentication, it is an open, decentralized ledger recording transaction between two parties at its core. This possibly reduces the cost of transactions as well as creates an extremely efficient process.
- Smart contact was the third innovation that embodied in a second-generation blockchain system called ethereum. In blockchain, it built little computer programs that allowed loans, or bonds called financial instruments to be presented, rather than only the cash-like tokens of the bitcoin. The market cap of ethereum smart contract has around hundreds of projects headed towards the market. The smart contract has obvious advantages including improved quality, reduced contract execution costs, and increased speed. These smart contracts can be stored as well on the blockchain.
- The current cutting edge of blockchain thinking, called proof of stake was the fourth major innovation. The proof of work secured the current generation of blockchain for beginners, in which the group with the largest total computing power makes the decision. In exchange for cryptocurrency payments, these groups are called miners and operate vast data centers in order to provide the security. For a similar or high degree of security, the new system does away with these data centers, replacing them with complex financial instruments.
- Blockchain scaling is the fifth major innovation on the horizon. Right now, every computer in the network processes every single transaction in the world of the blockchain, but this is slow. Without sacrificing the security, the following process is accelerated through a scaled blockchain by determining the computers necessary to validate each transaction as well as dividing up the work efficiently. A difficult problem is to manage it without compromising the legendary security and robustness of the following technology, not intractable. With the major payment middlemen of the banking world such as VISA and SWIFT, a scaled blockchain is expected to be fast enough, and go head-to-head to power the internet of things.
What is blockchain?
The spine of the entire crypto-currency system can be called blockchain for beginners. With the use of crypto-currency, this technology not only helps the users performing transactions but also ensures the security and anonymity of the users involved. The continuous growing list of records is linked as well as secured with the use of cryptographic techniques. An open and distributed ledger served by blockchain can be shared among everyone in the network for all to view. This brings trust and transparency as well into the system.
A block being a current part of blockchain results in the permanent database as it records all the recent transactions, and once completed goes into the blockchain. A new block is generated each time when a block gets completed. This is typically adhering to a protocol for validating new blocks. Without the alteration of all subsequent blocks and collusion of the network majority, the data in any given block cannot be altered retroactively, once recorded.
Features of blockchain
1. SHA256 Hash Function
In blockchain technology, the core has algorithm used is the SHA256. The output is not encryption or it cannot be decrypted back to the original text is only the purpose of using a hash. For any size of the source text, it is a fixed size, and it is a ‘one way’ cryptographic function as well.
2. Public key cryptography
The cryptographic technique creates a set of keys referred to as public and private key for helping the users. The private key is kept as a secret by the users whereas the public key is shared with others.
3. Distributed Ledger and P2P network
On the network, every single person has a copy of the ledger. There is no single centralized copy. A unique way is used by the blockchain to implement the transaction. No accounts and balances in the bitcoin blockchain ledger exist. Today, in this technology there are 484, 000 blocks around 250 million transactions.
4. Incentives for validation
To give rewards to the miners who have created the latest block is the last step of a bitcoin transaction. In order to validate the transactions and maintaining the blockchain, the rewards are provided by its system. This is the most important as well as interesting part of bitcoin mining as the current reward per block is 12.5 BTC (Rs. 3, 427, 850). The only way of generating new currency into the system is the bitcoin incentives, and it is believed that all 21 million bitcoins will be mined by 2140.
Concepts of blockchain
The essential blockchain technology concepts you need to know, and these are as follows-
1. Blockchain and bitcoin are not the same
Blockchain and bitcoin are assumed the same by many people, but blockchain for beginners is the underlying technology of bitcoin. We can say that they are closely related, not the same. The first use case leveraging technology can be actually considered by the bitcoin. The introduction of these two concepts at the same time often creates confusion in the mind of most of the people. As a type of unregulated digital currency, bitcoin was introduced by Nakamoto in 2008 whereas being the ledger solution, blockchain was used to record new currency securely.
2. Data stored on blockchain is public
Many people considered this statement true, but it is false as some public blockchains are open, and some are privately accessible only to specified users. There are three types of the blockchain, which are as follows-
- Public blockchain – A user can become a member of the network in a public blockchain in which they can store, send, and receive data. A public blockchain is decentralized, allowing anyone to read and write the data stored as it is accessible to everyone.
- Private blockchains – In this, one organization controls the sending and receiving of data. Also, only specific users are allowed to access it as well as carry out the transactions.
- Consortium blockchain – Also called permissioned blockchain, it is a hybrid model between the highly-trusted entity model of private blockchains and the low-trust offered by public blockchain
3. Blockchain and bitcoin transaction
The blockchain technology used for bitcoin allow recording of the transaction on a distributed ledger across a network of users. The storage of data from the transactions is allowed by the open-source technology into blocks. Without the ability to change or remove previous transaction data from the distributed ledger, the information stored on blockchain is fully transparent as well as permanent.
4. Blockchain- nothing more than a buzzword
Undoubtedly, the overused term- blockchain is daily covered in multiple media as well as press outlets, but this doesn’t mean it is just a buzzword, nothing more as the investment numbers speak for themselves, for example- capital markets firms with 90% of North America and European banks spent over $280 millions on this technology in 2016.
Role of miners
Each unconfirmed transaction is verified by miners, grouped together in a block, hashed the block and in the last, they do find the proof of work in bitcoin platform. Bitcoin depends on miners for a couple of important roles:
- Store and broadcast the blockchain
- Validate new transaction
- Vote on consensus
So, what you have to do for becoming a bitcoin miner? You should follow 6 easy steps, which are as follows-
- Join the network to become a bitcoin node and listen for all the transaction because you have to validate them.
- Do listen for new blocks in order to maintain blockchain for beginners.
- Assemble a new valid block
- Work hard to find the nonce to make your block valid
- Hope every other miner accepts your new block
- If all the steps completed, you finally get the profit.
As of today, the mining difficult target is 256-bit hash output. Currently, at least the first 64 bits of the hash of an evaluate block has to be set at zero. Overall, the current difficulty is about 2 degree 66, which is a huge number, and approximately similar to the world’s population. Over time, the mining difficulty keeps increasing and it is not steadily increasing such that it depends on the activity in the market as well as how many miners are getting into the game, which may be affected by the current exchange of bitcoin.
Why use bitcoin?
Generally, the following questions often arise in our mind- why use bitcoin? What are its benefits? Why is it better than cash or credit cards? So, here is the list of reasons why to have bitcoin considered to be beneficial?
1. Fast, secure, and global as well
In order to send value instantly to another party, you can use it anywhere in the world, nearly for free. You can send as much value as you want as transferring bitcoins costs just a few pennies. Also, don’t forget to remember that bitcoins can’t be duplicated or counterfeited as it doesn’t discriminate. Interestingly without the need for a third party, the transactions are conducted in a peer-to-peer network.
2. Made for our generation
What we meant by it is that today is the world of internet. Gone were the days when we move around with paper cash or pulling out credit cards. With a payment option, which significantly provides virtually instantaneous transaction time, truly lower in fess, and is accessible through various bitcoin wallets as well, bitcoin is far better than the convenience of credit cards
On top of convenience, if you are concerned about the fraud, identity theft, and crippling interest rates, then bitcoin offers credit card users freedom from these following concerns. Also, it has been discovered that 33% of millennial will not be needed a bank account in 5 years.
3. Bitcoin was designed with your privacy in mind
The entire history of bitcoin transaction was displayed by block explorer for all. When searched with online access, you might consider the level of transparency opposite of private, but in reality, it means that whether the users want to be completely transparent with their finances or wants to keep them very private.
In order to transact, some businesses may need to identify themselves due to compliances reasons, but bitcoin protocol does not require people to identify themselves as some businesses may need to for compliances reasons. You can create as many bitcoin wallets as you like whereas people often have one or two accounts in their respective banks.
4. Bitcoin is not subject to inflation
Unlike other currencies, the total numbers of bitcoins are capped at 21 million. The inflation is created when the total number of dollars in circulation rises. Due to an increasing supply, inflation is where the value of your dollar, for example, decreases over time. On the other hand, bitcoin that gives it interesting properties are scarce and fungible as well.