Blockchain Simplified

One of the biggest challenges we have been grappling with for quite some time now is that of ‘hacking’. Whether it’s a bank account, a credit card reader or a Yahoo, large businesses and their stakeholders live in perpetual fear of hacking. Once hacked, data can be misused in a wide variety of ways – identity theft, service denial, fraud etc. Another challenge that often confronts us is counterfeiting – counterfeit cigarettes, drugs etc.

Admittedly, IT systems have over the last few years created a number of security mechanisms to fight hacking – firewalls, encryptions, multi-layered security access etc. But all these security mechanisms have loopholes that a clever hacker or fraudster cleverly exploits. The commercial world was looking for an infallible security framework that is near impossible to breach. I say ‘near impossible’ because, as the adage goes ‘Impossible is a word in the fool’s dictionary’.

But was such a framework really possible? Or was it to remain a fantasy, a pipedream?

Enter Blockchain.

Blockchain owes its origin to the need for digital currency or cryptocurrency –Bitcoin. There were only three known ways of making a payment to someone – cash (for small payments), cheques and bank transfer. e-transfer of money was not even considered an option.

But Blockchain has changed all that.

What is a Blockchain?

A blockchain is a chain of blocks or a distributed ledger that contains information. Once data is recorded in a Blockchain it becomes very difficult to change. Each block has some data, a hash and a hash of the previous block.

The data that is stored in a block depends on the type of Blockchain. The bitcoin block chain for example contains details of the sender, the receiver and the number of coins.

What is a hash?

A hash can be likened in its uniqueness to a fingerprint. Here’s an example of what a hash is like - 0000000000000000000e3ccdd089511408199acb6c39425bc5ae864951774a7f. Changing something inside a block will cause the hash to change. And if the hash changes, it is no longer the same block. Proof of work is a mechanism that slows down the mechanism of the creation of new blocks. This mechanism makes it hard to tamper with the block because if you tamper with one block, you’ll need to recalculate the proof of work for all the following blocks. The security of Blockchain comes from hashing and the creative use of proof of work. Another way Blockchain secures itself is by being distributed.

Every 10 minutes the bc gets updated with a new txn. Many individuals compete to solve a mathematical problem. When one of them solves it he broadcasts it on the bc that he’s solved the problem, after which he can add txns. If more than 50% of the people in BC agree that the txn is valid, that block of txns is included.

A bc is a distributed, shared ledger that multiple parties are using without having to trust each other.

Bitcoin records are kept by everyone

Decentralization reduces the risk of fraud, corruption and manipulation.

Imagine we are maintaining a shared ledger with many pages of records. Each page begins with a summary of the previous page. If you change the previous page, you also have to change the summary on the current page. The pages are linked or chained together. In BC terms, pages are called blocks. Since each block is linked to the date of the previous block, it’s called a Blockchain.

Elements of a blockchain

Peer to peer network - Where each computer in a network called a node has the same privileges as any other node in the network. It’s open to anyone and everyone.

Cryptography - the art of secure communication in a hostile environment. It allows me to verify messages and prove the authenticity of my own messages even when malicious players are around. We need cryptography because anyone and everyone can participate including bad actors

A consensus algorithm or consensus rule defines rules on how we add a new page. There are many rules available – proof of importance, proof of activity, proof of stake, proof of work etc. BC uses POW. This rule states that in order to earn the right to add a new page a participant has to find a solution to a math problem that requires computational power to solve. Computers in the network run calculations to solve the problem. In so doing they consume a lot of energy. In other words, they do a lot of work. When one of the nodes solves the problem and displays it in the network, they are displaying proof of work. It’s the node’s way of saying I have spent a lot of energy doing this work and I’m entitled to write the next page.

Punishment and reward. We reward people who help us maintain these records and add new pages. This reward is a token or coin. People exhibiting bad behaviour are punished by taking a coin or token away.

Marketing adoption is the fifth and important element. If there’s no adoption, there’s no value to our tokens/coins. Only when we have the critical mass in terms of the number of users, does the bc become truly decentralized