What is Blockchain and How it’s Changing the World?
What is Blockchain?
Blockchain can be described as an online database of transactions. It is used globally and has no owner. Anyone who can access the internet can use it First and foremost, What most people need to understand is that bitcoin is not blockchain. Bitcoin is an application of blockchain or a digital currency that can be used within a blockchain. Blockchain was designed as a way to eliminate the various problems experienced during money transfer.
To better understand what blockchain is, we will look at the 3 very important concepts of blockchain.
The open ledger system
Imagine a group of 4 people who want to transact among themselves. We can call this a network and refer to the people as nodes. This people have to record each and every transactions they make among themselves on a single ledger. So if one of them, well call him Mark, had an initial balance of 100$ and transfers $40 to Mary, then he is left with $60 and the transaction is updated on the ledger. Each transaction made between these four, beginning with Mark, are linked chronologically to one another on the ledger forming some kind of a chain. This is what we call a blockchain. The ledger can be seen by every node in the network so it is impossible to cheat the system. For example, Mark cannot transfer more than $60 to anyone in the network because he is only left with $60. If he attempted to do so, such a transaction would be noticed by the others and considered invalid and hence would not be carried out.
The distributed ledger system
The ledger mentioned above is centralized. Blockchain now tries to get rid of such a system by distributing the ledger to every node in the network. Mark will have his personal copy of the ledger and so will Mary and the other a Anyone participating in the network will be able to hold the chain of events that happen. This is why blockchain is described as a decentralized ledger system. To ensure that all the nodes always have the same copy of the transactions in their ledger, a process called mining needs to be don. This is our third concept.
Transactions are done regularly within the network. If Mary wants to transfer her received money to another person in the group then she will need to show the transaction she wants to do, to everyone else. Bear in mind that the transaction is still not validated and therefore has not yet entered into the ledger. For it to be recorded in the ledger someone has to do mining. Miners are special people within the network who are able to validate the transaction for it to enter the ledger and by doing so they are financially rewarded. They will have to compete among themselves to do this.
The miner will have to do:
- First, check if the funds are available for the requested transfer. They need to ensure that the person has the money he/she wants to transfer.
- Look for a special key that will allow them to link this transaction to the previous one. Finding the key will require some computation skills and also time Random keys will be generated until the miner finds the correct one that enables them to link the transactions. The first one to accomplish the task will be rewarded. This could be through bitcoin.
- On solving the problem, the miner will then distribute the solution to the entire network. Other miners and nodes will see that the key has already been found and the transaction validated. They can now add the transaction to their own ledger copies using the found key.
This is essentially the concept of the blockchain.
How is blockchain changing the world?
- Blockchain is eliminating the need for third parties during transactions. Everytime we send money through our banks or other online sevices, we are asking for permission from banks and other institutions to use their system to move money and of course they will not allow you to do this for free. They take a small percentage of your money as processing, service or transaction fees. The blockchain system does not need intermediaries and hence it is cheaper. You also do not have to submit your personal information to third parties.
- Money is being sent faster both locally and internationally. It is very frustrating having to wait for 3 to 5 days to receive money from someone abroad. Sometimes the situation may be an emergency and by the time the money arrives, you have no need for it Sending money abroad has become very fast through blockchain. You do not need imtermediaries who will have to follow lengthy procedures to complete your money transfer.
- Blockchain ensures that our money is secure. Many financial institutions these days are faced with fraud scandals. Some are even facing the risk of being closed down. Now picture a situation where you have all your money stored in such institutions. If the company is liquidated, then you run the risk of losing everything. Blockchain’s digital currencies, such as bitcoin, gives you a sense of security and more control over your money. Making transactions using the blockchain database also ensures that there is no likelihood of someone illegaly taking a small amount of your money and assuming you wont notice.