How Blockchain Technology Works: What Does the Future Hold?
Blockchain technology is perhaps the biggest invention after the internet. By now, you must have heard the terms Blockchain, Bitcoin, Ethereum, Cryptocurrency, and so on being thrown around corporate corridors and pretty much every internet forum. So, what is really Blockchain and how does it work?
Blockchain is a platform that allows for value exchange without a centralized regulator. It is the underlying structure of data that runs the financial ledger entries or transaction records for cryptocurrencies like Bitcoin. Each transaction is digitally signed to guarantee authenticity and ensure that no one can tamper with it. That’s not all – what makes blockchain a magical innovation is its ability to distribute these digital ledger entries over a deployment or infrastructure. So, the extra nodes and layers within the blockchain infrastructure help to provide a consensus about the transaction state at any given time. Each user has a copy of the real-time authenticated ledger distributed on the network.
The Decentralized Ledger
To better understand how the blockchain technology works, it’s easier to begin with Bitcoin, the pioneering cryptocurrency that runs of blockchain. Bitcoin (BTC) digital currency has no value on itself, the same way a USD has no value on itself, except that people have agreed to trade goods and services with it. Bitcoin’s value keeps fluctuating based on the conviction that many more people will accept to trade with it in exchange for a superior value of the currency under your control.
Now, to keep track of the amount of BTC each one holds, blockchain technology uses a decentralized ledger, which is basically a digital file that records all Bitcoin transactions. Unlike the traditional banks, the blockchain ledger isn’t stored in a centralized server or a specific data center. Everything is distributed across the globe through a network of individually-owned computers that store data and carry out computations. In the blockchain ecosystem, each of these individual computers represents a node and keeps a copy of the ledger file.
Assuming that John is sending 5 BTC to another Bitcoin wallet holder, Jenny. John will broadcast a message to the entire blockchain network that his bitcoin account should reduce by 5BTC and Jenny’s account to increase by 5BTC. Each node on the blockchain will receive the same message and keep a copy of the requested transaction on the ledger hence updating the account balances.
So, what is the implication of maintaining the ledger by a group of connected computers as opposed to a single centralized entity? Here are a few reasons why:
Blockchain allows everyone to see the transactions of everyone else on the network, unlike centralized bank systems where only the account holder knows his/her transactions and account balance.
If anything goes wrong on the blockchain network, there is no help desk to call or entities to sue.
Blockchain doesn’t require any trust, but security and reliability are achieved through special mathematical computations and codes.
To perform any transaction on the blockchain, one needs to own a wallet. A crypto wallet is basically a program that allows users to store and exchange their coins. There are different types of wallets that allow different cryptocurrencies, and each wallet is secured by a combination of cryptographic technologies that utilize a unique pair of connected keys − usually a private key intertwined with a public key.
If you encrypt a message with a private key, you can only decrypt it using the corresponding public key. On the other hand, if you encrypt a message with a public key, it can only be decrypted by the possessor of the paired private key. So, when sending Bitcoins to a vendor to purchase a service or product, you’re basically broadcasting an encrypted message with your wallets private key, so it’s only you who can spend the bitcoins you own – you’re the only one who has access to your private key that is needed to unlock your wallet. Each node of the network can however crosscheck your transaction request by decrypting it with their wallet’s public key.
When using your wallet’s private key to encrypt a transaction request, you’re creating a digital signature that is propagated through blockchain computers to crosscheck the transaction source and its authenticity. A digital signature is simply a string of texts that represents a combination of your transaction request and your wallet’s private key. So, it can’t be used to carry out any other transaction. By altering even a single digit of the transaction request messenger, the digital signature will change as well, so no hacker can alter your transaction request or the amount of bitcoins you’re transferring.
What Constitutes the Blockchain?
There are three different technologies that work together to form the blockchain. These technologies have been around for some time now, but their application and orchestration has evolved to create the disruptive solution in blockchain. They include:
Private key cryptography
Shared ledger distributed network
The incentive to service transactions on the network, record-keeping, and security.
With that information in mind, its time to delve deeper into how these technologies work together to create digital relationships.
Taking a scenario where two people, again John and Jenny, are transacting over the internet, each of them must hold a private key. So, the first component of blockchain is responsible for creating a secure digital key (identity reference). The identity is often a combination of both private and public cryptographic keys that form the digital signature. Meaning that both John and Jenny are able to maintain a strong ownership of their coins and provide a dexterous form of consent during the transaction.
Having a strong control of ownership is a great security feature but it isn’t enough to completely secure digital relationships. That’s why you need a system that approves transactions and permissions, in other words, authorization. In the blockchain ecosystem, authorization is achieved through a distributed network.
A Distributed Network
The blockchain ecosystem works with the analogy that all players are witnesses to the same occurrence, in this case, a digital transaction. It’s more like a CCTV system using a group of cameras to monitor your compound. If a burglar breaks in, then most, if not all the cameras will reach a consensus that the burglar actually broke in at a particular time. However, in a blockchain ecosystem, mathematical verifications are used as opposed to cameras. The size of the network is therefore critical to the verification process. Bitcoin, for instance, is secured by over 70 million TH/s – that’s more than the computing power of 10,000 largest banks across the globe combined.
Network Servicing Protocol
Going back to the scenario of a burglar breaking into a home, it’s prudent to have as many cameras as possible recording the same occurrence to make the network more secure. In the blockchain ecosystem, this means attracting more computing power to service the network. Mining is the primary source of computing power, especially in the open, public blockchain. Mining is actually founded on the principle of “the tragedy of the commons” −an ancient economics question.
So, when you donate your computer's processing power to service the blockchain network, you get a reward. In other words, your self-interest is used to service the public need. Bitcoin utilizes this protocol to eliminate any possibility of a single bitcoin being used in two different transactions simultaneously.
Miners usually vote with their computing power to express their agreement to accept new blocks or reject invalid blocks on blockchain. So, if the majority of blockchain miners reach the same solution, they create a new block, which is then time-stamped. The verification process and the value of the block are different for each blockchain and different rules and incentives are created once a consensus is reached by the majority of the nodes.
Benefits of Blockchain
Blockchain technology is gaining useful grounds on various constituencies for a number of reasons. First, there is no requirement for a central authority, making it ideal for affiliate relationships and joint ventures that use legers and settlement solutions. Most online business relationships are now based on 50/50 footing without a need for third-party managers or arbitrators. By utilizing the computing power to verify and settle transactions, blockchain provides disintermediation business arrangements, reduces costs, and improves transaction speeds.
Blockchain uses a digital signature for verification hence making it difficult for bad actors to execute fraud on the network. Every pending transaction upholds cryptographic integrity, and each request is examined by multiple nodes of the blockchain architecture to keep check of any malevolent use of the network or cyberthreat.
Downsides of Blockchain Technology
All the benefits notwithstanding, blockchain tends to have a very steep learning curve, which is typical for any open source system. To build up a functional blockchain infrastructure, you need several teams of developers each running a parallel project that constitutes the blockchain. Now, marrying all the diverse ideals from these developers into a cohesive and functional application is not a walk on the park.
Blockchain technology has made it possible for total strangers to transact anonymously without raising trust concerns. Blockchain combines cryptography with a public ledger to build the concept of digital assets. Unlike the shaky start experienced by various cryptocurrencies, blockchain seems likely to live up to the expectations of creating unique and specific online assets. The world will soon experience a complete game changer in the online shopping arena, entertainment, film & music, smart contracts, governance through voting and taxation, real estate, and much more.