A Guide to Understanding Blockchain

Blockchain has been around for over ten years and there has been so much progress from the moment it was first introduced. When blockchain was first introduced, a lot of people didn’t pay attention to it.

This could easily be attributed to a lack of trust in a system such as blockchain, one that was different from what has always been known by people. It was understandable for people to be uncertain about how genuine it is.

Over time, as it grew and expanded there has been much acceptance and it has proven to be reliable, giving people reasons to trust and rely on its systems.

Blockchain is not rocket science as many people try to make it seem, it can be understood and the reason some people have not come to accept it is that they don’t know what blockchain is all about.

Some feel it is too complicated for them to understand, so whenever they hear about blockchain, they immediately lose interest. One can’t blame anyone for the loss of interest when they don’t understand certain terms.

Here you will get an overview of what blockchain is, to aid your understanding.

How did Blockchain come about?

From its inception, the person or people behind blockchain have not been known. But when it was invented far back in 2008 it was by a person/group of people with the name Satoshi Nakamoto. From the point of invention till this very moment, the identity of Satoshi Nakamoto remains unknown.

What is Blockchain?

This is probably what you’ve been waiting to understand all along. Blockchain which is sometimes referred to as Distributed Ledger Authority (DLT), is based on a peer-to-peer (P2P) topology which allows data to be stored on a global scale on various servers, giving everyone liberty and access to all entries entered in real-time.

With a democratized system such as this, it is difficult for anyone to gain absolute control of any information that is being shared.

Blockchain is a technology that gives individuals and organizations the benefit of making instant transactions on a network without the barrier of middlemen.

Blockchain is a secure way of passing information from one place to another, and the process is completely automated.

There is still more to the blockchain technology and just like every new technology, there are always new updates and changes to be made. We can’t tell for sure that all we know about blockchain now, is all that will always be.

Though blockchain is gaining ground already, a lot of people are still skeptical about it. Over time, it is likely there would be more to what we have today.

Blockchain consists of three important concepts that can’t be overlooked. They are;

1.       Blocks: Every chain is made up of multiple blocks and these blocks have three basic elements which are;

-        The “data” in the block.

-        A 32-bit whole number called a “nonce”. The nonce is randomly generated when a block is created, which then generates a block header hash. 

-        The “hash”, which is a 256-bit number linked to the nonce. It has to begin with a huge number of zeroes.

2.       Miners: New blocks are created on the chain by Miners, through a process called mining. Every block has its unique nonce and hash in a blockchain, but the previous block in the chain is always referenced. Mining a block is not entirely easy, and it is even much difficult when it is a large chain.

          Miners make use of particular software to solve the problem of discovering a hash, it is a very complex process of trying different nonce-hash combinations and there are a billion possible combinations for this. With the actual combination found, miners are said to have found the “golden nonce”.

          For any change to be made on any block, it has to go through a process of re-mining not just the block with the change, but you’ll also have to work on the blocks that come after it. This process further proves why it is difficult to manipulate blockchain technology

3.       Nodes: These are any kind of electronic device which maintains copies of the blockchain and ensures that the network is functioning. Each node has its copy of the blockchain and any newly mined block has to be approved algorithmically for that chain to be updated, trusted, and verified.

How does Blockchain work?

Like the name implies “blockchain”. In a simple explanation, you can get the whole idea of what it is about. Blocks are like digital information, and the chain is like the public database.

The blocks store information about transactions, which includes dates, time, and amount of any purchase that is made. Those involved in the transaction are also stored in the blocks.

Also, when a piece of information is stored on the blocks, it distinguishes each block from another with the use of unique codes called “hash”, the hash helps to differentiate each block. For instance, you purchase an item from an online store, while the transaction is in the process, and you feel you need more of it.

You can make another order, and it will be stored with a different unique code from that of the first transaction, and you can still identify both transactions differently.

To get more details of how blockchain works, let’s get an idea from Willian Mougayar who is a Blockchain Specialist.

“The traditional way of sharing documents with collaboration is to send a Microsoft Word document to another recipient and ask them to make revisions to it. The problem with that scenario is that you need to wait until receiving a return copy before you can see or make other changes because you are locked out of editing it until the other person is done with it. That’s how databases work today. Two owners can’t be messing with the same record at once. That’s how banks maintain money balances and transfers; they briefly lock access (or decrease the balance) while they make a transfer, then update the other side, then re-open access (or update again). With Google Docs (or Google Sheets), both parties have access to the same document at the same time, and the single version of that document is always visible to both of them. It is like a shared ledger, but it is a shared document. The distributed part comes into play when sharing involves a number of people.

Imagine the number of legal documents that should be used that way. Instead of passing them to each other, losing track of versions, and not being in sync with the other version, why can’t all business documents become shared instead of transferred back and forth? So many types of legal contracts would be ideal for that kind of workflow. You don’t need a blockchain to share documents, but the shared documents analogy is a powerful one.”

For a block to be added to the blockchain, four things must happen. They include;

-         A transaction must occur.

-         The transaction must be verified. After initiating a transaction, it must be verified. For offline transactions like we have in traditional systems, there are people whose job requires them to verify transactions, but with blockchain, such verification is done by computer networks to ensure that your transactions go through just the way it should. Details of the transaction, such as the amount, time, and the participants.

-         The transaction has to be stored in a block. Once the transaction has been verified to be accurate, then it is cleared to go through.

-         The block must be given a unique identification code. After verification, the block must be given a unique code known as “hash”. When the block is given a “hash” it can be included in the blockchain. With the new block added to the blockchain, it is available for anyone to view and that includes you also.

Advantages of Blockchain

1.       Transparency: Even though the personal information on blockchain is kept secret, the technology is open. Users on the blockchain network can make changes as they feel it should be done, but this can only be when they have a strong backing of the network’s computational power.  Data on blockchain are open source, and it would be difficult for anyone to think of tampering with data because there are millions on computer networks connected.

2.       Decentralization: There is no storage of information in a central place with blockchain. One key thing here is that, when there has been an addition of a new block, every computer which is connected to the network, goes through an update and effects the change that has been made. This feature also makes it even difficult for information to be manipulated or tampered with because it is spread across the computer network.

3.       Reduction of Cost: Blockchain takes away the need to pay third-parties an amount for verification and other costs that they charge in carrying out their duties. Those charges that are paid to the banks for carrying out certain transactions are eliminated, thereby reducing cost. For blockchain, due to the absence of a central authority, those charges are eliminated.

4.       Accuracy:  The absence of human involvement in the verification process makes it less likely for error to occur. The transactions on blockchain are approved by a network of thousands of computers, and this makes room for more accuracy in the record of information. Likely, an error could also be made on the computer network, but the error would only be to one copy of the blockchain, if that error was to spread, it would need to have been made by at least 51% of the computer network which is almost impossible.

5.       Transactions are Efficient: With regular banks and other financial institutions, there is often a delay in transactions, as they don’t operate all day and are only open for five days a week. For blockchain, transactions go on for 24 hours and seven days a week. In just a few minutes, transactions can be processed without any form of delay. For international transactions which could be altered by time zone related issues, blockchain is very helpful.

Disadvantages of Blockchain

Though there are lots of advantages beyond what has been listed above, one can’t deny the fact that there are disadvantages as well, this could be some of the reasons why there has been a slight delay in people accepting blockchain. Some of the disadvantages are;

1.       Complexity: For a start, it can be quite complex to understand, seeing that some of the terms like hash, nodes, and the rest are not familiar terms to people. It would take some time for someone to understand what blockchain is all about.

2.       Susceptible to Hack: Though the blockchain technology is safe to an extent, it is still susceptible to hack. The attack on blockchain might be difficult to execute because of the computational power that is required to execute it. For hackers, renting the required computational power could be more preferable instead of spending a huge amount of money to acquire them.

3.       Illegal Activity: Blockchain is highly confidential and also ensures that the privacy of the users is maintained and they are safe from hacks. But it gives room for some illegal activities to be carried out.

4.       Lacks Regulation: Because blockchain has not been fully recognized all over the world, it is clear that not everyone has bought into the idea of it. Organizations and the government are probably still getting an idea of what it is all about, with that there is no clear regulation of blockchain, and as far as people still reservations concerning blockchain, it will take more time before people get to accept the idea.

 

Areas of Blockchain Application.

Though some organizations are working towards adopting blockchain into their system, some are still not clear about the whole processes involved in blockchain. Blockchain would be beneficial in some certain areas, they include;

-         Bank Use

-         Healthcare Use

-         Supply chain Use

-         Voting Use

-         Property Records Use

-         Use in Cryptocurrency

-         Use in Smart Contract.

Blockchain can be used in these various areas and is most likely to make these processes easy, secure, safe, and responsive, unlike with the traditional way in which it has always been done.

Blockchain and Bitcoin

For those conversant with blockchain to a little degree, one can always see the link between blockchain and Bitcoin, this is because Bitcoin relies on the technology of blockchain. The person/group of people behind blockchain, Satoshi Nakamoto referred to it as “a new electronic cash system that’s fully peer-to-peer, with no trusted third party.”

For payment and transactions, Bitcoin doesn’t rely on any third-party or any sort of regulation. It is different from what we have with physical cash which is regulated and verified by a central authority, this could be either a bank or the government.

Bitcoin transactions, which are in line with blockchain technology are verified by a network of computers and this further reveals its decentralized system of operation.

For a transaction to be conducted on the Bitcoin network, one must complete transactions using a wallet. Anyone who decides to make use of Bitcoin can make fast and secure transactions to anyone in any part of the world and at any given time.

As it stands, some businesses already receive payment in the form of Bitcoin and it seems to be getting acceptance, it is arguably the most common cryptocurrency and it has helped some businesses in different ways.

As we look at the concluding part of this guideline on the basic things you need to know about blockchain, here are some words from Peter Mead who is the Head of Marketing for Bitcoin Australia;

“Businesses mainly think of cryptocurrency or blockchain as an alternative to money and assume it’s just a way to pay suppliers, retailers, etc. However, one of the biggest advantages and most useful aspects of blockchain for businesses is it can handle agreements such as financial contracts and insurance policies. All parties on the blockchain are privy to a shared ledger that cannot be changed. Clients and companies can easily verify any agreements added to the chain. Smart contracts can also use blockchain to verify that the terms of the contract meet the benchmark criteria. All handled in a programmatic way with the blockchain software.”

One may not know the future of blockchain entirely, but it has shown promising signs which if properly regulated and given critical attention, can serve the general populace a greater good.