Ever wonder if there's an easier way to complete transactions without having to deal with online wallets, banks, and third-party applications? Well, it's possible thanks to blockchain. Here's everything you need to know about blockchain.
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| What is Blockchain? How Blockchain Works? |
Imagine four friends, Ram, Shyam, Jadu, and Madhu, meet up for dinner after they're done. Ram pays the bill, and all of them decide to split the expense amongst each other now. On the next day when Madhu sends his share to Ram via online money transfer, the transaction goes through without a hitch. Then Shyam and Jadu send their respective shares to Ram, but their transactions don't go through. The failed transaction cites some issues at the bank. That's when Ram comes to know about the many ways a bank transaction could fail; it could be due to technical issues at the bank, one of their accounts being hacked, daily transfer limits being exceeded, and sometimes additional charges like transfer charges associated with transferring money. To solve these problems, the concept of cryptocurrency came into existence.
What are Cryptocurrencies?
Cryptocurrencies are a form of digital or virtual currency that run on a technology known as blockchain. Thanks to blockchain cryptocurrencies are immune to counterfeiting, don't require a central authority and are protected by strong and complex encryption algorithms. And in a market of more than thousands of cryptocurrencies like Litecoin, ethereum, z cash and so on, one reigns supreme bitcoin.
What is a Ledger?
Now let's go back to our previous example and have Madhu, Shyam and Jadu send Ram two Bitcoin each as their contribution to the previous night's dinner. Let's assume Madhu, Shyam and Jadu have three Bitcoin in reserve while Ram has five. First Madhu sends two Bitcoin to Ram a record is created in the form of a block. The transaction details between them are permanently inscribed in this block. This record also holds the number of Bitcoin each of the friends own. So after Madhu's transaction Ram has seven Bitcoin while Madhu has one. Following this Jadu and Shyam send two Bitcoin to Ram. A new block is created for each of these transactions. These blocks hold the transaction details, as well as how many Bitcoin Jadu, Shyam, and Ram have in reserve.
These blocks are linked to each other, as each of them takes reference from the previous one for the number of Bitcoin each person owns. This chain of records, or blocks, is called a Ledger, and this ledger is shared among all the friends, which acts as a public distributed ledger. This forms the basis of blockchain. So, what happens when Madhu has only one bitcoin left and he tries to send two more Bitcoin to Ram? The transaction will not go through. This is because all his friends have copies of the ledger, and it is clear that Madhu has only one bitcoin left. His friends will flag this transaction as invalid. A hacker will not be able to alter the data in the blockchain because each user has a copy of the ledger. The data within the blocks is encrypted using complex algorithms. All of this is made possible with the help of blockchain technology.
What is Blockchain?
Blockchain can be described as a collection of records linked with each other that are strongly resistant to alteration and protected using cryptography. Now, let's have a closer look at the Bitcoin transaction between Ram and Madhu and find out how it works. Every user in the Bitcoin network has two keys: a public key and a private key. The public key is an address that everyone on the network knows, similar to a user's email address. The private key is a unique key that only the user has access to, something like a password. First, Madhu enters the number of Bitcoin he wants to send to Ram, along with his and Ram's unique wallet addresses, through a hashing algorithm.
All of this forms part of the transaction details. These details are encrypted using encryption algorithms and Madhu's unique private key. This is done to digitally sign the transaction and indicate that the transaction came from Madhu This output is now transmitted across the network. Using Ram's public key, the message or transaction can be decrypted only with Ram's private key, which only Ram has access to. Different cryptocurrencies use different hashing algorithms. Bitcoin uses the SHA-256 algorithm, while Ethereum, which is also a famous cryptocurrency, uses one known as Ethash. This transaction, along with several other similar transactions, takes place all around the world. These transactions are validated and then added block by block. The people who validate these blocks are called miners. For a block to be validated and added to the blockchain, miners need to solve a complex mathematical problem. The miner who solves it first adds the block to the blockchain and is rewarded with 12.5 Bitcoin. The process of solving the complex mathematical problem is called proof of work, and the process of adding a block to the blockchain is called mining. With this, Madhu and Ram's wallets are updated, just like those of every other person in the network who has completed a transaction.
Also Read, What is Bitcoin? Why Bitcoin is So Popular? How Bitcoin Works?
Now that you know about blockchain and its important concepts, it's time for a small quiz.
What is the concept of blockchain that ensures data cannot be altered by any of the users within the network?
A. Public distributed ledger
B. Proof of work
C. Proof of stake
D. Hash encryption
Let us know what you think is the right answer in the comments below. That's all for now.
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