The blockchain is one of the most promising technologies for the upcoming era. To unleash its cost-saving and operational efficiency potential, nearly all financial institutions are experimenting with this unique technology underlying the cryptocurrencies. Prior to digging deep, it is imperative for us to understand the concept of Blockchain.
What Is A Blockchain?
The Blockchain is a kind of distributed ledger that allows data to be exchanged between two contracting parties directly. It does not require any intermediaries within a network. It enables a decentralized trust and cryptocurrencies is one such concept which has popularized the idea of blockchain ensuring that the architecture works. The network participants or the miners interact with each other through encrypted identities. Then each transaction carried out is added securely to an immutable transaction chain and then distributed to all the network nodes.
Despite the apparent complexities pertaining to the concept of blockchain and cryptocurrencies, we can consider blockchain as a type of database for recording transactions plus a distributed ledger system where data is stored in fixed structures called blocks. The two important components of a block are as follows:
- a. Its header: It contains ‘metadata’ like a unique block id with the ‘time’ of the creation of the block and a ‘link’ that refers to the previous block.
- b. Its content: It includes a list of assets and instruction statements that has been validated. Eg the transactions are done, the amount associated, etc.
The best part about the open ledger system is that they are immutable and they are cryptographically secured by the Hash functions, for example, Bitcoin uses SHA256.
Let’s take a generic example of the functioning of a Bitcoin Blockchain:
- In order to make a payment a person installs a wallet app and the wallet potentially acts like a bank account. So in order to make a payment a person needs two pieces of information. First his private key and second the other person’s public key.
- As soon as he has the access to the above-mentioned keys the app notifies the miners globally about the impending transactions. These miners act as the verification centers who verify if the person has got enough bitcoins to make a successful payment.
- Numerous transactions occur in a network at any given time, all the transactions at a given timeframe are grouped in the format of a block for verification. Every block has a unique id, time of creation along with reference to the previous block.
- The new block is now added to the network. The miners then ensure the transactions are legitimate which is carried out by complex cryptographic computations.
- When the cryptographic problem is solved by a miner the discovery is announced to the rest of the network and a new block is added in front of the existing blockchain. Each block joins the block before and hence the name blockchain.
- Within a short span of time both the parties involved in the transaction receive a confirmation first. All the transactions are thereby fulfilled and the person gets paid.
Access to the latest block makes it possible to access all the prior blocks that are associated with it. Thereby the blockchain database maintains a complete record of all the assets associated and the instructions that were executed since the beginning. Hence making the data credible and auditable at an individual level. With the increase of the participants it becomes more and more difficult for malicious actors to overthrow the verification process of the majority and hence the network becomes all the more robust and secured.
Blockchains come through various implementations such as the Bitcoin. Numerous other independent blockchains have emerged recently. Though none had achieved the same status and popularity as that of Bitcoin they offer other benefits like enhanced speed, larger data capacities, etc. For example, Litecoin is a smaller competitor but it is known to offer faster transaction times.
One can expect Blockchain to impact a wide range of industries across various domains. It will tremendously alter the kind of business models and their operating processes. Anywhere there is ledger and transaction authenticity requirement, blockchain will play an imperative role. There will be massive changes in accounting, payment settlements, use of loyalty cards, etc. Due to technical complexities and lack of acceptance this new technology is not feared yet as the disruptive technology replacing payment industry or rather replace currency altogether! But gradually it is going strong and might just establish itself as a new industry in a new world of its own.
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