The world is going completely digital as we enter the fourth industrial revolution. With the internet of things, artificial intelligence, and blockchain technology, the future is already here. Many people find it difficult to understand the concept of the blockchain, hence there is a need to provide the simplest explaination of blockchain. About few days ago, one of my friends told me she has heard about blockchain everywhere, she read about it, but everything is all technical jargons. In a nutshell, she wanted me to explain blockchain to her.
At that point, I was caught between two things; first, giving an explanation that may add to her confusion or explaining the concept in the simplest possible way I can. The latter won! I now have a strong belief that the explanation can be useful to you too and I decided to put pen on paper. Relax and enjoy the simplest explanation of blockchain.
Remove Intermediaries, Embrace Decentralization
Blockchain can be simply defined as a technology that brings decentralization to decision making. To illustrate this, let’s use your bank. We will need three characters here; you, your bank and me. Assuming I am the cashier at a shopping mall and you have visited the mall to buy some stuff. You have your debit card with you and intend to make use of the POS. After you have gotten all the products you needed, you put the card in the POS to pay me $200 which is the total amount of the products. At this point, I need to validate your payment by asking your bank if you have up to $200 in your account.
Whatever answer the bank gives to my request is the final because it is the central authority here. If your bank says you don’t have up to $200, then, your purchase will no longer scale through.
This has happened despite your own belief that you have enough to make the purchase. But something could have happened. What if your bank account has been tampered with? What if someone has hacked into your bank’s database and your money is no longer accessible? Apart from all these, your bank itself can make a mistake when inputting values. With all these issues, you can’t put all your trust in your bank. Now, think of it, can’t we remove the bank from this transaction? Yes, we can, and blockchain is the answer.
You May Not Trust One Person But You Can Trust Everybody
Instead of your bank doing the verification, it becomes the responsibility of everybody when you use blockchain. This happens with blockchain’s introduction of a distributed ledger. Many people will have copies of the distributed ledger and each owner (known as a node) of each copy records every transaction. Now, to buy stuff from the shopping mall, you can use cryptocurrency which is a digital currency that operates on the blockchain technology. All you need do is give me (the cashier) your details, then, I ask the nodes (those keeping the records) if you have enough money to pay for your product. The nodes check their records to see if you have enough money. If you do, they tell me, and I give you the product while the nodes update their records.
Once the transaction is complete, it will be bundled up with other transactions to form a block. Therefore, a block is like a page of a bank’s ledger. It is the chain of blocks that make up a blockchain network. Once a block has enough transactions that make it full, it is sealed off with the hash ID. With this, if any node tampers with the details of any transaction, others will know very easily.
Miners and Proof of Work
In Bitcoin, the nodes that keep the records of all transactions are known as miners. Their primary role is to validate the transaction. However, they don’t do that for free. Bitcoin is giving incentives to them through the concept of proof-of-work. When making a transaction using Bitcoin, a mathematical puzzle that is related to the transaction is created to process the transaction. Miners can solve this puzzle. The miner that finally provides a solution that is generally accepted gets a reward in the form of bitcoins. This is the way you mine bitcoin. The puzzle the miners are jostling to solve is known as a proof-of-work mathematical problem. It is good to note at this juncture that the nodes (miners) are not human beings, they are computers.
Blockchain is Beyond Cryptocurrency
When you talk about blockchain, people quickly think about cryptocurrency. Yes, cryptocurrencies like Ethereum, Bitcoin, Ripple, Litecoin, etc. are based on the blockchain technology, but that’s not all. Blockchain can also be used in upgrading traditional contracts to become smart contracts, introducing transparency into philanthropy, charity and crowdfunding and promoting rentals and ride-sharing. Other applications of blockchain technology are in healthcare, land rights, real estate, and elections. In the United States, West Virginia has already utilized blockchain technology for its elections.
Recap: How Blockchain Works
This article already gives you a basic knowledge of how blockchain works, and this is summarized below:
- Hillary requests to transfer $200 to Donald
- A block that represents the transaction is created
- Every node/miner in the network is notified about the block
- The nodes approve and validate the transaction
- Nodes receive a reward for proof-of-work
- The block is added to the chain which offers a transparent and permanent record of the transaction.
- Donald receives the $200 from Hillary.