What You Need To Learn About Blockchain Technology
The blockchain is perhaps one of the best inventions made in this day and age of the Internet. This technology allows the exchange of value without the need for a central authority. Just imagine this scenario – you made a $50 bet with your friend for tomorrow’s weather. You believe that it will be sunny while he believes that it’s going to rain. Click Here To Go Straight To Our Online Tutorial
You’ll have three options to manage this transaction:
First, you can both trust each other. Whatever the outcome is, the loser needs to pay $50 to the winner. Since you are friends, it may be easy to trust each other. However, there are situations where even friends will not adhere to what has been agreed.
Another option is to create a contract out of what you have agreed on. With this contract, whoever loses will be obliged to pay or the other party could resort to taking legal action. However, for a small amount of $50, taking legal action might be illogical.
The third option is to involve a third party in the transaction, where both you and your friend will give your $50 bet to this third party that will award the money to whoever wins. But what happens if the third party runs away with your money? In this case, you’ll be left with the two options mentioned above – trust and contract.
Trust and contract are not really the best solutions because it’s hard to trust third-party persons and enforcing a contract for a small amount of money doesn’t make sense. The best thing about blockchain is that it offers a third option for the scenario above and this option is both quick and cheap.
The blockchain is a technology that allows people to write certain lines of code, a type of program that runs on the blockchain, where both parties involved could send their $50 bet. The program works by keeping the money safe and will only release it to the winning party after tomorrow’s weather update is available. Both parties have to check contract logic and as soon as it’s running in the blockchain, the contract can no longer be stopped or changed. This effort might seem a bit extreme for a $50 bet, but this is definitely beneficial for big transactions involving the sale of a property, for example.
On this article, you’ll learn how the blockchain technology works without having to go through the technicalities in detail. However, it will dig just enough information so you’ll have a general idea of the logic and mechanisms behind the blockchain technology.
Perhaps, the most talked blockchain technology is the Bitcoin. Bitcoin is a type of digital currency that’s used in various transactions, including paying for products and services, similar to using a traditional currency.
So let’s find out how blockchain works by understanding the concept of Bitcoin.
What is Bitcoin?
One Bitcoin is a single unit of the BTC digital currency. Like the dollar or any traditional currency, BTC has no value in itself. It will only have value once you agree to use it when trading goods or services in exchange for a specific amount of currency. In order to keep track of the total amount of Bitcoins that people own, the blockchain technology runs a ledger. This is basically a digital file that records all of the Bitcoin transactions.
This digital file isn’t stored in any central entity or any single data center. Instead, it’s distributed all over the world through a network of computers that are responsible for storing data and executing the computation of value. Each computer is represented by a node on the blockchain network and keeps a copy of the digital file.
For instance, John would like to send 5 Bitcoins to Alicia. In this case, he’ll send a message to the Bitcoin network stating that his account should be deducted 5 BTC, while Alicia’s account should be added 5 BTC. Each node within the Bitcoin network will get the message and will apply such request to their digital ledger files, which results in the updating of the account balances of John and Alicia.
Since the digital ledger files are handled by groups of private computers instead of a centralized entity similar to banks, this will lead to the following implications:
In a traditional banking system, we are only aware of our own account balances and transactions. However, in a blockchain technology, everyone in the network can view all transactions going on.
While you have full trust in your bank for keeping your money with them, the Bitcoin network is distributed to everyone. In the event that something goes wrong, there would be no one to sue.
The blockchain technology is designed in a way that no trust is required. Reliability and security are obtained through a special code and mathematical functions.
To conduct transactions on the blockchain network, you will need a wallet. This is basically a program that gives you the ability to exchange and store your Bitcoins. Since you’re the only one who can spend your Bitcoins, the wallet is protected by a cryptographic method that uses a special pair of unique but connected keys; a public key and a private key.
Is Blockchain Safe?
Anyone has access to the Bitcoin network through an anonymous connection. Everyone can also view the submitted and received transactions that reveal everything by using the public key. However, if someone will be using the same public key over and over again, it’s possible to link all these transactions to a specific owner.
The Bitcoin technology allows users to generate as many wallets as they want to, and each wallet has its own public and private key. The wallet allows users to receive payments from different wallets that can’t be connected together. No one can determine who owns these particular wallets except when you send all the Bitcoins in one single wallet.
The Bitcoin network processes transactions by collating all transactions together in a group known as blocks. Each block contains a specific number of transactions with a link to previous blocks. This is what places one block after the other in time. The blocks are organized through a time-related chain, which is responsible for giving names to the entire system called the blockchain.
Transactions made on the same block are those that have happened at the same time and transactions that are not yet in a block are unconfirmed transactions. Each node is capable of grouping transactions together in a block and then broadcasts it to the network by offering suggestions for what block must be next. Since any node is capable of suggesting a new block, you might be wondering how a system agrees on which block must be next.
In order for a transaction to be included in the blockchain, each block should contain an answer to a complicated mathematical equation that’s created from a cryptographic hash function that’s irreversible. Guessing random numbers combined with the previous block content is the only way to solve the mathematical problem. It’s usually a number that’s less than a specific value.
It will take up to a year for a computer to be able to guess the exact number and resolve the mathematical problem. But due to the huge number of computers within the blockchain network, a block can be solved within 10 minutes on average. The node that was able to save the mathematical problem will have the right to place the next block within the chain and broadcast it to the entire network.
So what happens when two nodes are able to solve the problem together and broadcast each of their blocks to the entire blockchain network?
When this happens, both blocks will be announced and every node will be built on the block that received it first. However, the system would require that each node be built immediately in the longest blockchain available. Therefore, if there’s ambiguity on which would be the last block, once the block is solved, each node will have to adopt the longest chain as the only option.
Because of the low probability involved in solving blocks in a simultaneous process, it’s usually almost impossible that several blocks are solved altogether over and over again. The entire block stabilizes very quickly into a single string of block, which every node often agrees on.
The confusion on which block has to represent the end of the chain or the tail may once again lead to a potential fraud. If the transaction happens in a block belonging to a shorter tail, when the block is solved, this transaction has to go back to being an unconfirmed transaction, similar to the rest that was in block B.
Let’s find out how Alicia would be able to leverage the ambiguity of the end of the chain in order to create a double spending. So Alicia pays to John and then John ends up shipping the product to Alicia in exchange. Since nodes will usually adopt the longer tail as being a confirmed transaction, if Alicia would be able to generate a much longer tail containing a reverse transaction that has similar input references, John would end up without any money, while also losing his product.
So how can this fraudulent transaction be prevented?
Each of the blocks has a reference to the previous block and this reference is a component of a mathematical problem that must be solved to spread such block within the blockchain network. Therefore, it’s extremely difficult to pre-compute several blocks because of the vast number of random guesses involved in guessing a block before placing it within the blockchain.
In this situation, Alicia is racing against the rest of the network to solve a math problem so she can place the next block in the chain. Even if she’s able to solve it before everyone else does, it’s extremely unlikely that she can solve more than three blocks in a row because every time she does it, she’ll be competing against the entire network.
Can Alicia use a superfast computer to generate plenty of random guesses in order to compete with the entire network when solving blocks? Yes, she can. However, even with an extremely fast computer, because of the huge number of members within the blockchain network, it’s very unlikely that she can solve plenty of blocks in a row within the exact time necessary for her to conduct a double spending attack.
Benefits and Challenges of Blockchain
You should now have an idea of how blockchain works.
So let’s take a look at what makes blockchain so interesting.
- Here are some of the remarkable benefits of using the blockchain technology.
- You’ll have full control of the amount you will own and there’s no third party involved who will keep your money or someone who could block you from accessing it.
- The fees required to perform transactions to and from anywhere in the world are very low.
It’s possible to transfer any amount in only a few minutes and the transaction is considered secure in only a few hours instead of waiting for several days or weeks.
- Since every transaction can be verified by anyone at any time, there’s full transparency.
- The blockchain technology can be leveraged in order to come up with a decentralized application that’s capable of managing the transfer of information and value securely and quickly.
However, despite the benefits mentioned, there are certain challenges that must be addressed.
- It’s possible to send and receive transactions anonymously. This may help protect the users’ privacy, however, it also allows for illegal activities to be carried out in the network since institutions have no way of tracking the users’ identities.
- Even if there are plenty of exchange platforms that are emerging, it’s still not that easy to use Bitcoin to buy products and services. However, this is changing very fast.
- Just like with other cryptocurrencies, Bitcoin is very volatile. There are not enough Bitcoins available on the market now and the demand for them is increasing very fast. The price of Bitcoin is often affected by significant announcements and events in the cryptocurrency industry.
- The blockchain technology is still in its early stage although several new tools are being developed day by day in order to enhance its security while also providing a wide range of services, tools, and features.
Overall, the blockchain technology is likely to revolutionize various industries, from energy distribution to advertising. The main advantage of this technology is the fact that it’s completely decentralized.