💡What's the Fuss about Blockchain? Simplified Series.. Get smarter in 5 min!
Crypto & Blockchain is all the rage. Let's look at a few analogies to understand it better and really understand what makes it special.
🚨Big Disclaimer: This is not investment advice. I am not an investment advisor. This information is meant to be for educational purposes. Please do your own research before you decide to invest your hard-earned money. If you are unsure seek help from a professional financial advisor who can understand the full breadth of your financial needs & commitments to advise you on what you should do.
All this fuss about Crypto & Blockchain?
Crypto & Blockchain is all the rage. It seems to be the answer to most of our problems; anything from financial inclusion to environmental challenges - it promises to solve everything for everyone. Maybe I am exaggerating a bit, but when you get past the first layer of hype and ask most people what is ‘Blockchain’ very few seem to have the depth to answer that question.
This article aims to equip you with the basic information you need to understand what is blockchain and why it matters. As always this is not a technical explanation of the technologies behind blockchain. At the very least we should know a bit more about the technology that is expected to make us millionaires.
Blockchain - Decentralized & Trustless
The first blockchain system (Bitcoin) was introduced to us in 2008 just after the financial crisis that gripped the world. Homes were lost, Jobs were lost, Money was lost. $10 Trillion dollars of household wealth was estimated to be destroyed. Innocent people who had no say in the matter and did not even know what was happening with their money paid a very heavy price for the mistakes of others.
Across the many drivers of the crisis, the most relevant ones were
Disproportionate Trust we ascribed to “middlemen”
Information asymmetry of complex financial products created by Investment Banks & intermediaries around the world
That is where the idea of “decentralization” Steps in. Let me break it down
“De”: Latin for “Away from”
“Central” is simply a fancier way of say “Middle”
Essentially, we want to move away from the current system to one where we don’t have to put our “trust” in a middle man - A TRUSTLESS system. And that’s exactly what a blockchain can give us – a trustless, decentralized system.
“Woah, so you’re saying I can’t trust the blockchain?” No, I am saying that you don’t have to trust it. And your wealth (or information) will still be protected.
Why the hype around this technology
There have been many failed attempts to create digital money in the past. The key problem to solve is that of “Trust”. If someone creates a new currency called the “T Dollar”, how can we trust that they won't give themselves a million “T Dollars”, or steal your “T Dollars” for themselves?
Bitcoin was designed to solve this problem by using a specific type of database called a blockchain.
Most normal databases, have someone in charge who can change the entries (e.g. giving themselves a million “T Dollars”). In a simple way, Blockchain is different because nobody is in charge; it’s run by the people who use it. What’s more, bitcoins can’t be faked, hacked, or double-spent – so people that own this money can trust that it has some value.
So what is Blockchain
Blockchain in its simplest form is made of two obvious parts:
Block: A container of data or information. Not a literal one, but a unit of information that can exist in various forms.
Chain: The linking of blocks in a network that allows for consistency of record-keeping and an audit trail through the linking of the bloc
Stay with me.. through the next paragraph
As for its definition, blockchain is a public digital ledger used to record transactions across many decentralized or distributed computers in a peer-to-peer network, where transactions are added to a block. Blockchain uses existing cryptography schemes to append new blocks to previous blocks. This way, blocks are never overwritten or destroyed, just appended to, forming a chain of blocks, hence “blockchain.” This chain of blocks is synchronized across all of the nodes by providing an economic incentive to the node that is able to first validate and then add the block to the chain by solving a complex mathematical task.
Blockchain Understood with Analogies
No better way to understand a new concept than by drawing analogies with something we already know and understand well. To fully wrap our minds around this, let’s go into story mode
IDEA 1 - The Magical Glass Vault Museum
Imagine a museum with thousands of Glass boxes. Anyone can freely walk through the museum and observe the contents of the box. They can see whether it has Jewelry, documents, Banknotes. The glass boxes are protected by a magical “Cryptographic” spell that ensures they can be only be operated (opened and closed) by whoever has a “cryptographic” key.
When an individual gets access to a new box, they get a key made exclusively for that box. Now, even though they have a key for it, the box itself does not belong to the keyholder, but they have access to its contents.
Every time the owner of the box wants to put new items in or take something out, she needs to use her magical key to sign for the transaction. Every transaction needs some small fee to be paid to the Elves (blockchain miners) who manage the security and upkeep of this magical museum.
The boxes are not labeled with a name but have a number (or a wallet address). Anyone walking around in the museum can track what goes “in” and “out” of a box but they can’t tie it to the real-world identity of the who owns the specific glass box. People are allowed to have any number of glass boxes at no extra fee.
If you lose or forget the key, then the box is locked for all eternity and its content cant be removed even by the creator of the box.
To sum it up, a blockchain is like a series of glass boxes with content everyone can see, verify, and can’t change. Everyone knows where the boxes are and what they contain. When someone opens a crypto wallet, it is creating a new address in the blockchain, and the private key “unlocks” this address.
IDEA 2 - The Hindu Wedding
Back in the day, in a Hindu wedding, when two people decided to bind themselves in a holy relationship (for the next seven lifetimes) they didn’t go to a marriage registrar or a central department. They fixed the date for the wedding and invited everyone from the village. The priest would perform the religious rituals binding them in holy matrimony and all the invites bore witness to the ritual. These 50-100-1000 invites would confirm that the two were married on a certain date, time & place. The marriage was completed without a middle man or central authority. The legitimacy(verification) of the marriage was guaranteed by the consensus of the whole village that attended the wedding enjoyed the festivities & great food.
While this is easy to achieve in a physical interaction, it was almost impossible to achieve in a digital environment without trusted intermediaries given that participants can be anywhere in the world and don’t know each other. All of this changed with Blockchain, with Bitcoin being the first example of this amazing technology
In a Blockchain network when two unknown participants want to enter into a transaction, the network facilitates the process of gathering a decentralized network of witnesses from around the world that confirm the validity of this transaction. Each node (or digital witness) maintains a copy of the ledger and writes the transaction to the blockchain. As the blocks are not overwritten they get added to the collective memory of that blockchain
Features of a Blockchain
There are many types of blockchain networks with additional features based on how they are architected and what problem they are solving. However, the below listed are some of the baseline features you would expect to find in all blockchains.
From 101Blockchains
Immutability - Can’t be changed or altered. This is one of the top blockchain features that help to ensure that the technology will remain as it is – a permanent, unalterable network.
However, there is a concept of 51% Attack where a malicious party takes over control of more than 51% of the network and re-writes the historical data. This is harder & more expensive to execute on the popular chains like Bitcoin or Ethereum where the cost of the processing required to take over 51% of the network is not economically justified.Decentralized Technology- Doesn’t have any governing authority or a single person looking after the framework. Rather a group of nodes maintains the network making it decentralized.
Enhanced Security - No one can just simply change any characteristics of the network for their benefit. Cryptography lays another layer of protection for users. Cryptography is a complex mathematical algorithm that acts as a firewall to prevent attacks.
Distributed Ledgers - A public ledger will provide every information about a transaction and the participant. It’s all out in the open, nowhere to hide. Although the case for private or federated blockchain is a bit different. But still, in those cases, many people can see what really goes on in the ledger.
Consensus - The consensus is responsible for the network being trustless. Nodes might not trust each other, but they can trust the algorithms that run at the core of it. Here, the nodes can come to an agreement quickly and relatively faster. When millions of nodes are validating a transaction, a consensus is absolutely necessary for a system to run smoothly.
A few Blockchain Myth busted
Difference between Bitcoin & Blockchain
Real-life use cases of what can blockchain be used for ?
More to come in separate articles.
Some of my earlier posts if you have not read them yet
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