Blockchain explained: what is blockchain technology and how does it work? Watch this video for better understanding!
What gave the gold its value and why is it so expensive? It is just another piece of rock lying under the earth along with iron and silver but it costs us a fortune. Well, the answer is the demand it generates in the market & the traditional value attached to it. We have given the gold its value and so to every other thing. It is through a human agency that material objects get their value and the market economy runs. In recent years we have had one new item in the market that caught the attention of youth, it was not something visible and beautiful but an invisible digital currency known as Bitcoin.
Everyone was talking about it, it was supposed to make you rich if you have powerful computer systems and knowledge about them. Everyone asked a question, What is Bitcoin? Like gold, we have given it the value and you must have seen the huge conversion rates for Bitcoin. Today we are going to learn about the road that was taken to invent Bitcoin.
To understand Bitcoin and any cryptocurrency, we have to know about the Blockchain. As the name suggests, it is a chain of blocks. What do the Blocks represent? They represent the stored data and information about transactions, medical records, contact information, financial services, etc. It was cryptographer David Chaum who first developed a blockchain-like program in the year 1982 but the system was not very much popular until it was made into a revolutionary idea in 2008 to solve the main problem involved in the digital payment method.
Satoshi Nakamoto published his work, popularly known as White Paper in which he talked about creating a decentralized currency known as Bitcoin, running through the Blockchain system. Whether Satoshi Nakamoto is a real person or a group of individuals is still a mystery.
Who’s Satoshi Nakamoto? Whether Satoshi it’s a real person or a group of individuals is still a mystery.
Blockchains can be understood simply as a transparent distributed ledger system. A ledger is a book or collection of accounts in which transactions are recorded and Blockchains are exactly like this, a chain of collections of data of transactions. They are transparent because they are available to every person connected to the system, unlike the ledger we have in companies and banks where organizations have the sole authority to manage it. It is decentralized because it can be managed by any member and does not need a centralized authority to do so.
One block in the chain contains 3 main things: information, a “hash” of the particular block, and a hash of the previous block. The information in the block differs from system to system and requirements. For example, in the case of Bitcoin, data will be the details of sender address, receiver address, and amount of the transactions. Hash is a digital unique code that signifies and provides the address of the block. This hash also depends on the manipulations of the block, once you change something in the block, the hash changes too.
Along with its own hash, every block contains the hash of its previous block. Now suppose, someone tries to tamper with some data in one of the blocks, then the hash address of the block will change that will not match with the hash address of the previous block, and thus there will be discontinuity and all further blocks will be invalid. Thus, the Blockchain model is much more secure than the ordinary system as to avoid getting caught in the process of data tampering, one needs to change all the blocks that could be thousands in number and require an insane amount of time and computational power.
Along with the interrelation between blocks, this system also uses peer-to-peer connectivity and thus every member attached to the network will be able to access each one of the blocks. Every time a new block is created, the new block is sent to everyone on the network, they can verify it and thus increase the security parameter.
Now let us understand the Blockchain system in terms of its application in Bitcoins. Bitcoin is a decentralized distributed currency that works on the Blockchain ledger in which each block contains a history of financial transactions. If we look at the normal market system, our currency gets value by the guarantee of the government and nationalized banking system where each transaction is recorded in their ledgers and managed centrally.
Nakamoto presented a model to manage the transactions digitally that can be managed distributively among the associated members. Everyone can see all the transactions and balances involved in the process but they can not see the information of the owner of the balance and who is behind these transactions, thus privacy is maintained while transactions are perceived wholly.
Suppose somebody wants to purchase anything on the network then the message is flashed to all the members that are attached through a peer-to-peer network. Each node is managed by a computer system run by a “miner”. The job of a miner is similar to banking personnel of keeping the transaction and checking if there is any fraud going on. Digital currency has a problem that it can be copied and used at different times using complex programs, this problem is called “double spending problem”. Miners check similarly if somebody is using the same bitcoin at different times.
It is technique of securing information through use of codes. The prefix “crypt” means “hidden” and suffix “graphy” means “writing”. Source: Getty Images Signature
Each transaction is encoded cryptographically using the “hashing function” and one block contains this data. The job of a miner is to validate the block and run a hashing algorithm to come up with a 64 digit hexadecimal number that must be less than or equal to the target value of the hash of that block.
Hash is the digitally encrypted code associated with the data of the transaction stored in a block and miners all around the world try to find the legitimacy of that transaction using the complex algorithm. The one who gets to the closest value of the target hash gets paid for the work. He or she gets paid for the process of auditing and verification of transactions happening.
Once the miner solves the problem with the computer system, a new block is added to the chain, then sent to all the peers connected to the network, and everyone can verify and check it. The first one to solve the cryptographic code to verify the transaction is awarded in digital coins known as Bitcoin. This is how the Blockchain system is used to generate a decentralized transaction system run through a digital cryptocurrency that makes the economy transparent and safer than it was ever before.
Blockchains are also used for smart contracts that can be used to exchange coins and stored on Blockchain. They are useful in managing the transactions involved in video games. During the Covid period, analysts have also proposed that Blockchain help employees, government, and other facilities to keep track of people who have taken antibody tests and could be immune to the virus.
Blockchain is not a new concept but has found legitimacy in the recent decade and the way it has involved the people and programmers, it has the capability to bring a change in the ongoing system. We have evolved from the barter system to the gold standard and then to the currency system. Today the majority of transactions happen online and if the process continues it can surely solve many problems of a centralized regulation system and a centralized economy.
What are thoughts about blockchain and cryptocurrencies like bitcoin? Do you want us to make content on other coins or tokens that are preferably called Altcoins? Let us know in the comments!
The interesting thing about blockchain is that it has made it possible for humanity to reach a consensus about a piece of data without having any authority to dictate it.
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