WHAT MAKES BITCOIN VALUABLE? BLOCKCHAIN TECHNOLOGY
Cryptocurrencies have been the subject of a lot of attention in the recent times. With Bitcoin crossing over 19000USD/coin earlier this year, many are considering cryptocurrencies as a legitimate currency with which one can pay for goods and services. Many have even termed Bitcoin as digital gold. However, what has made cryptocurrencies so popular among the masses is the underlying technology on which the cryptocurrencies are built, i.e., the Blockchain. The blockchain is a trustless system, which inspires trust among the users with the use of cryptography and without the need of any other trustworthy third mediating party. Blockchain allows the decentralization of data by storing the data at different nodes across its network, thereby allowing open access of the data to the users. Also, the blockchain technology is such that any retroactive alterations in the data cannot be effected by any person as it would cause a chain of alterations in the subsequent blocks of the blockchain, which would present an entirely different blockchain than the one in which the retroactive alterations were sought to be done.
Currently, cryptocurrencies continue to be the major application of the blockchain technology. However, attempts are being made to employ blockchain in other technologies. For example, International Telecommunication Unit (ITU) has performed a study regarding Distributed Ledger Technology, which may culminate into an ITU standard in the near future. These attempts are and will fundamentally transform our business interaction with each other over the internet.
WHAT IS THE BLOCKCHAIN TECHNOLOGY?
A blockchain is an exhaustive catalog of all transactions, whether fiscal or otherwise. More specifically, the blockchain essentially is a ledger of records, events, or transactions, which are digital in nature and are encrypted, authenticated, and preserved through a “dispersed” or “public” or “distributed” network of members by means of a group consensus protocol. Typically, the blockchain is disseminated between numerous nodes along with a process for validating transactions that utilize a group consensus protocol.
A block of a blockchain is nothing but a group or a cluster of transaction data. Each block may have data related to a specific number of transactions. This number is typically governed by the allowable size of the blocks in a particular blockchain. For example, Bitcoin has a block size of 1Mb. Adding a block to a blockchain ledger demands the endorsement of the network (majority of the nodes) at large, which makes it impossible to attempt and/or make backdated changes. Thus, once information or a record or a block is entered in/added to the blockchain under consideration, the information or record cannot be removed or altered or erased at any point of time, which is one of the significant advantages of the blockchain.
Another advantage of the blockchain is the elimination of third-party mediators in transactions. The blockchain is based on cryptographic proof instead of trust, which facilitates and permits any two parties to transact directly with each other. This not only reduces the transaction time but at the same time reduces the cost involved in the transaction.
HOW DOES BLOCKCHAIN TECHNOLOGY WORK?
One can think of the blockchain as a distributed database in which data is stored in the form of blocks. It is a giant spreadsheet, which is accessible to millions of nodes present on the blockchain network. This spreadsheet may contain data pertaining to different transactions or events. A group of transactions is termed as a block in the blockchain, and the ledger is termed as the blockchain. More specifically, the transactions in a blockchain are stored in a formatted manner in the different nodes of the blockchain network. To add one or more blocks to the blockchain, a participating node broadcasts the information/details relating to the transaction/s under consideration, which are then verified by a group of verifying nodes. Typically, the verification may be done by provision of a proof of work by the participating node. Once a certain number of the verifying nodes on the blockchain network have verified the proof of work, the block is then added to the blockchain, and the participating node that provided the block may be rewarded.
Encryption of the data/information or the blocks of the blockchain, provides a way to obscure the same so that it can be retrieved only and only by the party to which it is sent. In case of the blockchain, typically, a cryptographic hashing technique is employed. Each block in the blockchain contains a hash pointer along with a timestamp and the transaction data, which also acts as a link to the previous block in the blockchain.
If one or more transaction or details in any one block are amended, the hash pointer of such amended block becomes different from the original one. As the hash pointer of that particular block is changed, it also causes a change in the hash pointers of the subsequent blocks in the blockchain, since each block of the blockchain contains a hash pointer which is linked to the previous block of the blockchain. To have this blockchain approved would require collusion between the different authenticating/verifying nodes within the blockchain network, which is generally not a very easy thing to achieve in view of the collective self-interest of the nodes within the blockchain network. Further, it is next to impossible to retrieve the original transaction and/or details from its hash pointer, but at the same time, the hash can be used to verify a copy of a transaction or document maintained outside of the blockchain. That is what makes the bitcoin so valuable.
Blockchain holds the potential to disrupt a multitude of applications in today’s times. For example, execution smart contracts based on the blockchain has the potential to disrupt the conventional agreements. Based on the terms of the smart contract, payments can be digitally released by the smart contract only after the execution of some pre-agreed terms/service by both the parties. The terms of the smart contract can be so designed to be used many different industries such as in music industry, car-lease agreements, banking operations, and so on. And it should be noted that the smart contracts is just one application of the blockchain.
Innovation has had its landmarks in history – invention of the wheel, invention of currency, invention of the light bulb, invention of the internet, and so on. With the wide range of potential applications, the blockchain truly deserves to be called the landmark of innovation of this century!