101 On How Blockchain Works

It’s not a new fact that we live in an increasingly digitized world. We have made new connections, we communicate in more refined ways, and have evolved the methods by which we send and receive information, thanks to this little thing called the internet.

Now, while our ways of communication have evolved through sites like Facebook and Instagram, the way we trade assets is also a practice that has to evolve at some point. Here is where blockchain comes in.

The word blockchain is not self-explanatory to most people. To someone who is not accustomed to tech or information technology, it can be extremely daunting to understand blockchain and what it entails. In this article, we try to break down a few lessons in Blockchain 101 – what it actually is, how does it work, and why do people use it?

What is Blockchain?

The blockchain was first created by a group of people who went under the alias of Satoshi Nakamoto. It started off as a small project but is now a global phenomenon.

First things first- blockchain is a set of data that represents a financial entry. It is the public record of a transaction or trade that has taken place between two parties.

A simple example to understand this is to imagine that there is a network of people who want to trade fruits and each person has an excel sheet to keep track of the trade. Now, everytime someone gives away his or her bananas in exchange for someone else’s oranges, or exchanges grapes for cherries – everyone notes this data on their excel sheets.

They note this regardless of the fact whether they have participated in the transaction or not. Each time a new exchange of fruits happens, a new note is automatically taken down on the excel sheet.

It is a public ledger of transactions.

Now, to go into further details, let us try to break down how the blockchain works as a piece of code and how this ledger is maintained.

Each transaction made between any two parties is added as a data point called a block. It is like adding a new row to your excel sheet in our fruit trading example. Each block contains the ID of the block before it (to maintain chronology), a timestamp, and the details of the assets exchanged in the transaction.

Now, as more and more fruit exchanges occur, more and more rows are added to everyone’s excel sheet. In the same way, as more transactions occur, more and more blocks are added together which then form a chain. Thus the name – blockchain. Also, once the deal is made and the block is created – it is done. There is no going back and erasing that block.

These blocks are linked using cryptographic coding. The details of this cryptography are something we shall not get into at this point, but it essentially means that the sensitive parts (such as the value of money) of the trade are only privately accessed.

Why Use Blockchain?

Let us go back to the previous example of people noting down the trade of fruits on their excel sheets. Why should they keep such notes? And why do these notes have to be the same for everyone?

They do this to decentralize power or remove the middleman. The fruit exchange network will not need a fruit stock exchange or fruit bank where they can give or get fruits. The exchange happens straight between the buyer and the seller.

For example, every time someone has to send money to someone, he or she has to do it through a bank – which is the middleman. The bank will verify the details of the sender and the receiver and then authenticate the transaction.

In most cases, the bank will also charge a small fee to do this. This is to prevent the sender from cheating and the receiver from being cheated and vice versa. Both parties trust the bank to verify the transaction. This gives the bank a lot of power. A blockchain removes the need for a middleman.

When everyone on the fruit exchange network has an excel sheet to record who is sending what fruit to whom in exchange for which fruit, it is impossible for the sender and the receiver to cheat on their trades.

The blockchain is a publicly held and verified record. And not only this, everyone’s excel sheet gets updated in real time as soon as a new transaction takes place as they are connected through the internet.

In essence, the blockchain is not controlled by a single entity. There are multiple copies of each transaction because everyone on the network has noted it down whether or not someone has participated in the transaction. Thus, even if a person tries to cheat and change the details of the transaction on one copy, there are thousands of other copies of the same transaction that will show the true data.

Where is blockchain Currently being Used?

Bitcoin is currently the world’s best example of blockchain use. It has removed the differences between currencies, nations, banks, and exchange rates. It is a currency that is present only on blockchain networks. Whenever goods are exchanged for Bitcoin, the data becomes a part of the public ledger, irrespective of the country or the time zone in which it takes place. It has encouraged true free trade.

In the recent years, it has also been used by refugees trapped in the Syrian refugee crisis. It has helped them in sending and receiving money without the hassle of forex or bureaucracy and in sustaining their daily lives.

In an unforeseen benefit, the blockchain has helped prevent voter frauds. Electronic voting machines and ballots are notorious for being prone to tampering. With the inclusion of blockchain and unerasable data, which is publicly updated in real time, vote tampering will soon become a thing of the past.

By being a universally accepted network of economic and asset trade, blockchain is proving its mettle. It is bypassing borders and laws which place a lot of power in the hand of a few people in boardrooms. By solving logistical problems, it is also solving policy-related problems where traders are finally regaining the power they deserve, rather than submitting to the middlemen.