In the past few months, most of us have come across the terms Blockchain, Bitcoin, Ethereum, Dogecoin, and what not. If you’ve heard of these terms, you might be familiar with the following statements as well.
“Bitcoin will be the next gold.”
“Blockchain is the future of the world.”
“Ethereum will be the M1 supply of the world in the years to come.”
In my next few articles, I will be covering the basics of Blockchain and Cryptocurrencies, as well as these bold claims made by ‘intellectuals’ over on Twitter.
In this article particularly, I will be talking about what Blockchain technology really is and what the future holds for it.
How does Blockchain work?
What is Blockchain?
Blockchain, to put it simply, is a type of database. A database is nothing but a collection of information stored electronically. Unlike most databases, however, a blockchain is not stored in computers under a single roof and can be accessed by all computers on the peer-to-peer network. Now that we have a broad understanding of the topic, let’s take a deeper look into it.
As the name suggests, Blockchain is a chain made up of several blocks. A new block is made for every transaction, and it contains details such as the hash number of the block (unique to every transaction), hash number of the previous block, and other data depending upon the type of Blockchain. For example, in Bitcoin, every block is made up of 2700 transactions. This means every block in the Bitcoin blockchain contains details for 2700 transactions. The details include the ID of the sender and the receiver and the amount of Bitcoins transferred. The details in each block vary from blockchain to blockchain.
Now that we understand what a block is, let’s talk about the ledger. The ledger is a public record of all the transactions on the network. It is a spreadsheet that can be accessed by any computer connected to the Blockchain. This is what makes it a “decentralized” way of storing information. All the data in the ledger is in some form of code, and an individual cannot identify another person by name or address from the ledger. This means transactions on Blockchain are not anonymous but pseudonymous. Therefore, if the government wanted to trace a certain transaction, they could very well do that since there is no law stopping them as of now. This feature addresses the concern of Cryptocurrencies being used for illegal activities.
How are blocks created?
Now, let’s look at how blocks come to life. When a new transaction is initiated, the user must wait a stipulated time period, which depends upon the blockchain, before it is verified and eventually goes through to the other end. This time period is called the “proof of work,” which is a security measure used in many blockchains and it helps in preventing the problem of “double-spending” — wherein a user replicates a transaction and uses their coins multiple times. For example, Bitcoin requires 10 minutes of proof of work, meaning your transaction will not go through before this specified time. During this time period, all other nodes on the network are sent information about this transaction, and if the hash numbers or some other details don’t match the records of the other nodes, then the transaction will be denied.
Proof of work is an important part of Blockchain because it makes it harder to manipulate. For example, if someone were to try and change the information inside a block, its hash number would automatically change since it is unique to every block. If the hash number of one block were to change, the proof of work of all the following blocks would have to be recalculated since each block contains the hash of the previous block. Since proof of work requires a minimum time period to complete, this would make the entire process extremely time-taking and thus difficult to carry out.
Once proof of work is calculated and the transaction is verified, a new block is created and each node adds it to their version of the blockchain.
We have discussed nodes in the last few paragraphs, now let’s take a look at what they exactly are. A node can be any device ranging from a simple computer to a large and complex server. All the blocks of data in a blockchain are stored on nodes, making it the infrastructure blockchain technology operates on. Nodes are responsible for verifying and adding new blocks to the chain by communicating with other nodes on the network.
A full node is a device that contains the entire history of transactions that have occurred in the blockchain. For mining, a system always needs to run a full node so that it can verify if the transaction is valid or not. However, there is a slight shortcoming here. In order to run a full node, you would require a lot of memory and storage power on the system you’re using since you’ll have to download the entire history of transactions. This means only individuals with the financial ability to invest in these powerful systems will be able to carry out the activity of mining. And an important thing to note here is that as the number of nodes on a network increase, the difficulty in mining new blocks increases, therefore, requiring more powerful systems.
Since the majority of the population does not have access to powerful systems, apps such as Gemini and Coinbase help bridge this gap by allowing users to broadcast transactions from their network. This comes with its own set of pros and cons, and we will touch upon that in a later post.
Another type of node, which is present only on a select few blockchains, is a masternode. A masternode is typically much more heavily equipped compared to a full node and has the power to conduct activities such as voting events, enforcement of protocols, and more depending upon the blockchain. In order to run a masternode, you must deposit a stipulated amount of collateral in Crypto, which would be seized if protocols are violated.
A smart contract is a feature of blockchain technology that has increased in usage over time and will most likely continue to increase. It is a computer program which executes a certain task when the required conditions are met. They are used to execute contractual agreements so that all participants are immediately aware of the outcome as there is no delay caused by third-party involvement. For example, if Person A agrees to pay back his car loan at a certain date, but fails in doing so, they will be locked out of the car until the payment is complete. This is a feature which holds the power to revolutionize contractual agreements and is one of the most exciting technology in the field of Blockchain.
The Bottom Line
In summary, Blockchain is a form of technology that has the potential to change the world as we know it. It might seem a little complex to understand at first, but I hope this article brought you a little more clarity on what the well deserved hype is around this piece of technology. In my upcoming articles, I will be writing more about Blockchain and we will also venture into the topic of Cryptocurrencies such as Bitcoin, Ethereum, and of course…..Dogecoin.
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