Blockchain Explained for Beginners by a Newbie!

Blockchain is the technology that is used by Bitcoin, the first and still the most popular cryptocurrency, to process secure, public, and anonymous transactions in a faster mode. We can imagine blockchain as an operating system like Windows or Mac OS and Bitcoin as an application that runs on that operating system.

Introduction

A blockchain is a distributed database, meaning that the storage devices for the database are not all connected to a common processor or server but connected to each other. It maintains a list of growing records in an ordered manner. These records are known as blocks. Each block has a timestamp and a link to a previous block. The blocks are maintained in sequential and chronological order. Confused? Let’s try differently.?

To understand the blockchain also known as distributed or decentralised database though not exactly so, just imagine that you typing www.google.com on the internet. Your browser will connect you to Google’s central server(s). However, if the Google server is down, you won’t be able to see the contents and images. In contrast, under blockchain technology, your computer is not connected to any central server but all the computers or nodes in the network and even when one or more connected computers (nodes) are down, you are not offline. This is because the database is distributed and the nodes in the network that are not down will communicate. Feel better now?

Blockchain is the technology that is used by Bitcoin, the first and still the most popular cryptocurrency, to process secure, public, and anonymous transactions in a faster mode. We can imagine blockchain as an operating system (like Windows or Mac OS) and Bitcoin as an application that runs on that operating system.

What is Blockchain?

The blockchain was created to allow fast, secure and transparent peer-to-peer (without third-party intermediaries) transactions. It is a trusted, decentralised (not on a central server or controlled by a central authority) network that allows for the transfer of digital values such as currency and data.

Now, here’s the blockchain for the newbies:

1. Imagine the blockchain as a digital database, like an Excel spreadsheet for instance.
2. This database is shared across a large network of many computers (known as “nodes”) publicly. It is important to know that the more nodes, the more secure it is. That’s why it’s good to have a large number of nodes running the blockchain.
3. Every time the network makes an update to the database, it is automatically updated to every computer or node on the network.
4. Blockchain technology is secured with cryptographic techniques, making it near impossible for hackers to make changes to it. The only way to make changes would be to hack more than half of the nodes in the blockchain. This is highly impossible and expensive and that’s why it is more secure to have more nodes/computers running the blockchain.

That is blockchain explained in simple words for a layman by a layman.?

Blockchain vs Distributed Ledger Technology

Both blockchain and distributed ledger technology are commonly used interchangeably. For beginners, there is no need to know much about the finer differences between the two. However, we will touch upon it.

The Distributed Ledger can be seen as the parent technology of the blockchain, or blockchain as an advanced version of the distributed ledger. In simple words, the blockchain is a type of distributed ledger. However, you cannot call every distributed ledger a blockchain. You know how certain types of products become a brand and become more popular in their own name. That is almost how the relation between distributed ledger and blockchain. The difference is mainly in its structure.?

How Does Blockchain Work in the Case of Bitcoin?

Bitcoin was the first cryptocurrency to use blockchain technology. In other words, blockchain technology was conceived and developed for Bitcoin. It was invented by a man or woman or group of people, that go by the name of Satoshi Nakamoto who remains a mystery.

The sole purpose of Bitcoin is to act as a store of value. It allows for peer-to-peer transactions that do not need a third party, such as payment gateways or a bank.

Getting Bitcoin blockchain explained is essential to understanding how blockchain works. The Bitcoin blockchain is a database (known as a “ledger”) that consists only of Bitcoin transaction records.?

There is no central location or server that holds the database, instead, it is shared across a huge network of computers aka nodes. There is no central authority like the ones that control or oversees fiat currencies such as US Dollar, Euro, Indian Rupee etc. So, for new transactions to be added to the database, at least 51% of the nodes must agree that the transaction is real and valid which is known as ‘consensus’.?

A Simple Example to Explain Blockchain Better

Let’s compare how data is stored and shared in standard (non-blockchain) systems to how it is stored and shared in a blockchain system. The way the traditional (non-blockchain) ledgers work is very similar to the way you would share a Microsoft Word document with your friend:

• While you are editing the document, your friend is locked out and cannot make changes.
• Once you have finished making your changes, you send it to your friend to edit it further.
• Now while your friend is editing the document, you are locked out and cannot make changes until they are finished and send it back to you.

In a blockchain system, however, all users can view the changes while they are being made. The data is accessible in a secure and shared environment, instead of being locked to one company or person at a time at the risk of losing the data.?

With the blockchain, the data is stored on all the computers/nodes that run it. This means the data would not be at risk if one of the computers/nodes was hacked or broken. In a non-blockchain system, the data is stored on one computer and if that computer is hacked or shut down, the newest version of the data would be lost.

Let’s also look at some of the other advantages of blockchain technology.

Decentralized: Decentralization is one of the most important advantages of blockchain technology. It has been a highly-desired concept for many years, but it was blockchain technology that made it possible.

Instead of the data being stored in a server in one place, it is stored on the blockchain and is powered by many different computers/nodes. This means data won’t be lost or hacked as it could happen if kept on a central server.

Unbreakable: Once a transaction is confirmed, it is stored on the ledger and protected using cryptography. It cannot be changed or deleted without a consensus (the group agreement), which makes the blockchain unbreakable.?

Trust and Transparency: Trust is an essential part of getting the difficult world of blockchain explained. As it is a shared database, everyone can view the full details of the transactions within it. These include the source, date, time and destination of the transaction.

Cost-Effective: As the blockchain is a trusted peer-to-peer network, it removes the need for a central third party. This is one of the major benefits for businesses as it completely removes the costs that are required to pay third parties.

Faster Operation: Let’s use a real-world example to explain this. Imagine that you want to send a payment to someone in another country. Without the help of blockchain technology, you would normally need to pay expensive fees (to the banks) and the transaction may take 3-10 days to be processed.

Using blockchain, this can be done almost instantly and at a much cheaper cost.

Availability: Blockchain is a decentralized peer-to-peer network and there is no central point of failure. Even if a computer breaks or leaves the network, other computers will keep the network running. That's why this is a huge, huge advantage.

Simplifying Business to Business: Most businesses use different systems, so it is hard for them to share a database with another business. That's why it can make it very difficult for them. As a blockchain can act as a single shared database for both businesses to work from, sharing data is much easier for them on a blockchain system.

Blockchain technology is not all about cryptocurrencies though it’s cryptocurrencies that currently use this technology extensively. It can benefit many different industries. Imagine the amounts of legal, health, accounts, government, and customer data, etc. that should be used this way.

In a recent document, World Economic Forum opined that blockchain could dismantle corruption in government services thanks to the transparency the technology provides. The trust and transparency of the technology’s core advantages can help financial services and banking companies a lot from both the business and customer perspectives. For example, how easy and transparent can be the data related to landholdings under the blockchain.??

Blockchain in Real-World Industries

To help you understand some of the other advantages that blockchain offers to businesses, here are a couple of examples of industries that are currently using blockchain technology. However, don’t assume that this is all.?

Identity

Cybersecurity threats are a huge problem in the identity management industry. In the current world, our identity is controlled by large companies like Netflix, Facebook, Instagram, or even the companies we work for.

People are always under the threat of having their identities stolen by cyber-thieves — also known as hackers. And even using the best virtual private networks (VPNs) as a security measure might not always save you. All of these companies use centralized servers. If the central server is hacked, all the data they hold for their customers is at risk.

But the personal data hacking can be stopped using the blockchain. A centralized database is much easier to hack into because it uses one main server. All the hackers must do to steal the data, is hack the main server. In a blockchain, there is no main server — there is no central point for a hacker to attack. Hacking the majority of computers/nodes on a blockchain network is practically impossible and highly expensive.

Banking and Payments

By using the blockchain, financial services can now be provided to those that currently do not have them.?

Let’s use Bitcoin again as an example, With Bitcoin blockchain, anyone in the world who has access to the internet can now send digital payments. As well as helping those that do not have financial services, blockchain is also helping the banks themselves.

Summary

Let’s summarise what we have read so far as a ready reckoner.

What is blockchain?

• A peer-to-peer network that removes the need for trusted third parties;
• Transactions are processed quicker and cheaper than standard (non-blockchain) systems;
• It is a public database and all transactions are visible on the network, preventing hacking and cyber-attacks;
• The database cannot be changed without more than half of the network agreeing, making it much more secure;
• It is not controlled by one single company or authority and it has no single point of failure;
• Blockchain can be used in many different industries — not just digital currencies.

How does blockchain work?

• It works as a large database that is shared across a network of computers known as nodes;
• The nodes on the network work together to verify transactions and confirm their validity - in the case of bitcoin- are rewarded with the blockchain’s currency — a process popularly known as mining;
• Once a transaction is verified by the network, the transaction is placed in a block;
• New transaction blocks are placed — in order — below the previous block of transactions
• All transactions are stored in a distributed database (ledger);

How can blockchain technology benefit enterprises?

• It removes the cost of third parties;
• Payments and data are processed much quicker;
• Database management between businesses is much easier;
• Provides improved data protection/security on a large scale:
• Trust and transparency of transactions and data are enhanced:

Blockchain technology may change and improve the way businesses operate, but that’s not all it will change. It may also change the lives of millions of people by giving them the ability to store and send money to one another without the need for a third-party intermediary. More importantly, it will facilitate governments and corporates to discard or minimise corruption in their governance benefiting the business, people and the economy in the process. We can visualise a future where finance and accounting, tax administration, government data and governance, health records, identity data are all on the blockchain or distributed ledger.

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