Understanding Blockchain From Ground Level

It was in the year 1999 when the file-sharing network Napster launched its hybrid peer-to-peer network to share audio files. The intelligent-network allowed all its users to retain perfect copies of shared files across a global network. Napster was so successful that it forced "Tower Records" to close all of its 89 U.S.-based stores by 2006.

Another such incident was in 2008 when U.S. based powerful financial institutions and insurance companies declared themselves on the brink of bankruptcy. To avoid a domestic & global financial meltdown, the federal government had to intervene, which created doubts at centralized banks and exposed the danger of not scrutinizing the financial ledgers publicly.

Again In 2008, the data breach at Heartland Payment Systems revealed approximately 130 million credit card numbers, which was used later for fraudulent purchases.

All the above cases, illustrate, how common people are vulnerable to digital exploits, greed, and crime of the digital world that is dependent on middle-men.

To avoid such cases in the future, a decentralized digital infrastructure is required to openly and securely transfer digital assets with no corruptible or fallible centralized authority.

Welcome to the realm of Blockchain!!

I will try to explain the building blocks of a Blockchain network in this article. I strongly believe that it is crucial to understand this booming technology and create a decent understanding of its advantages across information technology, research, and business. Albert Einstein said, and I quote “If you can't explain it simply, you don't understand it well enough”, so my goal in this article is to explain the Blockchain network simply.

It is crucial to understand before we start, that the application of Blockchain is not limited to Bitcoin. Bitcoin is digital money and it is not Blockchain. As per the official website of Bitcoin https://bitcoin.org/en/ “Bitcoin uses peer-to-peer technology to operate with no central authority or banks; managing transactions and the issuing of bitcoins is carried out collectively by the network.” 

Bitcoin ≠ Blockchain

Blockchain is a highly robust and extensive network of decentralized digital ledgers/blocks that are cryptographically linked to one another. Being highly secure, Blockchain allows moving digital money or assets from one person to another easily, and efficiently. After the basic knowledge of these terms (Bitcoin and Blockchain), it is time to go forward with the problems that Blockchain (also referred to as Distributed Ledger Technology) ventures to solve; and the primary problem, the smart network attempts to solve is MONEY TRANSFER.

Let’s say a person “Mr. A” staying in India wants to transfer money to a person “Mr. B” staying in Israel, so in the traditional method, it would be done using a 3rd Trusted Party, which is as follows:

Fig 1: Block Chain Simplifies Money Transfer

Step 1: A person “Mr. A” From India will request the 3rd Trusted Party to transfer money to a person “Mr. B” in Israel.

Step 2: The 3rd Trusted party because it is “Trusted” identifies “Mr. B” as a person in Israel

Step 3: The 3rd Trusted party moves money from person “Mr. A’s” bank account in India to person “Mr. B’s” bank account in Israel, after taking some fees as commission. The total time to transfer the money is approximately more than 3 days.

How Blockchain is striving to soften this issue of money transfer is as follows:

Fig 2: Block Chain Attempts To Eliminate The 3rd Trusted Party, Reduce Intermediate Commission, Reduce Time To Transfer Money

1. Blockchain is trying to eliminate the “3rd Trusted Party” and transfer money without intervention
2. Increase the speed of money transfer, i.e. faster than 3 Days, actually immediately
3. To do it Cheaper, i.e. cheaper than the commission that the “3rd Trusted Party” collects.

Let’s now, understand how Blockchain addresses this money transfer issue:

The concept of Open Ledger

Let's assume that there is a network of four people Mr. A, Mr. B, Mr. C, and Mr. D. They want to move/exchange money from one another's bank account and let's pretend that at Genesis i.e. at the moment of the inception of this network

1. Mr. A has 10$
2. Mr. A wants to move 5$ to Mr. B; what is going to happen is that we are going to add a transaction, (Mr. A -> Mr. B; 5$) and link this transaction into the already existing transactions.
3. Mr. B wants to move 3$ to Mr. D; we are going to do the same by linking another transaction into the ledger that says (Mr. B -> Mr. D; 3$)
4. Finally, if you want to move 1$ from Mr. D to Mr. C again we will do the same process (Mr. D-> Mr. C; 1$) and we link it to the open ledger.

Fig 3: Concept Of Open Ledger

This notion of "Open Ledger" is essentially a chain of transactions, and this is one of the primary reasons why this network is referred to as a “Blockchain”. This chain of transactions is open to the public, which essentially means that everyone owns the network, monitor the money, see how much money each one has in their pocket, and decide whether a transaction is valid or not.

For example: if “Mr. A” now tries to move 15$ to “Mr. C’s” account

Everyone in the network can immediately see that this is not a valid transaction, because at genesis “Mr. A” had “10$” later “Mr. A” moved “5$” to “Mr. B” and now “Mr. A” does not have 15$. So this transaction will not add up to the open ledger and will also not be attached to the existing ledger chain.

Now with the help of this Open Ledger, we have a centralized place to manage the ledger. But, this creates a new problem since the goal of Blockchain was to eliminate centralized control in the first place; this leads us to the next principle of Blockchain network the “The Notion of Distributed Ledger”

The Concept of Distributed Ledger

The Distribution of the "Open Ledger" across all the nodes in a network is referred to as Distributed Ledger Technology (DLT). For example “Mr. D” now can have a copy of the Ledger and can hold it in his control. “Mr. A” can do the same and have a copy of the ledger, and further anyone who participated in the network can hold a ledger containing chain of events from past and present.

Fig 4: Distributed Open Ledger

Now when everyone in the network has their own personal copy of Ledger the centralized Open Ledger becomes distributed, and essentially becomes useless.

Nevertheless, by using Distributed Ledger Technology (DLT) we created another problem. When there are multiple identical copies of the ledger in the network; the interface needs to make sure that all the ledgers should be synchronized accurately with each other, so that all the participants in the network can see the same ledger.

To understand how nodes in a Distributed Ledger synchronize in a Blockchain network, let’s take an example:

Let's say, that “Mr. B” wants to transfer 5$ to “Mr. C” what “Mr. B” is going to do is, “Mr. B” will now publish and broadcast this intended transaction to the network for everyone to see that “Mr. B” wants to move 5$ to “Mr. C”. This becomes an invalidated transaction, and this transaction will not be updated in the ledger; to update this transaction in the ledger, we first need to understand the purpose of "Mining" & “Miners” in Bitcoin.

Fig 5: Concept Of Miners

In the Blockchain network, special nodes that can hold a digital ledger (The ledger containing list of transactions) are referred to as Miners, they compete among themselves to solve a complex mathematical problem to earn a reward. In this instance let's say that “Mr. A” and “Mr. D” are miners, and they are going to do the following thing:

1. Miners compete among themselves to validate a transaction (earlier referred to as a random puzzle) and put it into the ledger.
2. The first miner, to win the competition receives a financial reward in this case, “Bitcoin” because it is a Bitcoin-based Blockchain

Let me try to explain, what it means to win the competition (solve the random mathematical puzzle). To be the first that can take the transaction and add it to the ledger, a miner needs to do the following things:

1. To validate the new transaction. As the ledger is open, validating it becomes easy. It can be done by calculating whether “Mr. B” has sufficient funds to make the transfer.
2. To find a unique key that will enable the miners to lock the new transaction to the previous transaction and update the ledger.
3. To solve this complex mathematical puzzle this miner invests computational power (Hardware and software power) and time as this search for the key is random. The first node that will solve and add this transaction to the ledger will get a financial reward.

How Ledgers are synchronized across the network.

Let say “Mr. D”, a miner was able to resolve the puzzle and was able to add the transaction to his ledger. Miner “Mr. D” will now publish/broadcast the clarification and its security key to the entire network; to enable everyone on the network to download the validated ledger and add it to their ledgers.

What all miners are going to do now is miner “Mr. A” for example, can see that this transaction is already validated and can be added to the ledger; which means there is no point in trying to resolve this transaction as there will be no reward. Miner “Mr. A” will immediately take this transaction, and add it to its ledger and will further start looking, for another transaction to work on and earn reward next time.

Fig 6: Synchronizing The Ledger

Summary

Let's try to summarize what we learned briefly.

1. In the first section, we learned about Blockchain and how it works.
2. We learned that there is a massive difference between Blockchain & Bitcoin.
3. We learned that Blockchain stands on the basic principles of open-ledger which is decentralized & public for everyone to see and validate the transactions.
4. As the ledger is distributed and exists in many nodes on the network; it eliminates the dependency on a third party.
5. We recognized the special role of "Mining and Miners", in the Blockchain network, and how they authenticate transactions and add them to a ledger. Further, we also discussed about incentives that a miner earns and how it ensures the reliability of the official ledger that everyone uses.

Conclusion

This article only concentrates on the basic approach & theory behind a simple Blockchain network. The practical implementation of a Blockchain network in any application is much more complicated and detailed. For more information, visit our previous article "Blockchain: The Era of Decentralization" which explains the advantages of this revolutionary technology more distinctly.

If you have a more immeasurable explanation, of any of the sections discussed above, I will request you to share your knowledge in the comments section below. Also, share this article with anyone who'll be drawn towards this topic, and subscribe to our newsletter if you are new to this website.

- Written By Debashis Chatterjee

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