Let's start by asking ourselves, what is a blockchain? Why should we care about it?
Unlike traditional methods, blockchain enables peer to peer transfer of digital assets without any intermediaries. It was a technology originally created to support the famous cryptocurrency, BitCoin.
Today, blockchain has taken a life of its own and permeated a broad range of applications across many industries, including finance, healthcare, government, manufacturing, and distribution. It is poised to innovate and transform a wide range of applications, including goods transfer (supply-chain), Digital media transfer (sale of art), Remote services delivery (travel-tourism), Platform for decentralized business logic (moving computing to data sources, and distributed intelligence (education credentialing).
Other examples include distributed resources (power generation & distribution), Crowd funding (startup fund raising), Crowd operations (electronic voting), Identity management (one ID per person for all functionalities), and government public records and open governing.
Moreover, blockchain can enable an inclusive economy. It can enable a person in a remote corner of the world to partake in a democratic process. Opportunities for innovative applications are endless. There is a dire need for critical thinkers, designers and developers who can envision and create newer application models on blockchain to benefit the world.
Two major contributions of cryptocurrency Bitcoin are a continuously working digital currency system, and a model for autonomous decentralized application technology called the blockchain. It's a good idea to understand the working of the technology behind Bitcoin to fully appreciate the innovation of blockchain.
We can all agree that the advent of the internet in the world wide web has transformed every aspect of our lives, from stock markets to street corner food trucks. It has enabled a technology explosion with Web 2.0 and the world of e-commerce applications. Around 2008-2009, when the institutions and markets we trusted went crumbling down, and everybody was running away from the Wall Street, a mysterious person, or persons, called Satoshi Nakamoto, introduced a new digital currency, a cryptocurrency called Bitcoin.
Bitcoin enabled an innovative platform for peer to peer transfer of value without any central authority. With no central authority, how did Bitcoin realize trust and security?
By implementing software programs for validation, verification, consensus in a normal infrastructure
called the blockchain. Around 2012-2013, computation elements were added to the blockchain infrastructure that has opened up a whole world of possibilities beyond simple currency transfer. These innovations are significantly shaping the direction of Web 3.0.
What is a blockchain? Blockchain is about enabling peer to peer transaction in a decentralized network. Establishing trust among unknown peers. Recording the transaction in an immutable distributed ledger.
What is Centralized versus Decentralized network? Consider a scenario where customer wants
to buy an item using her credit card. Let's enumerate the intermediaries involved in accomplishing this task. We have a credit card agency, we have a customer bank, we have a credit cards bank, we have an exchange, we have the merchant's bank, and finally, the merchant. This is an example of a centralized
system that we are so used to.
Now compare this with a system where peers can transact directly with each other irrespective of where they are located. Functions of the intermediaries are shifted to the periphery to the peer participant in
the blockchain infrastructure. Peers are not necessarily known to each other. This is a decentralized system.
How do we establish trust among the peers in such a decentralized system? By having a process in place to validate, verify, and confirm transactions. Record the transaction in a distributed ledger of blocks, create a tamper-proof record of blocks, chain of blocks, and implement a consensus protocol for agreement on the block to be added to the chain.
Validation, verification, consensus, and immutable recording lead to the trust and security of the blockchain.
Let's look at another scenario: I'm lending You $10,000. This is one single peer to peer transaction. We both make a note of it on a ledger. What if I change my entry from 10,000 to 11,000? Alternatively, You make changes in your ledger from 10,000 to 1,000.
To prevent this trust violation, we need to seek the help of people around us – a copy of the “ledger” is provided to all - this is the basic concept of an immutable distributed ledger defined in a blockchain process. Now imagine this to be an online transaction to an unknown peer. Also, scale up the one transaction to 10,000 transactions, how about a million transactions.
I should be able to transact with equal ease to any unknown peer in London,/Toronto/Mumbai - maybe to send some flowers to a friend in Albania.
This is the tenet of a decentralized system supported by blockchain. In the case just described, how do we trust our unknown peers? Through verification and validation.
Other “unknown” peer/peers verify the amount transacted – if the amount(s) do not match, peer rejects and nullifies the transaction. These validation and verification methods devised by the blockchain and implemented by the peers provide the collector trust needed in a decentralized system.
Summarizing, blockchain technology supports methods for a decentralized peer-to-peer system, a collective trust model, and a distributed immutable ledger of records of transactions.
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