Blockchain – A Decentralized Technology

Introduction

Let us, in this post look at the bigger picture & learn in simple words about the power of blockchain and its capabilities in solving real-world problems. Blockchain is a tamper proof ledger that can literally store anything which possesses value and enables moving of cryptocurrencies from peer to peer without the need for any centralized system. Blockchain should not be confused with Bitcoin, it is the underlying technology of the cryptocurrencies like Bitcoin, Ethereum, Ripple etc. One of the most important real-world problems that blockchain solves is the cross-border money transfer. Apart from finance, blockchain also has its uses in other sectors, like Retail and Manufacturing, Healthcare etc. Let’s have a quick look how blockchain helps in money transfer.

Traditional Money Transfer

blockchain traditional system

In a traditional money transfer let’s say Tom who is in India wants to send money to his friend David in France. So, Tom asks his bank to send $10 to David’s bank. Tom’s bank sends the money to a trusted third party who instead verifies the transaction, takes a commission of say $0.5 and sends the money to David’s bank. This whole process takes anywhere from 3-4 business days to occur. And this is where blockchain kicks in.

Money transfer in Blockchain

Blockchain has the promise to not only make this transfer independent of the third party but also at a much faster speed and cheaper rate.

This is only possible because of the below concepts in Blockchain:

Open Ledger:

blockchain open ledger

Suppose we have a network of 4 people who want to move money from one another and suppose during Genesis, ‘A’ has $20 & so, in the ledger, which is visible to all the participants of the network it is shown as A=$20. ‘A’ wants to send ‘B’ $10. So, in this case, we add a new transaction A-›B $10 and link it to the existing leger/transactions. Next ‘B’ wants to move $5 to ‘C’, hence we update the ledger as B-›C $5 and link it to the previous transaction. And finally say, ‘C’ wants to move $3 to ‘D’ so, we add C-›D $3 in the ledger and link it to the previous transaction. This open ledger is nothing but a chain of transactions. So, what’s the advantage of this network? It’s simple, everyone on the network sees where the money is and how much money everyone has, and everyone decides whether a transaction is valid or not. Now, let’s say ‘A’ wants to move $15 to D, everyone on the network can see that the transaction is invalid as ‘A’ does not have $15 and will reject it and thus will not be added to the open ledger.


Distributed Ledger:

blockchain distributed ledger

So, now that we have a centralized place, but our goal is to get rid of it. To do that, the ledger is distributed among the participants. So, all 4 of them (A, B, C, D) can have a copy of the original ledger. Any participant participating in the network can have a copy of it. However, now the problem lies in making sure that all the participants in the network see the updated ledger i.e. the copies are synchronized so that all the participants see the same ledger.

Synchronous Ledger:

blockchain sync ledger

Now, let’s say B sends D $5, B publishes and broadcasts the intended transaction to the network. Everyone in the network can see the transaction which is not yet validated and is not a part of the ledger. To validate this, comes into the scene the concept of miners in cryptocurrencies. Miners (assume A, B, C) are special nodes who compete among themselves to validate the transaction and add it to the public ledger. In return, they are awarded cryptos (Like, a miner in the Ethereum network will be awarded Ether, on Bitcoin network will be awarded BTC and so on) and the network fee which is like the commission in our traditional system which the sender must bear. A miner generally does two things, first, validate the transaction and secondly find a special key that enables the miners to take the current transaction and lock it to the previous transaction such that other miners in the network can also verify it. In order to find the key, miners have to invest computing power and solve a random puzzle. As the search for the key is random, they will have to repeatedly guess the key until it solves the random puzzle. After it is solved the transaction is added to the ledger and published to the network. Other nodes update their own ledger and look for other transactions to validate.

Hope you learned something, if you did, please share and comment.

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