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Blockchain Simplified Blockchain Simplified

Blockchain Simplified

How Does Blockchain Work ?

Tech Updated 5th February, 2018 by Stacy Clark


Blockchain is everywhere, literally. But not many people have a clear understanding of this simple, transformational technology. I say “simple” because if you understand its architecture and functionality, you will be marveled by how brilliant it is and in how many ways it can be exploited. Of course, there are complexities involved but they are at a micro level. So, if you are looking for a jargon-free, not-so technical explanation of blockchain, this post is for you.

Another thing before you dive deep, blockchain finds many other applications apart from Bitcoin. In fact, Bitcoin is just one of the 700 applications that work on the blockchain principle. But since cryptocurrencies seem to be the flavor of the season, I will mainly talk about blockchain technology in context of digital payments.

Why blockchain?

Historically, monetary transactions have relied heavily on intermediaries or middlemen for authenticating the transactions and maintaining records. They acted as a regulatory body to prevent frauds.

Digital assets are more vulnerable since they are easy to compromise and duplicate. They are generally files that can be duplicated if their source code is accessed. Therefore, permission had to be sought from banks in case of money) or intermediaries (for stocks, etc.) for completing a digital transaction. This process could take time but was important to prevent the problem of double-spending (spending the same asset more than once).


Why blockchain for asset transfers?

So, in 2008, someone called Satoshi Nakamoto released a whitepaper in which he detailed a revolutionary technology by which digital transactions could be verified, authenticated, recorded and completed, without any intermediary! In fact, all the checking and record-keeping was to be done by people themselves. But not everybody is equipped with special verification powers. This can be achieved by specialized people who can solve complex puzzles (miners) by a process called mining. The good news is that miners are normal people like you and me (peer to peer), not banks or middlemen. They use the processing power of super powerful computers and software to solve big puzzles (like Sudoku, only tougher). Each puzzle has a definite answer and follows a complex algorithm. The puzzle gets harder as the network gets bigger. All miners in a network have to follow the network’s protocol strictly and they are rewarded for their services by Bitcoins. Once a transaction is verified and attached to the network, it is irreversible. Reversing, modifying or deleting a transaction would require manipulation of all previous transactions (remember, it’s a chain). This is practically impossible and thus blockchains are thought secure.

Blockchains have eliminated the need for a bank by fulfilling three of its roles- storing value, verifying identities and keeping transactions records. Hence, blockchains intrigue people more than other digital payment methods like PayTM that require tie up and verification from banks.

A network of value

Blockchain can be interpreted linguistically as a chain of blocks. A block being a bundle of transactions and the chain made up of many interconnected blocks. Miners compete with each other to verify all new transactions by solving complex puzzles. The miner who gets to the result first, attaches his solution (proof of work) and is awarded with a fraction of Bitcoins that are generated now. The other miners double-check his solution and if a majority is in agreement, the transaction completes (Consensus).

Verified transactions are bundled up with their proof of work and made into a block. The new block is time stamped and attached to the existing blockchain, in a chronological order. Now, everybody in the network knows that payment has taken place and it becomes impossible to spend the same currency twice.


Since every block contains an encrypted link to a previous block, all transactions can be back-verified till we reach the origin of the first transaction. So, data that once enters a blockchain becomes immortal, a property it shares with internet!       

Some people describe blockchain as an internet of value, and it seems fitting. In internet, anyone can upload information and other can view it. A blockchain allows anyone to send Bitcoins (encrypted currency) anywhere but only the person who knows its unique address (private key) can access them. So, to transfer your Bitcoins you have to share your coins’ unique address with the recipient.

A distributed ledger

Blockchains not only have an auto-verification system, record-keeping is also automated. A copy of the entire blockchain is available to everybody on the system. Since blocks contain encrypted records representing receipt or payments of money (Bitcoins, in this case), blockchain is a type of virtual ledger. There is no central server that holds the record database or that gives permission to access the database. It is distributed and decentralized. As explained before, there is no need for an intermediary.

Blockchains can be private

Another revelation- blockchains can be private. I know, this essentially kills our favorite feature of blockchains- decentralization. But hold on; there’s more to this. Bitcoin blockchains are public, meaning anybody who has a computer and an internet connection, and follows the rules of the blockchain, can join. Then he is given a copy of the entire database. A new transaction cannot be added to the ledger till all its associated previous transactions are verified. Once everything is found in order, the new entry is written and the entire database is synced and replicated to reflect new addition. As you can note, there process has built-in redundancy. This also makes the blockchain sluggish.

Enter… private blockchains. They have rules governing who can access the network. They are mostly initiated by enterprises for their private use; something like intranet. Private blockchains can be accessed by anyone who has been granted permission (invitation) by the starter of the network or who matches the protocol set by the starter. Since the number of participants in private blockchains is less, processing speeds are much faster and processing costs are lower than of public blockchains.

Aside from the access rights, public and private blockchains share similar features:

  • Both are decentralized. A copy of the entire blockchain is available with each and every participant.
  • Both have an access protocol (consensus).
  • Both are immutable and irreversible.

Public or private, blockchains are intriguing. They have made digitization of assets possible and transfer of assets faster. Their encrypted, peer to peer mechanism has phased out the need for regulatory bodies and administrators. And while blockchain purists might protest that private blockchains aren’t exactly permission-free, we say- better a devil known than a devil unknown!

Blockchains can go beyond Bitcoins

Although blockchain’s application in digital currencies and asset transfers is most widely documented and exploited, blockchains go way beyond finance. Blocks can store any kind of encrypted information. Bitcoins are also lines of code that hold a unique address.

Apart from handling currency, blockchains can be made to execute some actions (in real and physical world) if they work in tandem with other technologies. Actions can be to fetch external data such as medical records, census information, intellectual property, weather reports, inventory details, etc. But here comes a problem. Not all participants in a blockchain trust each other. So, how can they filter who can access their data? This can be done using smart contracts. A smart contract contains sets of conditions that must be met by a user, for him or her to gain trust and enter a blockchain. Once a user meets all criteria, blockchain programs trigger and perform some action.

Consider an example. You must have heard of smart devices. They are regular appliances fitted with sensors and connected to the Cloud. These devices are programmed to operate in a predefined manner if certain conditions are met. For example, a smart glucometer keeps monitoring the user’s glucose level and triggers an alarm when levels rise beyond a certain defined limit. They might also send a message to the user’s physician if a low or high sugar situation arises. Now, add blockchain to this equation.

Suppose the physician stores all patient records in a blockchain and shares its private key with his patients. He will be controlling access to confidential records. Apart from securing his patients’ data in encrypted form, the blockchain will be governed by smart contracts that will control who can access the data. Suppose an invalid transaction is tried, the entire blockchain is alerted and doctor as well as patient gets notification. Smart contract can set a protocol that if an input is valid, access should be granted. Programmed devices will be triggered to perform any action- increase insulin dose, contact emergency room, etc. incredible, isn’t it? No need for manual intervention, no hassle, no delay!

Blockchain is more than a bubble. It’s an ocean of possibilities and opportunities. Take a dip and find out for yourself!                                                         

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