Before diving right into what blockchain is, let us first understand the working of bank fund transfer related stuff for a better understanding of further topics.
Let’s examine the working how bank fund transfer work, with an example. Assume person A has to make a transfer of $100 to person B. The person A approaches to his bank branch and provides person B’s bank’s details. The bank then initiates the transfer by sharing the fund transfer information to the clearinghouse. Clearinghouse is a network that connects all the banks, which processes the transaction to the overseas bank. The bank then transfers the fund to person B. While the transfer is in process, the banks keep an entry on the register of transactions. The update of this information is done by a central authority (banks) and is not known to everyone. This might sound quite secure. But there’s a catch. The entries of transactions can be tamper-able and can be manipulated and changed. A solution to this problem is bought up by blockchain.
History of Blockchain
The journey of blockchain began around 1991. Before Blockchain technology came into existence, a structure similar to the blockchain was published in a research paper titled “How to Time-stamp a Digital Document” by Haber and Stornetta in the year 1991. According to that paper, a client sends a document to a timestamp server where the server signs the document with the current timestamp. Also, the current document would contain the information on the previous document. The pointers in the document pointed to the data and not its location. Therefore, the emphasis was not data, not location. If the data were changed, the pointer would become invalid. This ensured that tampering with the data was not possible.
Going forward, Bitcoin was introduced in the market. This was when blockchain made its way for innovation. In 2008, Satoshi Nakamoto published a paper, “Bitcoin: A Peer to Peer Electronic Cash System.” The main motive of the paper was to develop a peer-to-peer digital currency that would not bring the financial institution into involvement. Then around 2014, the blockchain technology grew massively. The world realized that blockchain technology has its application in other fields other than digital currency as well. From 2014 to present date, the blockchain technology has seen exponential growth.
What is Blockchain?
In very simple terms, dissecting the word blockchain, blockchain is a chain of blocks. In other words, Blockchain is a collection of blocks connected in chronological order.
Interpretation of the definition
Consider a spreadsheet (MS Excel) which has records of the transactions by users. A copy of this Spreadsheet is shared for everyone to access it. This spreadsheet is only for reading, and one cannot make changes to it whatsoever. Similar is the property of blockchain as well. A spreadsheet works with “rows” and “columns,” while blockchain works with “blocks.” Block in a blockchain is a collection of data (information). There are three parts that go into a block as given below:
- Data – In the case of a Bitcoin transaction, it contains the information of the sender, receiver, and the number of coins to be transferred.
- Hash – It is a code that is used for the identification of a block. It is basically a fingerprint of the block, and hence it is unique. Every block has its own hash.
- Hash of the previous block – It contains the hash of the previous block and the previous block contains the hash of its previous block and so on. This eventually forms a chain of blocks. As the first block in a blockchain cannot contain the hash of the previous block, this block is called the Genesis Block.
Blockchain is a distributed ledger. A ledger is a record-keeping file that stores record about the transactions performed by the users. Now, a distributed ledger is a ledger that is spread across all the peers across the network. Means, all the peers have a copy of the ledger, which is immutable. This is one of the properties which make blockchain so secure.
Key properties of Blockchain:
Peer to Peer (P2P) – There is direct communication between the sender and the receiver. There is no Central authority (third party) involved in the process of blockchain.
Spread of network – As discussed previously, the ledger is known to everyone across the network. Therefore, tampering the blocks becomes difficult.
Security – Another technique used to keep the ledger secure is cryptography. The blocks are encrypted by the use of cryptography, which makes the ledger tamper-free.
Immutable – Change of data in the ledger is impossible. There is only an addition of data in a blockchain.
Consensus – Any update made in the ledger, it is first passed through a validation check defined by the blockchain protocol. Once passing through the validation process, it is forwarded to all the peers to the network for the approval of the ledger. When all the participants in the network come to an agreement for updating the ledger, the ledger is then updated in the blockchain. Hence, this proves to be the most crucial property of blockchain.
Working of Blockchain
- A node initiates a transaction by first creating it and then gets it digitally signed with a private key with the help of cryptography.
- The transaction information is passed on to all the peers on the network to validate the transaction based on some criteria preset by the blockchain. This process is called Gossip protocol. Usually, more than one node is required to validate the transaction.
- When the transaction is validated completely, it is included in the block and is propagated to the network. This is the point where we can say the transaction is confirmed.
- If a new block is created, it goes through all the processes above and gets linked to the first or the genesis block. Now, the block gets its first confirmation, and the transaction gets its second confirmation.
- For every new block created, the same process continues, and the process is said to be reconfirmed. Typically, around six confirmations are required to consider that the transaction is ultimately confirmed.
Difference between Blockchain and Cryptocurrency
Quite often, it is mistaken that blockchain is a cryptocurrency. Well, it is not. Blockchain and cryptocurrency are two different terms. What makes it confusing is that both are related very closely. The reality is that cryptocurrency is just one of the applications of blockchain. A blockchain is a decentralized technology which is used to record the transactions. While a cryptocurrency is a tool or a token used in the transaction within a block. Going by the terms, blockchain means “chain of blocks” while cryptocurrency means “cryptographic currency.” Cryptocurrency is used as a measure of wealth and has monetary value, while blockchain is not a measure of wealth and does not hold any monetary value.