• Market Cap: $104b

  • Dec 16, 2018

Chapter 1.1

What is the Blockchain?

The Blockchain, which is the technology that powers the movement of Bitcoins from person to person is basically a ledger distributed across millions of people.

What is the Blockchain?

What is the Blockchain

Anyone who has studied accountancy or owns a bank account knows what a ledger is. The Blockchain, which is the technology that powers the movement of Bitcoins from person to person is basically a ledger distributed across millions of people. The Blockchain is basically the force that keeps Bitcoins in motion as it enables transfer of Bitcoins and records all transactions.

Blockchain is a ledger that records all the Bitcoin transactions. Before understanding what Blockchain is and how it functions, we first need to address the way traditional banking systems function and how a ledger works -

To understand the functioning of Bitcoins and the Blockchain, it is essential to know what a ledger is and how it functions.

Traditionally speaking, if you were to send $1000 to your friend John, you would need to do it via a centralized banking system. In this, you are the first party, your friend John is the second party and the banking system is the third party.

When you send $1000 to John, the bank records that in their books of account. The bank knows how much money you have in your account and based on that it validates or declines the transaction. The bank also charges you a certain fee for this transfer of money. Now that you know what a ledger is, and how the banking system deals with transactions, let us get back to Blockchains.

The Blockchain is an Open Ledger

The concept of the open ledger basically revolves around an interlinked chain of transactions which are publicly accessible. Imagine a group of 10 people transferring money to each other. All the transactions between these people are linked together and are verifiable. This interlinkage of each transaction is the concept of the open ledger. However, the Blockchain is not just an open ledger; it is a distributed open ledger!

The Blockchain is a Distributed Open Ledger

A distributed open ledger means that the ledger is decentralized. A copy of the ledger is available with all the members of the financial system. If there are 10 people in the group all 10 of them will have a copy of the ledger which would be automatically updated any time a transaction takes place. However, this transaction needs to be verified. What if a person who has only $10 puts in an entry of transferring $100 to their friend. Miners help verify these transactions.

Miner

Miners are the most important members of the Blockchain. Miners help verify the transactions. Miners need to find a cryptographically secure key which would allow them to link the new transaction (which has now been verified by them) to the set of previous transactions and seal it securely so that this set of transactions cannot be tampered with. This securing of transactions is done at every transaction ensuring that the data remains secure and incorruptible. This ‘key’ is generated when a Miner runs his high configuration computer for days, as it tries to solve complex algorithms. In return, the Miner is rewarded with Bitcoins as a financial reward.

You too, can become a miner! Read: How to mine Bitcoins

Blockchain is basically Block + Chain - a Block can be understood as an account statement that carries a set of transactions. This Block is cryptographically secured and is linked to other Blocks. Blocks identify each other via the hashing function. Together, it is one of the most secure forms of transactions, and it does not even require an external and centralized governing body. Let us take a look at the benefits of the Blockchain:

Benefits of the Blockchain System:

Eliminating the Third Party: One of the biggest advantages of the Blockchain is that there is no longer a need for a third party to manage the transaction. Transactions can now take place directly between the two people involved. What this elimination essentially brings to the table is a faster process and with lower fees.

Traditional banking transactions could take a couple of days, especially in case of payments across different countries. However, the Blockchain system makes this process faster as it happens in real time. Moreover, the transactional fees charged by this system is far lower than that the traditional banks charge.

Incorruptibility: One of the biggest flaws in the classic system of bookkeeping is that there is a high scope for fraud and tampering of data. On the other hand, the Blockchain system is protected with cryptographic security measures which ensures it is impossible to alter the records. The fact that all the users have a copy of the Blockchain on their systems also makes it highly incorruptible.

Scalability of the System: The Blockchain model which is currently being used for trading Bitcoins can be adapted into various other ecosystems. Imagine what might happen if the government implements it - a one-stroke end to corruption across levels as accountability becomes evident in a transparent system such as this. Let us now take a look at what the future of the Blockchain system might be -

Future of the Blockchain

With cryptocurrencies on the rise, we are not far from the day when banks start adapting Blockchain systems. As mentioned above, the scalability of the system also makes it possible for government adaptations. In fact, Nasdaq is already working on one such digital ledger program as we write. Startups are already coming out with new ideas with this technology. One such startup offered that it can track down crime using data from Blockchains.

Given enough time and awareness, Blockchain has the power to cause quite a disruption and break all the norms of the markets as we know them to be. While it is at a very nascent stage right now, there is no denying that Bitcoin is the future around which gen-next economies will evolve!

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