The blockchain development is one of the most recent technology evolution and is regarded as one of the best inventions of our time.
Wondering what Blockchain is and why and how it became so important?
What is the use of Blockchain?
How could blockchains change the world?
Let’s find out.
Many of you may not have heard much about Blockchains but I am sure that you all are quite familiar with Bitcoins. When we talk about bitcoins, we are actually talking about blockchain, which is the underlying technology behind bitcoins.
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What is the Blockchain Technology?
The blockchain is a technology that was invented to provide a safe and secure digital medium for value exchange (money transfer and all).
This technology makes it possible to exchange value electronically without needing any mediator or a trusted partner. It has several applications, the best present example of which is Bitcoin.
Let’s try to understand the application of Blockchain with a real-life example.
Imagine that you and another guy in a pub decided to bet $20 on an ongoing football match on the TV. You bet on Team 1 while he bets that Team 2 will win. Now, there are three options to manage the bet –
- You can either choose to trust each other that the loser of the bet will willingly pay to the winner. But what if he doesn’t?
- The second option is to draw a contract, which for one is not feasible for such a small bet and even if you decide to make the contract, the cost of making the contract and other legal charges in the case, if either party decides not to pay, would be too high.
- The third option is to seek help from a third party (a mediator) whom you will both give $20 so that he can give the total amount to the winner once the results are announced. But what if he doesn’t?
The thing is that you can’t trust a stranger or even a friend to pay you the money on time, and enforcing a contract for such small things is way too costly and time-consuming. Thankfully, we have an alternative option now, which is more secure, cheap and fast.
How Does the Blockchain Work?
Blockchain provides us with a way to protect our digital money by writing a few lines of code. The code will run in a secure blockchain environment and will only be accessible to the authorized users.
Now, whenever you need to secure any money or transfer to another user, you write a blockchain program and both of you send the money to the program.
The program will keep your money safe. You can even program it to transfer the money automatically to a particular person based on the result of the bet (or any other event).
The contract logic (of the program) will, of course, be decided and agreed by all the involved parties. Once the program is uploaded on the blockchain, it cannot be stopped or modified.
This technology is still not logical for a small bet of $20 but it can do wonders for major events where huge sum of money or other information is transferred.
Bitcoin – An Application of Blockchain
Bitcoins were created as a digital currency to provide a secure medium for performing digital transactions. The value of a digital currency (just like the dollar value) is bound by an agreement that it can be used to exchange (buy) actual goods and services.
Bitcoins exist in the blockchain which maintains a ledger to keep track of the amount and value of Bitcoins owned by everyone and of all Bitcoin transactions. It is believed that blockchain is probably the hardest thing to penetrate and is even stronger than the Fort Knox.
The blockchain ledger file is not stored on a single/central server but is distributed across the globe among multiples computers in a network. The machines are continuously making computations and storing data. These are called the nodes of the blockchain and each node maintains a copy of the ledger file.
Since all the information of Bitcoins is stored on these computers, any transactions from one user (account) to another user can be easily performed by simply sending a message to the network. The information will be simultaneously updated on each node of the network.
In fact, several other Bitcoin alternatives have been created over the years that are gradually making their marks in the digital world. Check out these 10 most profitable alternatives to Bitcoin.
Limitations of Blockchain
The blockchain is very secure and reliable, but it still is a technology that is controlled by computers and has some limitations.
- Unlike a bank, the transactions and accounts of every user are visible to every other user in the blockchain network.
- Since there is no official authority or a help desk associated with the Bitcoin network, there is no one you can call in case if something goes wrong.
- The system is designed to keep the human intervention at the minimum, and security and reliability of the system depend on its code and mathematical functions.
Transactions on the Blockchain
The blockchain is a system where a single ledger is maintained and updated by a network of computers. The transactions on a blockchain can be performed through special wallets that are managed and distributed by specific online companies.
A wallet is a program that allows users to store and transfer (exchange) their digital currencies. The wallets of individual users are protected by a special encryption technique that uses a pair of private and public keys, which are only accessible to the authorized users.
A wallet or transaction encrypted with a specific public key can only be decrypted by the paired private key of the intended receiver, and vice versa. The owners of Bitcoin wallets are given their own private keys which are unique to their wallets and cannot be recovered if lost. This private key is required every time a user wants to make a transaction through his Bitcoin wallet.
All the transaction requests are associated with unique digital signatures which along with public keys are used by each node (computer) in the blockchain network to check the authenticity of the source and the transaction. This is how security is managed in blockchain transactions and why it is almost impossible to hack it.
The owner of a Bitcoin wallet never has to reveal his/her private key to anyone while making a transaction as the messages are broadcasted only after they are encrypted by the user.
The Bitcoin (blockchain network) code is open source, this means that anyone can make transactions using the available code or by writing new codes. However, even a slight mistake in the transaction code might result in the permanent loss of all the associated Bitcoins.
Note that there is no way to restore a transaction or regain a Bitcoin account once lost or reset a forgotten wallet password. This is why it is recommended to keep your passwords secure and trade carefully while using this technology.
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What is Bitcoin Mining?
As you must have understood by now, the blockchain network is prone to errors such as wallet password loss and software errors, which is the main reason for the deflation of Bitcoin. To deal with this, a system has been put in place in which rewards are given to those who solve the mathematical error of a block.
The process of solving these mathematical calculations by running the blockchain software is called “mining” or Bitcoin mining in general. The people engaged in Bitcoin mining are actually contributing their computing powers towards operating the network nodes thus making Bitcoin transactions faster and more stable.