The blockchain is an undeniably ingenious invention. By allowing digital information to be distributed but not copied, blockchain technology created the backbone of a new type of internet. Originally devised for the digital currency, Bitcoin the tech community has now found other potential uses for the technology.
A block in a blockchain is a collection of data. The data is added to the block in blockchain, by connecting it with other blocks in chronological others creating a chain of blocks linked together. The first block in the Blockchain is called Genesis Block.
Blockchain is a distributed ledger, which simply means that a ledger is spread across the network among all peers in the network, and each peer holds a copy of the complete ledger.
Some key attributes of Blockchain are which proves that blockchain is better than traditional systems of ledger information keeping:
Peer-To-Peer: No central authority to control or manipulate it. All participant talks to each other directly. This allows for data exchange to be made directly with third-parties involvement.
Distributed: The ledger is spread across the whole network which makes tampering not so easy.
Cryptographically Secured: Cryptography is used for the security services to make the ledger tamper proof .
Add-Only: Data can only be added in the blockchain with time-sequential order. This property implies that once data is added to the blockchain, it is almost impossible to change that data and can be considered practically immutable.
Consensus: This is the most critical attribute of all. This gives blockchain the ability to update the ledger via consensus. This is what gives it the power of decentralization. No central authority is in control of updating the ledger. Instead, any update made to the blockchain is validated against strict criteria defined by the blockchain protocol and added to the blockchain only after a consensus has been reached among all participating peers/nodes on the network.
How Does It Work?
1) A node starts a transaction by first creating and then digitally signing it with its private key. A transaction can represent various actions in a blockchain. Most commonly this is a data structure that represents transfer of value between users on the blockchain network. Transaction data structure usually consists of some logic of transfer of value, relevant rules, source and destination addresses, and other validation information.
2) A transaction is propagated by using a flooding protocol, called Gossip protocol, to peers that validate the transaction based on preset criteria. Usually, more than one node are required to verify the transaction.
3) Once the transaction is validated, it is included in a block, which is then propagated onto the network. At this point, the transaction is considered confirmed.
4) The newly-created block now becomes part of the ledger, and the next block links itself cryptographically back to this block. This link is a hash pointer. At this stage, the transaction gets its second confirmation and the block gets its first confirmation.
5) Transactions are then reconfirmed every time a new block is created. Usually, six confirmations in the a network are required to consider the transaction final.
Blockchain Enables Low Cost & Micro-Transactions
While cryptocurrency is one of the more popular and sometimes considered a notorious application of Blockchain, it is not the only application. Think of Blockchain as a very secure and robust technology to enable parties to have transactions (a transaction can be exchange of money, exchange of data or exchange to anything that can be reduced to a digital entity) at an extremely low cost, as compared to traditional channels (like banking or government mandated institutions). It is like saying once upon a time a communication in the form of a letter had to be delivered by a government postal body and would cost say Rs 5 per letter. But with email, the same communication can be sent via private ISPs almost for free. The same principle applies to transactions via Blockchain.
Emerging Applications of Blockchain
This “almost-for-free” possibility of conducting exchange (transactions) in a very secure manner, opens up immense possibilities in the form of micro-transactions, which earlier would have required a huge overhead cost
Here are some examples of such possibilities:
Eliminating Middle Man
Instead of going via AirBnB and paying them hefty commission as an intermediary (who guarantees the payment transaction as well as authenticity of recommendations for the property), a person who wants to rent out a property can do so by promoting the property over Google; providing the potential client recommendations via Blockchain (which guarantees the authenticity of the person providing the recommendation); and then also collect the payment from the renter via the Blockchain miner, all without having to pay a big commission to AirBnB.
Remittances by expatriates to their families back home is a mega billion dollar business. Banks charge hefty sums (anywhere between 3% and 6% or even more) to facilitate the transfer. However the emergence of platforms (backed by Blockchain technology) that will facilitate transfer of this money at a fraction of the cost (just like ISP transfer emails at the fraction of the cost of transmitting letters via postal dept).
Intellectual Property Exchange
Movie and music sales: Similar to the AirBnB example, creators of intellectual property that can be digitised (like music and movies) can directly reach out to customers who are willing to the pay for the same. Using Blockchain, they can create “smart contracts”. All the money from the payer reaches the creator without expensive credit card charges or intermediary costs.
Monetisation of Personal Data
One of the biggest opportunities will be for consumers to monetise their data. For example, when you spend time on Facebook, you are creating tons of data (click, view etc) and this data is today being monetised by Facebook, by allowing potential advertisers to reach out you with their messages. Going ahead, you can restrict Facebook from accessing any data and then create a micro-transaction using Blockchain, where if Facebook wants to access of any of your data, it needs to share some of its revenue, that it generates from the advertiser with you.
One can cast electronic votes using Blockchain in favour of a particular candidate, with guidance to the candidate on how to vote on certain specific issues. If the candidate does not vote in that fashion, the smart-contract will automatically shift the vote to another candidate.
Blockchain is emerging as one of the key technologies that will drive the next round of disruption, especially in financial services sector and in government institutions. No wonder that numerous financial institutions globally and in India are already investing in understanding this technology and seeing how can be best leveraged.