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If you are interested in the future of money, it’s high time you got familiar with Blockchain technology, the new internet which has the ability to transform not only the idea of money but also the global record-keeping systems.

The idea of shared ledgers has indeed existed for some time. Central banks do share their ledgers with financial institutions including banks which operate in a centralized system. However, a blockchain does not have a central authority and therefore the system is decentralized. Blockchain is a broad concept but let’s get to the basics first.

What is Blockchain Technology?

Blockchain is a distributed digital ledger that records data or transactions in multiple places on computer network that makes it impossible or difficult for the system to be changed, hacked or manipulated.

For example, the digital ledger is like a Google spreadsheet shared with various computers in a network, in which, transactional records are stored on actual purchases. The interesting thing is that anybody can see the data, but nobody can corrupt it.

Whose Idea is Blockchain?

The first blockchain-like protocol was proposed by cryptographer David Chaum in 1982. Later in 1991, Stuart Haber and W. Scott Stornetta wrote about their work on Consortiums.

But it was Satoshi Nakamoto (presumed pseudonym for a person or a group of people) who invented and implemented the first blockchain network in 2008 after deploying the world’s first digital currency, Bitcoin.

How Does Blockchain Work?

Blockchain got its name by the way it stores transaction data – in blocks linked together to form a chain. As the number of transactions grows, so does the blockchain.

Blocks record and confirm the time and sequence of transactions which are then recorded into the blockchain network administrated by rules agreed by the network participants.

Each block contains a hash aka a digital fingerprint with timestamped batches of recent valid transactions and the hash of the previous block.

he previous block hash links the blocks together and prevents any block from being altered or a block being inserted between two existing blocks. In theory, the method renders the blockchain tamperproof.

The process of how a blockchain works can be summarized as follows:

1-Transaction Creation: Participants create transactions that need to be recorded on the blockchain. These transactions can involve the transfer of assets, data, or any other agreed-upon information.

2-Transaction Verification: Transactions are broadcast to the network, and participants (nodes) validate the transactions using consensus mechanisms. Once validated, the transactions are grouped into a block.

3-Block Formation: Miners (in PoW) or validators (in PoS) compete to solve a cryptographic puzzle. The first to solve the puzzle gets the right to add the next block to the blockchain. This process ensures security and prevents spam.

4-Adding to the Blockchain: Once the puzzle is solved, the new block is added to the existing chain. The block contains the hash of the previous block, linking them together.

5-Consensus and Synchronization: All nodes in the network update their copies of the blockchain to include the newly added block. The consensus mechanism ensures that all nodes agree on the state of the blockchain.

At its core, a blockchain is a chain of blocks, where each block contains a collection of transactions or data. These blocks are linked together in chronological order to create a continuous chain. The key features that define blockchain technology include:

1-Decentralization: Unlike traditional centralized systems where a single entity has control, blockchain operates on a decentralized network of computers (nodes). Each participant in the network has a copy of the entire blockchain, ensuring that no single entity has full control over the data.

2-Transparency and Immutability: Transactions recorded on a blockchain are visible to all participants in the network, and once a transaction is added to a block, it becomes extremely difficult to alter or delete. This immutability is achieved through cryptographic hashing and consensus mechanisms.

3-Cryptographic Hashing: Each block contains a unique cryptographic hash of the previous block’s data, along with its own data. This linkage creates a secure and tamper-resistant chain, as changing the data in one block would require altering all subsequent blocks and the consensus of the network.

4-Consensus Mechanisms: Blockchains use various consensus mechanisms to agree on the state of the blockchain and validate transactions. Some popular mechanisms include Proof of Work (PoW) and Proof of Stake (PoS). In PoW, participants (miners) solve complex mathematical puzzles to validate transactions and create new blocks. In PoS, validators are chosen to create new blocks based on the amount of cryptocurrency they hold and are willing to “stake” as collateral.

5-Smart Contracts: Smart contracts are self-executing contracts with the terms directly written into code. They automate and facilitate the execution of predefined actions when certain conditions are met. Ethereum, a blockchain platform, is particularly known for introducing smart contracts.

Why is Blockchain Important?

• Blockchain is secure
• Blockchain is transparent
• Blockchain is tamper-proof
• Blockchain enables peer-to-peer transactions without reliance on a central authority or third parties like banks

Are There Different Types of Blockchain?

Yes, and here they are:

Public Blockchains:

-These are open, decentralized network of computers accessible to anyone wanting to request or validate a transaction.

-Two common examples of public blockchains include the Bitcoin and Ethereum.

Private Blockchains:

-These are not open and have access restrictions. People who want to join require permission from the system administrator. They are typically governed by one entity, meaning they are centralized.

-For example, Hyperledger is a private, permissioned blockchain.

Hybrid Blockchains or Consortiums:

-These are consortiums, a combination of public and private blockchains and contain both, centralized & decentralized features.

-For example, Energy Web Foundation, Dragonchain, and R3 are hybrid blockchains.

Sidechains:

-A sidechain is a blockchain that runs parallel to the main chain. It allows users to move digital assets between two different blockchains and improves scalability and efficiency.

-An example of a sidechain is the Liquid Network.

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Kapil Rajyaguru

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