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Blockchain for Dummies — Beneficial Information to Get Your Basics Right

Sep 04, 2021


In all possibilities, you've already come across the term "Blockchain" a hundred, or even a thousand, times. Yet, you don't have much idea about what it actually is or what it truly means to the world. More importantly, you don't understand how this thing works, if at all it does.  

Now, first thing first, don't feel bad about yourself. For one, you're not alone in this, and two, this introductory course will set things right. In the following paragraphs, we explain the ins and outs of Blockchain technology in a language that people like you — those who don't have any prior knowledge on this subject — can easily comprehend.  

Before setting out, it's crucial to clarify something: Bitcoin is not the same thing as Blockchain, although that's what people often mistakenly believe. Instead, the latter is the underlying technology that makes Bitcoin possible. It's alright to not grasp this at the moment: just keep the distinction in mind. That said, let's begin.  

A Brief History of the Internet

With a grand vision to create a collaborative medium, a place where we [could] all meet and read and write', around 1990, Tim Berners-Lee established the World Wide Web. It was Web 1.0: a virtual space where users could post and interact however they wished, ideally, without any 'central controlling node'.  

Eventually, however, Web 1.0 experienced a shortage of content creators and an excess of consumers. As a result, it contributed to the emergence of the client-server model of the Internet as we know it today: Web 2.0. Simply put, data is stored in centralized servers, which the web-browsers (client) retrieves and displays upon the user's request. It is a two-way process, meaning that individual devices also upload or send data to the servers.  

Presently, these servers are mostly owned and controlled by big companies like Google and Facebook, among others. In turn, power is vested centrally in the hands of a few, as whoever controls the servers controls how users access the Internet and their behaviour therein.   

The Problems of Centralization

When you send a text, say using WhatsApp, the data (your text) first goes to Facebook's server, and from there, to the recipient's account. It is true of every bit of data you generate on the Internet: personal messages, images, social media interactions, and so on.  

It's unproblematic, primarily because it's cumbersome and expensive to maintain servers. However, there's a dark side: private companies, governments, or any other substantial authority, can gain access to our data and leverage the same for commercial or political gains. For clarity, consider the case involving Facebook and Cambridge Analytica, which raised serious questions regarding users' privacy online.

In the centralized Internet, users aren't sovereign: they neither control nor gain from the data they generate. Since 2008, we are witnessing the formation of a democratic and user-centric Web 3.0, driven by emerging shared ledger and Blockchain technologies.  

Distributed Ledger Technology & Blockchain: Defining the Terms

"Distributed Ledger" is to "Blockchain", what "Fruit" is to "Apple". It's a category of ledger technologies, of which Blockchain is only one type: there are others, such as Hyperledger, and so on. Literally, "ledger" means a record or a database. Traditionally, databases are centrally stored, which only certain people can access. On the contrary, a distributed ledger is a shared database stored over a network in which every member has an identical copy of the original data.  

Fundamentally, a blockchain is much the same: only with certain specific qualifications. Here, information is stored in a "block", thus giving the name its first part. In this context, consider a block a unit of information (say, like the bit in a computer). Every block contains only a part of the information, and each part (block) is linked to another part and so on: forming a "chain" of sorts.  

These links are securely codified (using cryptography), and data, once added to the Blockchain, is irreversible and indelible: a crucial feature of Blockchain. In turn, this makes blockchains virtually tamper-proof. Also, due to its chain-like form and because every network member has an identical, updated copy of the entire database, Blockchain is transparent.  

About usage, the technology applies to the storage and transfer of value of any kind. Although most present-day blockchains are used to support financial systems, they can be used for several other asset classes. To learn more on this point, read about Tokenization.  

The Working of Blockchain: A "Trustless" Machinery

As yet, digital currencies or cryptocurrencies — such as Bitcoin — are the most common use-cases of blockchain technology: despite being only one of many. Therefore, to understand how Blockchain works, we will focus on cryptocurrencies: essentially, they are like normal currencies, only cryptographically encrypted. However, note that these principles apply to any category of assets being transferred or stored on a blockchain.  

As such, to avoid fraud, double-spending, and the likes, every transaction must be verified. Traditionally, this is done by centralized governing bodies or "trusted intermediaries'' such as banks. In the absence of any central authority, blockchains employ what is known as mining. It's based upon the common consensus of the network members, established using predetermined, automated protocols such as Proof-of-Work (PoW), Proof-of-Stake (PoS), and so on. Each of these has specific ways of working, but we can skip that for now: it's enough to note that these are cryptographic algorithms ingrained into the structure of a particular blockchain.  

Different blockchains use different protocols: although, still, PoW is the most common. Now, when initiated, blockchain transactions generate a random cryptographic puzzle (technical name: hash). Each puzzle has only one unique solution, which the miners on the network compete to solve. Once solved, the transaction (block) is validated and added to the Blockchain — that is, the shared database gets updated with new information.

It's important to note that consensus, here, doesn't depend upon any single entity's authority but instead is algorithmically determined. Since the process is automated and mathematically driven, there's no need to "trust" anybody. It is in this sense that Blockchain is regarded as "trustless".  

Also, how much of a block any miner can validate is determined either by their computational power (in PoW) or by the amount of cryptocurrency in their wallets (PoS). Upon successfully validating a block, miners are rewarded in cryptocurrencies. As miners have a stake in the network, they abstain from validating invalid blocks, thus ensuring the network's security.

Types of Blockchain

Although ideally, every member on a blockchain network should have equal rights and access, certain specific functions require otherwise. Consequently, there have emerged three major types of blockchains:

Public Blockchain:  Being truly open source, anybody can join the network as a user, miner, developer, or simply a community member. Further, every member has equal and complete access to the shared database. Usually, public blockchains are incentivized.

Private Blockchain: Also known as permission blockchains, including new members based on consent, usually by a group of existing members. Only those with permission to join can participate in private transactions, as well. Usually, these are specifically used for data sharing by enterprises.  

 Consortium Blockchain: Otherwise similar to private blockchains, these are governed by a group of individuals or organizations. Usually, they are used by organizations within a particular industry. 

The Implications of Blockchain: Towards a Decentralized World 

Unlike the often-siloed, centralized systems — financial or otherwise — Blockchain lays the foundations for a decentralized world. As we have seen, blockchain networks (unless otherwise mentioned, we're talking about public blockchains) do not have any central authority: in this sense, they are truly egalitarian and democratic. In a peer-to-peer blockchain network, interactions are direct and don't rely upon any intermediaries.

That apart, decentralization in general and Blockchain, in particular, has certain other benefits.  

Transparency: Probably, this is the biggest benefit. No matter how loyal a citizen or user you are, you can never access certain records of your government or Google respectively. Blockchains, however, impart absolute transparency to the processes that use their technology. In a broader spectrum, this also allows for greater accountability and eliminates corruption.

Security: Being structurally immutable and cryptographically encrypted, blockchains are highly secure and almost completely fraud-proof.

Incentives, Data Control, and Privacy: In a blockchain ecosystem, the user is completely controlling their data. Using public and private keys features, one can control who has access to their documents and who doesn't: there's no scope for data-stealing cookies and the like. In turn, this ensures online privacy. Moreover, users can leverage financial gains by offering data to the network. Traditionally, the platform owners (say, Facebook) gain from the users' data through advertisements. 

Furthermore, Blockchain brings a range of business benefits, including reduced costs, greater efficiency, and so on.  

Blockchains Today and The Scope for the Future

First introduced during the release of Bitcoin in 2008, already, there are several blockchain platforms today. Of course, Bitcoin is still the most famous, but we also have Ethereum, Ripple, Corda, Stellar, and many more. As of now, most blockchains support financial systems. Yet, with developments in Ethereum and tZero, among others, diverse applications of this emerging technology are steadily growing.  

Mr. B A Barry, CEO & founder of the B A Barry Group says that, despite significant developments, however, challenges such as lack of scalability and low transaction speeds have, as yet, hindered Blockchain's mass adoption. Nonetheless, with constant innovations, such obstacles would be overcome sooner than later. Lastly, there has been a significant rise in institutional and even governmental enthusiasm regarding this technology over recent years. And, why not? After all, it not only promises but has already brought tangible solutions to many of our existing problems.  

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