The blockchain and the fascinating world of blockchain technology are today's topics. Hopefully, at the end of this article, you'll have a better understanding of what blockchain technology is and why it's so difficult to distinguish it from previous technologies. Before we can understand how blockchain technology works, we must first understand the challenges it was created to solve.
So, take a step back and allow me to pose a question to you. In today's world, how can we know if anything is false or real? A dollar bill, a driver's license, or a vote in an election, for example. How can we tell if it's true or not? We maintain a record. Each $1 bill, for example, has a serial number that the bank records. The Department of Motor Vehicles keeps track of your driver's license number and voting records are there to see who voted and who didn't. As a result, the same person will be unable to vote. You just search up a document's legitimacy with the appropriate authorities if you want to be sure it's genuine. We even have notaries who are government-licensed to act as witnesses, testing and recording the integrity of facts or identities. You'll notice something. One thing all of these mechanisms have in common is that they all work in the same way. They're all centralized, which implies a central authority, whether it's a bank, a state, an office, or a single individual, has the capacity to issue and authenticate internal documents. These central authorities have considerable influence. And, as you may be aware, power can be corrupting.
So, what happens if one of these authority wishes to alter the facts or even change the course of history? Even our world history is merely a record, which may seem far-fetched. Historians keep everything in one place. The expression "history is written by the victors" implies that facts can be twisted by those in power. If you don't believe it, consider the following real-life example. Due to the economic collapse in 2008, almost a thousand firms in the United States got about $630 billion that had never been before, while other companies had debts totally erased. Some could argue that the bailout was necessary, but you can't dispute that someone decided to alter the records of who held how much money, which is how Bitcoin came to existence. It was the first type of currency to deal with the requirement for a centralized authority. Its records are kept by everyone, not only central banks, and when everyone is tracking and confirming the facts, the ledger of transactions can no longer be changed. You have to start being accountable whenever anything doesn't add up or because it's more convenient. However, money isn't the only area where decentralization may help.
When it came to research encyclopedias, Britannica hired a hundred full-time editors and nearly 4,000 writers to publish what we regard to be the authority on the subject. Consider the influence of these works' editors. Had it decided what was important enough to mention, censure, condone, or ignore? The last volume of the Britannica Encyclopedia was released in 2010. With over 130,000 active editors maintaining various Wikipedia articles, information is considerably more dispersed now. Because each update is public and can be confirmed, the chances of any of them going rogue unnoticed are significantly lower.
Corruption, fraud, and manipulation are less likely as a result of decentralization. Blockchain technology is a revolutionary and forward-thinking approach to implementing decentralized systems. In summary, blockchain technology addresses the issue of centralization. It's a mechanism allowing everyone to keep records without the need for a central authority, a decentralized approach to keep a ledger that's nearly difficult to fake. It's difficult to breach the rules on notice when so many eyes are monitoring and confirming everything that's going on. Perhaps you're wondering why it's named blockchain. Assume we're managing a shared ledger with hundreds of pages of data. Each page starts with a summary of the previous page; if you alter anything on the prior page, you'll have to modify the summary on the current page as well, so the pages are connected or change. Pages are referred to as blocks in technological terms, and because each block is linked to the contents of the preceding block, we have a chain of blocks, or blockchain. Many individuals believe that blockchain technology was invented by Satoshi Nakamoto, the mysterious Bitcoin creator. Technically, he merely invented the first Bitcoin implementation in the real world. In reality, Satoshi's initial white paper makes no use of the term blockchain. The only thing he sees that resembles blockchain is a sequence of blocks.
You now have a better understanding of what blockchain technology is. Two important questions remain unanswered. How does it function in practice? Is blockchain going to have an impact on our future? Let's begin with the most basic question. Another way to phrase this issue is, "How can I design a system that allows everyone to create, verify, and update records?"
A peer-to-peer network is necessary to support a blockchain. A network of equally empowered computers, often known as nodes. Anyone and everyone is welcome to attend. This is essentially what the internet provides us with now. We require this network in order to communicate and share information with one another.
Cryptography is the second component. The technique of secure communication in a hostile environment is known as cryptography. It allows me to check communications and establish my own messages' legitimacy. Because of the first aspect, we require cryptography even when bad players are present. Remember, anybody, including bad actors, may be a part of this network. It's fantastic that I can communicate, but I need to make sure that my communication is consistent across the board.
The third component is a consensus algorithm, or you may use the term rule instead of the technical word algorithm. This implies we'll have to agree on the rules for adding a new page. Our records are also known as a block. Consensus rules come in a variety of shapes and sizes. In the case of Bitcoin, we utilize a consensus mechanism called proof of work. According to this method, in order to win the right to add a new page to our ledger, someone must solve a math problem, which necessitates processing power. Computers all across the network do computations to answer the arithmetic problem, using a lot of energy in the process. To put it another way, they put in a lot of effort. That's why, when one of them discovers the solution to the problem and broadcasts it to the network, they're effectively showing a proof of work. As a result, I have the authority to compose the following page. Other consensus algorithms, as I previously said, do not require as much energy. This is only the type of algorithm that the Bitcoin blockchain uses; various algorithms have their own set of advantages and disadvantages. However, you must pick one in order to run a decentralized ledger. Otherwise, reaching an agreement with so many individuals will be quite difficult.
Last but not least, we have punishment and reward. This aspect is drawn from game theory and ensures that it is in people's best interests to always obey the rules. So far, we've put up a network with a safe means to communicate and a set of rules for attaining consensus. Now we'll tie everything together by rewarding those who assist us keep track of our data and contribute new pages. This is a token or coin that is given out each time a consensus is established and a new block is added to our blockchain. Bad actors who try to deceive or manipulate the system, on the other hand, may either lose the money they paid on computational power or have their coins taken away from them. The key to understand here is that the punishment and reward system is based on psychological behavior. It transforms the system's rules from something you must follow into something you will want to do since it is in your best interests to do so. Well, that was only a high-level overview of what a blockchain is made up of.
So there you have it: a peer-to-peer network cryptography, a consensus algorithm, and punishment and reward are the four ingredients that make up blockchain technology. However, there is a fifth ingredient, market adoption, that cannot be fully synthesized. We can have a group of five individuals share a ledger using a consensus method, but it isn't truly decentralized since there aren't enough people involved. Furthermore, without adoption, our coin has no real worth, therefore the fourth aspect of punishment and reward isn't particularly effective. Only until the number of users reaches critical mass does a blockchain become genuinely decentralized and therefore unchangeable. At that moment, the value of the blockchain's coin generally begins to rise. It's difficult to pinpoint what causes mass size and market adoption.
In the case of Bitcoin, it all began with its usage on the dark web, where it was used to pay for drugs and other illegal goods. However, since then, more individuals have begun to investigate Bitcoin and blockchain, recognizing the advantages they provide in practice and as an investment. That concludes the five components of a genuinely open public decentralized blockchain.
There are just a few blockchains with over a thousand to really independent members that can be termed decentralized Bitcoin and Ethereum as of today. If you're thinking that putting a blockchain in motion seems like a lot of effort, you're completely correct.
You may have heard of a closed or private blockchain. This phrase refers to businesses that filter and limit the number of people that may join their blockchain. It's similar to how the internet, which is accessible to everybody, differs from an intranet, which is a private network of business computers. So, I'm guessing that some businesses will see the benefit of using private blockchains to better their internal processes. It's not really interesting since it has nothing to do with decentralization, to underline that point.
Let's look at the differences between open public blockchains and closed private blockchains. The public blockchain is accessible to everyone, it is international and borderless, it is censorship resistant, and it does not require the involvement of a third party. It's also unobtrusive. There is no such thing as a good transaction, a poor transaction, an unlawful transaction, or a legal transaction. There are just two options: valid or invalid. A private blockchain, on the other hand, is only accessible to approved users and is managed by a small group of people. According to Andreas Antonopoulos, "you actually don't need a blockchain in most situations of private blockchains." Participants can simply collaborate on a spreadsheet. The entire point of blockchain was to decentralize a process by making it accessible to the broader population. That is the exact opposite of what a private blockchain does.
On the other hand, the properties of a public blockchain provide significant benefits. There isn't a single point of failure in this system. Immutable records are sometimes known as altered records. Finally, there's censorship defiance. So, as long as a record meets the consensus norms, you can't actually delete it or prevent it from being published.
One important question about blockchain technology remains unanswered. I'm sure you've heard of many startups that are leveraging blockchain technology to address some type of problem as the next big thing. When I first hear about a firm like this, I usually ask two questions. Is it a public or private blockchain, because if it's not a public blockchain, there's nothing there, and that's highly disruptive. Second, do they actually require a blockchain? If you recall, we discussed the hazards of centralization at the outset of this essay, but these dangers are only relevant now. If there's a lot on the line. For example, the pharmacy line is controlled centrally, but I don't mind because there's not much at stake and it's really more efficient. In this manner, blockchain technology excels at decentralization. However, it is inefficient, sluggish, and energy-intensive. For example, it takes 10 minutes on average for Bitcoin's network to process a transaction, which isn't ideal for buying a cup of coffee at Starbucks. The only time you should consider blockchain technology as a solution is if your issue is one of centralization. If you don't need to decentralize something, you're probably better off with a centralized solution than with blockchain technology. In fact, it'll almost certainly be more effective.