Blockchain technology is a method of maintaining a decentralized ledger of records. It implies that everyone contributes to the upkeep and updating of the ledger, making it nearly hard to fake. While blockchain technology is an excellent answer to the problem of centralization, it is also inefficient and slow, therefore it should only be utilized if the problem is centralization.
Before we can know how blockchain technology works, we must first understand the challenges it was created to answer, therefore let me ask you a question; In today's world, how can we know if something is real or not? A dollar bill, a driver's license, or a vote in an election, for example. How can we know whether it's real or not? What is the solution? It's something we keep track of. Each $1 bill, for example, has a serial number that the bank records. The DMV keeps track of your driver's license number, and voting records are used to monitor who voted and who didn't, so the same individual can't vote again. You just search up a document's legitimacy with the appropriate authorities if you want to be sure it's real. Notaries, who are government-licensed witnesses who testify and record the legitimacy of pieces of information or identities, are also available. You'll note that all of these processes are centralized, which implies that there is a central authority, whether it's a bank, a governmental agency, or a single individual, who can issue and authenticate information.
The disadvantage of central authority is that they carry a great deal of power, and as we all know, power corrupts. So, what happens if one of these authorities decides to alter the facts or even change the course of history? This may seem far-fetched, yet even our world history is only a centralized record preserved by historians. The saying "History is written by the victor" implies that individuals in positions of power may occasionally twist facts. If you don't believe it, consider the following scenario. Most money nowadays is only a record of who owes what to whom. Almost a thousand firms in the United States got over $630 billion in 2008 as a result of the subprime mortgage crisis. Other businesses had their debts forgiven altogether. Some may argue that the bailout was necessary, but you can't dispute that someone decided to alter the records of who owned and owed how much money.
This is how Bitcoin came to be. It was the first kind of money to do away with the necessity for a centralized government. Everyone, not just central banks, keeps track of it. And when everyone is keeping track of the facts and verifying them, it's no longer possible to modify the ledger of transactions anytime anything doesn't add up because it's more convenient. You must begin to take responsibility for your actions. However, money isn't the only area where decentralization may help.
The problem of centralization is addressed by blockchain technology. It's a mechanism allowing everyone to keep records without the need for a central authority; it's a decentralized ledger that's very hard to fake. It's difficult to breach the rules undetected 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 opens with a recap of the previous page. You'll have to modify the summary on the current page if you change a section of the preceding page. As a result, the pages are connected or chained together. Pages are referred to as blocks in technological words. We have a chain of blocks or a blockchain since each block is connected to the contents of the preceding block. Many individuals believe that blockchain technology was invented by Satoshi Nakamoto, the creator of Bitcoin. Technically, he merely invented the first real-world use of it: Bitcoin. In reality, Satoshi's initial whitepaper makes no use of the term blockchain. He gets closest to stating blockchain when he says "chain of blocks."
Now that you know what blockchain technology is, we need to answer two important questions: how does it function, and how will blockchain affect our future? Let's begin with the first question. Another way to approach this question is, "How can I design a system that allows anybody to create, verify, and update records?" A blockchain, on the other hand, requires four elements to take on a life of its own. Peer-to-Peer Network (P2P) is a network of equal-privilege computers, often known as nodes. Anyone and everyone are available to join. This is essentially what the Internet provides us with now. We require this network to interact and share information remotely.
Cryptography is the art of communicating securely in a hostile environment. Even when malicious players are present, it allows me to validate communications and establish the legitimacy of my messages. The first element necessitates the usage of cryptography. Remember, I started everyone, including bad actors, may join this network. It's wonderful that I can communicate, but I also need to ensure that my message is clear.
Consensus Algorithm; the technical term "algorithm" can be replaced with the word "rule." This implies that we must agree on how to add a new page, also known as a block, to our records. There are many other sorts of consensus rules; in the case of Bitcoin, we utilize the Proof of Work consensus algorithm. According to this algorithm, to win the right to add a new page to our ledger, someone must solve a math problem that needs computer power to answer. Computers all across the network do computations to answer the mathematical 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 essentially showing a "proof of work." There are alternative consensus algorithms that do not require as much energy as the one I just explained. This is the sort of algorithm used by the Bitcoin blockchain. Different algorithms have advantages and disadvantages, but you must pick one to operate a decentralized ledger; otherwise, reaching a consensus with so many individuals on the network will be extremely difficult.
Punishment and Reward: This aspect is taken from game theory and ensures that individuals will always follow the rules in their best interests. So far, we've created a network with a secure communication system and a set of rules for achieving a consensus. Now we'll tie everything together by rewarding those who assist us keep track of our data and contribute new pages. Each time a consensus is established and a new block is added to our chain, this reward is given in the form of a token, or coin. 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. Last but not least, keep in mind that the punishment and reward system is based on psychological behavior. It transforms the system's rules from something you must obey into something you will want to follow since it is in your best interests.
So there you have it: A P2P network, cryptography, a consensus algorithm, and punishment and reward are the four elements that makeup blockchain technology. However, there is a fifth element, market adoption, that cannot be combined. We can have a group of five individuals sharing a ledger with a consensus algorithm, but it doesn't make it decentralized since there aren't enough people in the system. Furthermore, without adoption, our coin has no real value, therefore the fourth element of punishment and reward isn't particularly effective. Only when a blockchain reaches critical mass in terms of users does it 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 widespread 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. Since then, more individuals have been interested in Bitcoin and blockchain, as well as the advantages they provide in practice and as an investment. That concludes the five components of a fully open, public, and decentralized blockchain. There are just a few blockchains with over 1,000 fully independent members that can be dubbed decentralized; Bitcoin, Ethereum, and Monero are just a few examples. If you're thinking that putting blockchain in action seems like a lot of effort, you're completely correct. However, this is where Ethereum comes into play. All five of these elements are already in action on Ethereum, which is a "Do It Yourself" blockchain. All you have to do now is build the appropriate solution on top of it.
Although blockchain technology is excellent at decentralization, it is also inefficient, slow, and energy-intensive. The Bitcoin network, for example, takes 10 minutes on average to complete a transaction. 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. It'll most likely function better. To summarize, blockchain technology is truly disruptive, but just a few use cases now need its adoption.
