Lesson101: Beginners guide to understanding Blockchain

 Blockchain is the buzz word of the decade. Millennials all over the world are hyped about investing in cryptocurrencies and are head over heels for it. If you haven't joined that race yet, maybe you aren't sure you want to or you aren't aware of it . If you belong to the latter part, then this post is for you. This post is curated to the needs of an absolute beginner in regards to Blockchain, no matter your educational background. But if you know what Blockchain means and are looking on how to invest.

What is Blockchain?

In very simple terms, blockchain is nothing but a log of transactions(yes, like a bank transaction). It records transactions(like a ledger) in the form of blocks. Each block is linked to its previous block containing another set of transactions and the chain of blocks continues. Hence the name Blockchain. This definition is provided in a highly abstracted manner, but is enough to understand rest of this post.

A database is a repository of data related to each other. Distributed means that many parties hold the same data. Blockchain is a distributed database which can be centralized or decentralized.

A straightforward example

Assume your friend is in need of money and asks you for say Rs.500. What would you do? Obviously, you can either transfer the specified amount to his bank account via online methods or by physically handing a cheque to your friend. Here, you are invloving the participation of a third party, the bank. Let us assume that you decide to do online transfer. What happens?

If your account has Rs.2000, then after the transfer, it has to be changed to Rs.1500 and this has to change has to be updated in both your account as well as in the logs the bank maintains. Now considering the recipient's end(your friend), his previous balance, say Rs.100, is now to be updated to Rs.600. The same procedure of updating your friend's account, their bank ledgers is to be done. If the banks are different, then updating has to be done in both the banks. This process is cumbersome. A lot of updating of ledgers is to be done. This is not only a long process, but also involves a lot of resources, maintenance of bank, manpower, bank's servers and more.

Now what if we can entirely eliminate the intermediary(bank) and directly transfer funds to your friend? This is where blockchain comes into picture. As I already mentioned, blocks are used to store a record of transactions. So when you send money to your friend, this transaction:

From: You

To: Friend

Value: Rs.500

information is stored in the block. Hence we need to update only once and it eliminates the need to trust an intermediary. Hence this is called a peer-to-peer transaction.

What about security?

Okay, Blockchain is a peer-to-peer technology. But what if one of the parties changes the transaction? So instead of,

From: You

To: Friend

Value: Rs.500

your friend changed it to

From: You

To: Friend

Value: Rs.5000

This leads to major lose of money. So how can we trust the other person? Here is where blockchain proves its worth and is hence the giant of the decade. It provides security at various levels that it is literally impossible to hack into it. In fact, no major hacking has ever been performed on blockchain up till now! Explaining the security measures in detail would require some knowledge on cryptography, but I will explain it in simple terms.

We know that each block contains a set of transactions. Before storing the transaction into the block, 2 steps are to be performed on it. First, the data (from ,to, value information) is hashed. Hashing is when data is given as input into an algorithm which transforms into something entirely different and is meaningless. This would mean that even when hackers get access to blocks, they won't understand the transactions. Every data has its own unique hash value. Hence if someone tries to change the data, it would result in a different hash value and can be immediately spotted that some tampering has been done.

Next step is that, this hashed data is then encrypted using a private key of the sender. That is, a second layer of protection is provided by encrypting the data that is illegible and can be decrypted only using another key provided by the sender. This is called as digital signature and is used to authenticate data. Thus Blockchain is immutable, is neutral, is decentralized and is non-manipulative, making it very secure and trustable.

Is Blockchain and Bitcoin the same?

Many people confuse both these terms and conclude that both are same. But actually

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