Brief introduction to blockchain – For normal people

Crypto-what?

If you tried to immerse yourself in this mysterious thing called blockchain, you would be forgiven for throwing it back so much, in the sheer opacity of the technical jargon that is often used to frame it. Before we look at what cryptocurrency is and how blockchain technology can change the world, let’s discuss what blockchain really is.

In the simplest terms, blockchain is a digital book of transactions, unlike the books we use to record sales and purchases that we have had for hundreds of years. The function of this main book is, in fact, similar to that of a traditional book, in that it records debtors and credits between people. That’s the main concept behind the blockchain; the difference is who owns the ledger and verifies the transactions.

With regular transactions, paying from one person to another involves a kind of intermediary to facilitate the transaction. Suppose Rob wants to transfer £ 20 to Melanie. He can give her money in the form of a 20-euro note, or he can use some sort of bank application to transfer the money directly to his bank account. In both cases, a bank is the intermediary that verifies the transaction: Rob’s funds are verified when he withdraws money from the ATM or he checks applications when he makes a digital transfer. The bank decides whether the transaction should proceed. The bank also keeps a record of all transactions made by Rob, and is responsible for updating each time Rob pays someone or receives money from his account. In other words, the bank stores and controls the ledger, and everything goes through the bank.

It’s a big responsibility, so it’s important to feel that Rob can trust his bank because otherwise he wouldn’t risk his money with them. He needs to feel confident that the bank will not cheat him, that he will not lose money, that he will not be robbed and that he will not disappear overnight. This need for trust has supported all the behavior and major aspects of the monolithic financial industry, even when it became known that the banks (another intermediary) had chosen the bank (another intermediary) in the 2008 financial crisis. to fall over taking the risk of destroying the last pieces of trust.

Block chains work differently on one fundamental side: they are completely decentralized. There is no clearing house like a bank and there is no ledger that an organization has. Instead, the main book is distributed over a wide network of computers, called nodes, and each has a copy of its hard drive on its hard drive. These nodes connect to each other through a software called a peer-to-peer (P2P) client, which synchronizes data across the network of nodes and ensures that everyone has the same version of the book at all times. .

When a new transaction enters a blockchain, it is first encrypted using state-of-the-art cryptographic technology. Once encrypted, the transaction becomes something called a block, which is basically a term used for an encrypted group of new transactions. This block is sent (or transmitted) to the network of nodes on the computer, checked by the nodes, and once verified, the block is passed through the network so that everyone can add them to the end of the book in the computer book. in the list of all previous blocks. This is called a chain, so technology is called a blockchain.

Once accepted and registered in the general ledger, the transaction can be completed. This is how cryptocurrencies like Bitcoin work.

Deprivation of responsibility and trust

What are the advantages of this system over the central banking or clearing system? Why would Rob use Bitcoin instead of the normal currency?

The answer is confidence. As mentioned earlier, with the banking system it is very important for Rob to trust his bank to protect his money and manage it properly. To make this happen, there are tremendous regulatory systems in place to verify the actions of banks and ensure that they are appropriate for this. Governments then regulate regulators by creating a kind of step-by-step verification system whose sole purpose is to prevent errors and misconduct. In other words, institutions like the Financial Services Authority exist precisely because banks cannot rely on themselves. And banks often make mistakes and misbehave, as we have often seen. When you have only one source of authority, power is often misused or misused. The relationship of trust between people and banks is uncomfortable and precarious: we don’t really trust them, but we don’t feel much of an alternative.

Blockchain systems, on the other hand, do not need to be reliable at all. All transactions (or blocks) in a blockchain are checked by network nodes before they are added to the book, which means that there is no single point of failure and only one channel of acceptance. If a hacker wants to successfully manipulate a ledger in a blockchain, he would have to hack millions of computers at once, which is almost impossible. Even a hacker would hardly be able to demolish a blockchain network because he would have to be able to shut down every computer on a network of computers distributed around the world.

The encryption process itself is also a key factor. Blockchains like Bitcoin deliberately use difficult processes for the verification procedure. In the case of Bitcoin, blocks are intentionally checked by nodes that perform a series of computational and time-intensive calculations, often in the form of puzzles or complex mathematical problems, which means that the verification is neither immediate nor accessible. Nodes that commit to verifying resource blocks earn a transaction fee and a reward for newly created Bitcoins. This has the function of encouraging people to become nodes (as these require relatively powerful computers and a lot of electricity to process such blocks), and the process of creating or regenerating currency units is also managed. It is referred to as mining because it involves a great deal of effort (a computer, in this case) to produce new merchandise. It also means that transactions are verified in the most independent way possible, they are more independent than a government-regulated body like the FSA.

The decentralized, democratic and highly secure nature of blockchain means that they can operate without the need for regulation (they are self-regulating), without government or other opaque intermediaries. They work because people don’t trust each other, though.

Let the importance of this sink a little and the illusions about the block chain begin to make sense.

Smart contracts

Where things are really interesting, Blockchain apps are more than just cryptocurrencies like Bitcoin. Given that one of the basic principles of a blockchain system is secure and independent verification of a transaction, it is easy to imagine other ways in which this type of process can be valuable. This is not surprising when many such applications are being used or developed. The best are:

  • Smart Contracts (Ethereum): Probably the most exciting development of the blockchain after Bitcoin, smart contracts are the blocks that need to be executed in order to fulfill the contract. The code can be any, as long as the computer can run it, but it simply means that you can use blockchain technology (with its independent verification, unreliable architecture, and security) to create a bond system for any type of transaction. . As an example, if you are a web designer you can create a contract that verifies whether or not a new client’s website is up and running, and then you can automatically leave the funds. No more harassment or billing. Smart contracts are also being used to prove ownership of an asset such as property or art. The potential for reducing fraud with this approach is enormous.
  • Cloud Storage (Storj): Cloud computing has revolutionized the web and led to the advent of Big Data. This has launched a new AI revolution. But most cloud-based systems run on servers stored on single-location server farms, from a single organization (Amazon, Rackspace, Google, etc.). This presents the same problems with the banking system, as your data is controlled by a single, opaque institution that represents a single point of failure. Sharing data in the blockchain completely eliminates the trust issue and also promises to increase reliability, as removing a blockchain network is much more difficult.
  • Digital Identification (ShoCard): Two of the biggest problems of our time are the identification of theft and data protection. There are so many centralized services like Facebook that have so much data about us, and so many governments in the developed world have made a tremendous effort to store their citizens ’digital information in a central database. Blockchain technology offers a potential solution to this by wrapping your key data in an encrypted block so that you can verify your identity every time you can verify blockchain networks. The applications of this range from the obvious replacement of passports and identity documents to other areas, such as the replacement of passwords. It could be horrible.
  • Digital voting: a topical investigation into the impact of Russia’s recent US elections suggests that digital voting is unreliable and highly vulnerable to manipulation. Blockchain technology provides a way to verify that a voter’s vote has been successfully sent while maintaining their anonymity. In addition to reducing election fraud, it promises to increase overall voter turnout, as people will be able to vote on mobile phones.

Blockchain technology is still very small and most applications are far from general use. Even Bitcoin, the most established blockchain platform, has tremendous volatility, indicative of its new status. However, the potential to solve some of the major problems that blockchain has today makes it an incredibly exciting and attractive technology. I will definitely be watching.

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