What is a blockchain? Why is it the Future of Data?

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Let’s embark on a journey through a series of 3 blogs, understanding the world of Blockchain & Cryptocurrency.

1. Blockchain: What is this technology underlying cryptocurrency?
2. Understanding Cryptocurrency.
3. Categories of cryptocurrency (Metaverse, DeFi, etc.) & their use cases.
Stay Tuned!!

Today we leap into understanding the basics of blockchain and its use in cryptocurrency. But before we begin, I would like to present a caution.

Caution: This is not a financial advice

Correlation with the dot-com bubble

On 1st January 1983 Internet was officially introduced. [1] In the late 1990s, the internet was a hot topic & became mainstream with multiple companies jumping in on the opportunity & building their businesses online. Over years, huge returns were seen in the stocks of these companies, with the massive growth in use & adoption of the internet. Thus, leading to a belief that any company with a dot-com would eventually turn a profit. But with a filter of time, people came to see that not all business models were viable due to different reasons such as execution, expenditures, etc. Therefore, the bubble burst in the early 2000s filtering out the waste & leaving the best. [2]

Let’s compare the above scenario with Blockchain and Cryptocurrency.

The dot-com bubble:
Tech: Internet (Layer 1), Use case: Companies building a  business (Layer 2)

The crypto scenario:
Tech: Blockchain (Layer 1), Use case: Cryptocurrency (Layer 2)

I cannot help noticing the similarities in these: The tech, The use cases and The exceptional rise. The question is, will history repeat itself, will there be a crypto bubble that will burst, clearing out the waste and leaving the best?

Understand Blockchain

  • Brief History of Blockchain

Blockchain was first introduced in 1991 by a group of researchers for timestamping documents to prevent any backdating. But this technology went mostly unused until 2009 when Satoshi Nakamoto invented the first cryptocurrency Bitcoin, which used blockchain technology. But what exactly is blockchain? How does it facilitate the existence of cryptocurrency?

  • What is a Blockchain?

Blockchain is a database. It differs from a typical database in the way the data is stored. Blockchain stores data in the form of blocks, with every block interlinked. Let us establish this blockchain was not solely created to act as a database for crypto. It has various use cases. In the case of cryptocurrency, blockchain stores the transaction data (buy & sell). Thus, forming a ledger (hisab).

E.g. Assume that you execute a cryptocurrency transaction. This transaction you just did needs a record keeper/ a database (hisab). That is where the blockchain comes in.

Note: Ahead we will refer to the blockchain in terms of cryptocurrency.

  • Components of a Block
    • Hash (fingerprint/ identity): Every block created will have its unique representation which looks like this: 0x8e7f0104049e45a8cccb7273d3c21e0ee3e8da8614f76b611572dd3f560a114e (fingerprint).
    • Data: Every block will have its data with a timestamp. i.e. every transaction taking place in bitcoin or any other crypto, from its initiation to infinite, will be stored in these interlinked blocks.
    • Hash of the previous block: When a block is formed, it will inherently contain the hash of the previous block in it. Thus, the link between the blocks is created.

Note: The only exception for this component is the initiation block i.e. the first block in the chain (fig. 1, block 1). This block is called the genesis block.

  • Is the blockchain data public?

Yes, the data stored on the blockchain is accessible to users. But if the blockchain is public, does that make it susceptible to hacking? Yes, it does. But there are measures to tackle this, making the blockchain almost impossible to hack.

Note: Because the blockchain is decentralized, there are multiple copies. All these copies are in sync with each other.

The measures are:-

  • The blocks are interlinked

Referring to fig.1 we can see that the blocks are interlinked & each block has its unique hash. Consider in this chain, the data in block 2 has been manipulated. What will happen here is the hash of block 2 will change. Thus, making the entire blockchain ahead of it invalid. Why? Because block 3 has the hash of block 2 integrated into it & because of the manipulation, the hash is not going to match. Therefore, the link is broken. To make the blockchain valid, the hacker will have to manipulate all blocks in the blockchain. Therefore, the bigger the blockchain, the safer it becomes.

  • The blockchain is decentralized

Consider, with high computational power, the hacker manages to manipulate the entire blockchain. But there is a catch. As we discussed above, the blockchain is decentralized. Every node on the blockchain has its copy of the ledger. In our scenario, the hacker has achieved the manipulation of just one copy of the ledger. To truly manipulate the blockchain, at least 51% of the nodes, spread throughout the world at undisclosed locations (do not mistake them to be shady. They are just helping you maintain order to the blockchain) have to be manipulated. Therefore, if the data sync of one node is broken, other nodes will bring it in check.

Features of Blockchain in cryptocurrency and its benefits: The Pros and Cons of blockchain are very subjective. Therefore, I am going to list all of them under features.

Disintermediation
With a decentralized system, the blockchain can rule out any middlemen. How is this an advantage? Middlemen need to be paid, either through commission or salary and sadly, they also give rise to corruption. Therefore, increasing the expenses.

Privacy
Like bank accounts, a user on the crypto blockchain uses a wallet. But unlike a bank account, a wallet does not display your name. Every wallet created has a public identity that is alphanumeric.
E.g Public identity: 0x0DCad5f4414zddf8J030B414D62Ed3b9f3aB11a6
Therefore, giving the user a private identity.

High-Quality data
For any data to be registered in the blockchain, it must be verified. Therefore, the quality of the data is assured.

Immutability
Once a data entry has been done in the blockchain, it cannot be tampered with.

Transparency
The blockchain ledger is publicly visible. Not a single person can be barred from viewing it.

Empowered Users
Unlike centralized systems where one person or entity assumes control, blockchain gives control back to its users.

Faster transactions
The transactions where centralized banks take days to process, blockchain can do it in minutes.

Responsibility
On the blockchain, you are responsible for your assets. If by any chance you make a wrong payment, you are scammed, you lose your assets. They are not coming back and there is no central authority to complain. You have to safeguard yourself.

Private key
To transact on the blockchain, you create a wallet. This wallet has a private key, which should always remain with you. If anyone gains hold of this private key, they gain access to your assets. Keep your key safe.

Uncertain Regulations
Due to the lack of regulations, there is a rise in scams. You need to be aware and protect yourself from these.

Large energy consumption
With the back and forth communication of nodes for transaction validation, the process of attaining consensus takes up a lot of energy. But this issue has not gone unnoticed. As we speak, some blockchains mitigate these concerns.

Availability
It is operational 24hrs, 365 days. It cannot be stopped unless its users desert it.

New technology
Blockchain is not truly a new tech. But this is its first step towards mass adoption. Therefore, it will have its uncertainties.

Boundless
It follows no international boundaries.

Ending note:

Stay tuned for the upcoming blog, in which I will take you on an exciting journey through the world of cryptocurrency.

Be there & trust me when I say “This is an opportunity you want to grab.”

Reference:

[1] https://en.wikipedia.org/wiki/Dot-com_bubble

[2] https://www.thebalance.com/what-was-the-dotcom-bubble-5209336

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