You would have been living in an underground cave for the past 10 years if you havn't heard about cryptocurrencies. We all heard about Bitcoin, Ethereum and the rest of the crypto currencies. At the time of writing (2021-12-05) the price of 1 Bitcoin is 37,174.37$ . If you look at this price in 2015-11-20 it was only 215$ actually the Bitcoin price graph looks like this.
In this series I am not going to talk about cryptocurrencies investment tips, I will be explaining how everything works behind the hood. the technology behind it and what is going on with it. Because it is not only about currency. Blockchain (technology on which crypto currency is based) seems to be dominating how we will be doing a lot of things. it is the basis of Web 3.0 which is already dominating a lot of things going on with our lives and is predicted to continue doing so.
What is Blockchain ?
Blockchain is a term used to describe a Distributed Ledger Technology (DLT). Blockchain in its simplest form is a technology used to create a system for storing data in a distributed and immutable manner.
Blockchain is a technology used to build a data storage system that has the following properties :
1 - Immutability
Immutability means that once data is written to a blockchain data store, it cannot be changed. In contrast with traditional systems that, no matter how much security you implement, the data can be accessed and modified on the file system on which the data is persisted. This could be done by done either by an outside party (hacker) or by a corrupt admin storage keeper.
A blockchain system ensures that even if a bit of data is changed anywhere in the system, the entire system will be in an invalid state. And because the data is decentralised and distributed on multiple systems, the actual data with a valid state can be recovered from any one of the systems.
2 - Distribution
As the data on a blockchain is distributed to multiple nodes, you can trust that data to be accurate. This trust is because the data of the datastore is replicated on a number of peers(hosts) on the internet. If one of the peers goes in an invalid state (misbehaves), the other peers can filter it out. As long as there is a majority of peers agreeing to a common valid state, you can completely trust the data that is stored on that system. This replication also guarantees high availability.
There is no other system in the past has been able to guarantee this by design.
Use cases for an Immutable Distributed Ledger (Blockchain)
Automotive Service History
We have all either bought in the past or considered buying a used car to save money. You can easily imagine the amount of fraud that can be involved with a used car (service history coverups, odometer tampering, accident history) etc. The only way that you can lower the risk is that you find a third party between you and the seller that guarantees the state of the car an its history (maybe the dealership). but in a world where there is lack of trust how can you be even sure that the third party that you trust of keeping the history of the car is not corrupt ? it might be as simple as the seller being a hacker or has an insider that can alter the record of the car that you are planning to buy and modifies the odometer reading from 400,000 km to 80,000 km.
Now imagine all the car history is stored in a system backed up by block chain. once data is written there it is decentralised and is stored forever. The data cannot be tampered so if anyone tries to modify the car service history the system will not technically allow this to happen. even if the seller tries to change the car's data on a couple of nodes, the system will report the data as invalid and will be correct state will be restored because most of the other nodes in the distributed system still have the correct un tampered (Immutable) version of your car's data. This could solve the trust issue in the second hand market right ?!
Financial Industry
Let’s say you need to send $200 to a friend in another country.You contact your bank, and they debit that amount from your account. Your bank is regulated by the state bank (the central authority) which is why you trust your bank to send it as promised. Your bank updates its records and sends it to the central bank. The central bank updates its record and sends it to the the other friend central bank, which sends it through the central bank of that country. They again update their record and send it to your friends bank. Your bank in the other country then credits his account. It takes days but eventually your friends can access that money.
In this process, multiple parties from all these banks are involved for updating of records. Because the financial stakes are so high, things are done safely to ensure trust is developed. To support this trust, the $200 you paid will incur some processing fee deductions at all delays along the way. The trust you put in the current financial system is paid through your time and money.
Now imagine how a Blockchain based currency (ex Bitcoin) will solve that, In this new system, both you and your friend have a bitcoin address. All you need to do is transfer the money to your friend’s address. No fee, no delay, no middle parties, no cost buying ‘trust’, as the system is trustworthy be design.
Basic Terminology
Ledger
The data store that keeps all blockchain data is called a ledger.
Transaction
Each entry in the ledger is called a transaction. The transactions are timestamped and stored in groups of blocks.
On the ledger you can only add a new transaction or read the old ones. You can not update or delete anything.
The ledger is designed to be immutable using cryptographic algorithms (we will talk about it later) and its distributed design. The ledger is replicated and maintained by multiple hosts or peers or nodes.
This is why its called DLT or Distributed Ledger Technology.
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