Blockchain is getting so much attention currently, and it should get attention because it is really interesting and disruptive. So actually blockchain came into highlight after the success of Bitcoin. Bitcoin is open sourced cryptocurrency and payment system, But we are not going to talk about bitcoin. We are going to talk about bigger then Bitcoins and that is Blockchain.
Albert Einstein once said, “If you cannot explain simply, You do not understand what it is.”
So the goal of this article is to explain as simple as it can so that everyone can understand. Before we talk about Blockchain, let’s understand the difference between Bitcoin and Blockchain, because It is most common mistake people are making.
What is the difference between Bitcoin and Blockchain?
Bitcoin is digital money. It is money something like the dollar which is encrypted.
While Blockchain is a technology which enables digital assets from one individual to another individual. So we can say that Bitcoin can be transferred through Blockchain. It is very important to understand that,
Bitcoin is not Blockchain
So that now you understand the difference, we can go into some details.
What is Blockchain?
A Block is just a file and Blockchain is a distributed database which can transfer blocks. So
Blockchain = Chain of Blocks
A Blockchain is generated by multiple blocks which contain some information like timestamp, transaction and etc.
Now we as we understand what is blockchain it is time to understand,
How does Blockchain work?
So as I explain blockchain is distributed database architecture which allows blocks/files from one peer to another peer, let’s understand its workflow with a common example, Money Transfer. Currently, if a person wants to transfer money to someone he, uses third party payment gateway so that he can make the transfer.
This third party will identify and validate both person and transfer money. It will also take some amount from users as fees. But this process has some drawbacks like,
- Security: Provide financial information to some third party payment gateway
- Performance: Very slow
- Centralized: Payment Gateway is the moderator of the whole process. So that peers have to rely on data provided by Gateway whether sender/receiver is authentic or what.
- Commerce: payment gateway will charge for using its services every time.
On other hands, Blockchain is totally opposite of current centralized architecture. The blockchain is distributed and peer to peer architecture where everyone is validators (miners) and everyone is a Users. No centralized management. So let see how blockchain addresses this problem of money transfer.
For example, there is a blockchain to send money from one to another as described in above figure. Let see how it works steps by step.
- Joey has $ 10 who initiate the transaction by transferring $ 5 to Ross. So now Joey and Ross has $ 5.
- This transaction data will be sync with everyone in the network using OpenLedger. So that now everyone knows that Joey and Ross can transact only $ 5.
- Now, Ross is transferring $ 3 to Monica, but before transfer miners (in this case everyone) will validate the transaction and give the approval to go ahead because it is a valid transaction.
- So Monica has $ 3 and She wants to transfer $ 10 to Phibes but everyone will not allow performing transaction because everyone knows that Monica is only capable of transacting maximum $ 3.
So that’s how basic blockchain works. On each transaction, every node will synch their blocks with the latest information so that they can validate next transaction to be performed.
How does validation process work in Blockchain?
Validation is most important part of Blockchain workflow because it is securing us from bad things. In a centralized architecture, validating a transaction is very easy because Payment Gateway knows both nodes. So that Payment Gateway can validate both peers to perform the valid transaction. But for distributed architecture like Blockchain, it is quite tricky.
Blockchain resolves this issue using miners. Mining is a process of adding transaction record to the ledger. That means miners syncs data of the latest transaction to ledger and peers will use those data to perform a transaction.
Mining is a process of adding transaction record to the ledger.
And that’s how Blockchain works in simple terms.
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