“It will take years to transform business, but the journey begins now”. These are the words of Macro Iansiti and Karim R Lakhani. The pioneers in Blockchain Technology.
As we proceed it would be wise on our part to understand what Blockchain is and how it works. Blockchain was invented by Satoshi Nakamoto of Japan in 2008 to serve as the public transaction ledger of the cryptocurrency ‘Bitcoin’. The invention of the blockchain for the bitcoin solved the problem of ‘Double Spending’. Double spending is a condition where the same set of digital coins could be used twice for two different transactions at the same time as in the case of counterfeit money for fraudulent activities.
First work of cryptographically secured chain of blocks as described in 1991 by Stuart Haber and W Scott Stornetta.
There are Five basic principles underlying the functioning of Blockchain technology. Distributed Database, Peer-to-peer transmission, Transparency with pseudonymity, Irreversabilty of Records and Computational Logic.
Distributed Database gives each party the power to access each and everyone’s database and its history. It also ensures that no single party controls or dictates the data or the information. All parties can verify the records of all transactions directly without the need of a third party.
Peer-to-peer transmission ensures that communication occurs directly between the peers instead of a central node. Every node stores the previous and forward node’s address like a Linked list.
Transactions with associated values and details are visible to anyone with access to the system. Each node, or user, on a blockchain, has a unique 30-plus character alphanumeric address that identifies it. Users can remain to choose anonymous or provide their identity proof to others. This is called as Transparency with Pseudonymity.
Irreversibility of Records ensures that once the transaction is entered in the database and the accounts are updated, the records cannot be altered because they are linked to every transaction record that came before them.
Every transaction in the blockchain is digital in nature and can be provided with a computational logic. We can write codes for every transaction thus eliminating the need for keeping physical records or agreements. This adds teeth to the already strong network of Blockchain and is known as Computational Logic.
As of now, we have discussed as to what are the principles of the functionality of Blockchain. It is now imperative as to HOW blockchain actually works.
Basically, in a blockchain, there are two things. A block and a chain. At complex levels of understanding, it is just a chain of blocks. Since they function within the premises of a computer, the physical aspects of the computer can be ruled out. The digital information is divided into different blocks and linked together. We can understand this better with the help of an example. Let us consider there are three blocks each representing students of three different schools S1, S2, S3. Each of them contains the names of students of their respective schools(A1, B1, C1 and A2, B2, C3). In addition to the above details, we have more. Every one of the above blocks has something called “HASH”. It is derived from the information contained in the block. A ‘hash’ looks something like (2epo12341234). The block of School 1 has students A1, B1, C1. So the hash would be “A1B1C1”.It is technically inaccurate but is sufficient to give an overview of how addresses are stored. It basically functions as a ‘Doubly Linked List’ which has two references in its nodes, one for storing the address of the previous block and another for storing the address of the next block.
Every successive block will contain the previous block’s hash. This is what binds them together. If someone tampers the first block to add some different student D1, the new hash becomes “A1B1C1D1”. However, the successive block of school2 has already stored the hash “A1B1C1”. This mismatch will break the chain. Therefore the purpose of ‘HASH’ is to make sure the system is ‘TAMPER PROOF’.
There could be a case that someone changes the contents of a block and updates all other successive blocks. This could be possible but the chance of this event happening is thin as the data of the blockchain do not lie in one computer. It is replicated in the computers of every user in the network. If someone joins a blockchain network their computer will download these blocks. If someone tampers my blocks then the network will consider what the majority say is correct.
One thing, in the Blockchain network, not only the data but the entire program gets replicated. Computers collectively execute the program. To better explain this I would like to take the help of centralised apps on the internet like Facebook. Its data and program lie on its own servers. Our computer requests information from Facebook’s server on a “need to know” basis. In the case of Blockchain, there is no concept of “centralised server”. It relies on the user’s current computer to host the program which implies that if every computer on the blockchain network fails the system would die.
There could be two networks of Blockchain, Public and Private. In the case of Public Blockchain, the networks have more than one functionalities. Bitcoin operates on the premises of one such functionality. Bitcoin is a digital currency and a payment system. Its tamper-proof blocks hold ledger for all transactions. The people who sacrifice their computers are called “MINERS”. They get rewarded in Bitcoins.
Ethereum like bitcoin has an additional functionality of hosting our code. Developing a blockchain from scratch and hosting a network could be tedious. Here, Ethereum comes into play as it takes care of the heavy lifting.
Blockchain apps don’t just need to be about cryptocurrencies, they could be utilised for other network-based applications like education apps such as LiveEdu, Social Networking etc. Bitcoin, Ethereum, etc are the examples of Public Blockchain. Anyone can be a part of it. What about a private blockchain network? Why would someone need a private blockchain?
Let’s say there are two persons Tom and Jerry. Tom has not paid the rent for five months and every time Jerry asks Tom to pay the rent, Tom asks for the extension. Jerry is helpless and he can’t afford to take Tom to court as it is a tedious process. What can Jerry do?
Now let’s take the case of Ram who is a businessman. He does business with different corporates on a regular basis. Few months ago he signed a deal with a retailer. Even though the conditions of the deal were met the retailer refused to pay. These people took advantage of the loopholes in the legal system and persuaded Ram to settle for less pay. What should Ram do in such cases?
Have we encountered such cases earlier? In Jerry’s case, we need to make Tom pay the rent at the end of each month and in the case of Ram, we need to ensure that he receives payment as per the deal. “A time-based trigger” is what we need for Jerry. Calendar based apps use such a trigger to give us notifications of predefined events. “A condition based trigger” is what we need in for Ram. Amazon is an example of this. It doesn’t deliver a product unless it has received the payment.
The point of speaking is computer programs execute programs consistently. It did when you clicked on this article, scrolled down and read it. In order to help Jerry, we need to convert the agreements of the deal into code, a SMART CODE.
But where do we use these codes? It should be deployed on computers of all parties involved. Jerry and Ram will be a part of the private blockchain. Tom and Jerry will sign a smart contract. Then it’s deployed on the network. Both Tom and Jerry’s bank will have a copy of the same. When the clock ticks 12, money would be automatically transferred to Jerry’s account. Similarly, Ram started using smart-contracts to enforce his clients to pay the agreed amount.
Jerry is happy because he does not have to trust on Tom’s consent to transfer rent. Ram is content that he doesn’t have to go to court to get his payments. Instead, he can spend those efforts in expanding the business.
Therefore, With blockchain, we can imagine a world in which contracts are embedded in digital code and stored in transparent, shared databases, where they are protected from deletion, tampering, and revision. In this world, every agreement, process, task, the payment would have a digital record and signature that could be identified, validated, stored, and shared. Middlemen like lawyers, brokers, and bankers might no longer be necessary. Individuals, organisations, machines, algorithms would freely transact and interact with one another with little friction. This is the immense potential of Blockchain of empowering the business of tomorrow.