Blockchain — the Future of Transactions

Before we understand the role of cryptocurrencies and blockchain, let’s first understand the problems it solves.

Imagine Peter your best friend is in some serious trouble and needs to borrow money. Now you’re going to quickly call your bank and ask the manager to transfer $1000 to Peter’s account. On getting your instructions, the manager is first going to check your bank balance and then transfers the funds. The manager then makes an entry in his ledger-

You — Peter $1000

Once this is done, you call Peter and inform him that the money has been transferred.

In this scenario, you and Peter both trusted the bank to manage your money. In the real world, there was no physical movement of the money. All that happened was an entry in the ledger, precisely in a register that neither your nor Peter control or own.

Now this is the problem with the current system.

Most of our lives we’ve been dependent on middlemen to trust each other. The issue with this is that they are singular in number; one small spark of corruption can create chaos.

Here’s what can go wrong with middlemen

• What if the ledger gets corrupted
• What if they transfer the wrong amount
• What if he does it all on purpose

Keeping all this mind, is it possible for us to have a system where we can have a swift transfer of money without needing the bank?

Also if there is now a way to maintain the register among ourselves without relying on a third person.

The blockchain is the solution to this problem.

You may have heard about blockchain somewhere before, let’s see how it works.

The implementation of this method requires enough number of people not to be dependent on a third-party ie. at least three people

Let us assume there are eight people in the group who have each other’s account details all time, without knowing their identities.

What happens

Step 1

Each individual will have an empty folder with them, as transactions occur they will keep adding pages to their folder. This will be the recorded history of transactions.

Step 2

All these eight people on the network sit with a page and a pen, everyone is geared up to jot down transactions that take place.

Step 3

After a few transactions, the participants run out of space on their current page

Step 4

Sealing of the page. The term for sealing of the page is called ‘mining’ The purpose of doing this to make sure nobody alters the transactions ever. Once stored in the folder, it will always be in the folder. Mining is the trusting process and the real essence of Blockchain.

Sealing of the box is called the hash function.

It is like a machine in which you have to feed something from the left that will give you something completely different on the right. For instance, if you feed the number 3, the possible output would be ‘grhe’ How did the machine derive this? No one knows.

Given the output, it would be difficult to say what the machine was fed so as to get a particular output. The input and output are both unique in nature. But if we are given both the input and the output, it would be easy to verify if the input leads to the output.

There is more to sealing the page

Say I give you a puzzle- 40345 +? = 000…

What will you add to 40345 so as to get an output that starts with 000..

Now the only way to find that number is by trying all the possible numbers in the world. There is no logic or pattern to follow here. After many attempts, you will finally discover a number that matches your criteria and gives you the desired output.

In this situation, the number discovered becomes the ‘seal’. The sealing number is called ‘proof of work’ as it is proof that efforts were made to calculate this number.

To seal the page that contains crucial data of the transactions, we’ll have to find the number that when added to the list of transactions and fed to the machine, we get an output that starts with 000. In the real world, the output is much more complicated than starting with three zeros.

Once the number is found, if someone ever tries to edit the content on the page, the sealing number will help verify the page.

Getting back to the end of our page, as soon as we reach the last transaction, all the members on the network work on calculating the sealing number. Whoever finds it first announces it. Once everyone gets it, they check if it yields the same output or not. If it matches, everyone labels their pages with this number and tucks it away in their folder.

You may wonder, why to put efforts in calculating when you know someone from the network is going to find it anyway! It’s for the additional incentives. The first person to crack the number is rewarded with free money. They make an extra buck that is minted out of thin air, their balance increases without anyone else’s decreasing.

That’s how bitcoins came into existence. It is because of these rewards that everyone on the network keeps working to calculate the sealing number.

When enough people own bitcoins, they grow in value making more people wanting to own bitcoins again increasing their valuation. It is an on-going process.

Once this page is sealed, the members put that away in the folder and bring out a new paper.

A single page is a block.

The folder is the chain.

We are humans, and doubt even a full proof plan, so what if someone tries to make changes in the already sealed pages to favour himself. The sealing number will help others figure out an inconsistency, but what if that person calculates a new sealing number.

The solution to avoid this problem is quite a clever one.

In reality, the blockchain requires a seal that consists of three numbers. One is the list of transactions, one is the sealing number and the third one is actually the output of the machine from the previous page.

This way all the pages are interconnected and dependent on the previous one. Thus, if someone were to fiddle with a page, they would have to change the transaction content and sealing number of all the pages after that. Since finding the sealing number is a task, one dishonest fellow cannot outsmart seven honest fellows on the network.

But what if, instead of one more than half the team is dishonest? Also known as the ‘51% attack’ will lead to a total protocol failure. It drifts away from the purpose of the system.

This is the only vulnerable reason why blockchains may fail if they ever will. But that is most unlikely.

Conclusion

Looking at the simplicity, functionality and high level of security there is no doubt that Blockchain has potential of being used beyond digital currencies. As soon as this system is accepted officially industries are going to be witnessing ground breaking changes.