Imagine you just earned a very exceptional stone in your favourite game and now you can trade it outside of the game! Interesting right? This is just one of the many applications of Blockchain.
But first let’s understand what it is actually.
Three friends : X, Y, Z go out to play on the turf, have dinner at a restaurant ,and together book a cab back home.
X pays for the turf, Y and Z together pay the dinner bill and X again pays the cab fair. How do you know who owes who and how much? They decide to maintain a ledger for that.
1. Decentralised ledger-
It has a record of every single penny spent along with a name of the friend who paid it. This is basically what a blockchain is. A Decentralised ledger.
All activity is recorded. It does not involve any central authority, but the participants- called the nodes- retain the data collectively and can transmit money/information with each other directly i.e. Peer to Peer. The complete network hence is also Transparent.
2. Distributed-
How do we ensure X doesn’t add a line of his own to this ledger?
Every single friend/ Node has a copy of this ledger. If one node decides to change the data in its ledger, it won’t show in the other nodes’ register and hence would be proven false. The data is hence Distributed/Tamperproof.
3. Trust-
What if someone other than the three of them, let’s say A, adds a line to the ledger saying Y owes $100 to Z? How do we trust a line?
To avoid this, the three friends decide that they will sign after each line.
Similarly, in the Blockchain, every transaction/message is signed using digital signature.
4. Consensus based-
But how to know if the line Y adds is True? How do we validate a transaction in the blockchain?
Each node on the blockchain agrees if the transaction was valid by solving complex mathematical equations and consensus algorithms. This can be Proof of Work, Proof of Stake, etc.
Proof of Work (PoW): There are 26 nodes from A-Z and Y wants to add a line to this ledger. It can only add the line if it solves a very complex math puzzle. And once it solves, the other 25 nodes have to verify it. And the good part is, it is EASY to verify!
It shows that Y has done a considerable amount of work for adding the line to the ledger and others have also verified it. Therefore, it is True. Because it requires Y to do the work, it is called Proof of Work.
Proof of Stake (PoS): Instead of solving a math problem to add a line to the ledger, Y offers a certain amount of coins as a Stake. From A-Z, ten random nodes are chosen. We need at least 51% nodes who verify the line as True and only then that line will be added to the ledger. This was introduced as a substitute for PoW as it requires the nodes to solve complex math problems and expend a lot of energy.
5. Timestamp-
After X wrote a line on the ledger, cunning Z modified the line to “X pays $40 for the turf”. How do we solve this issue?
After every line, they added a timestamp which would record the time and place of every line added to the ledger. If Z tries to change the line, it cannot as the line has already been registered at 8pm at the turf.
Every transaction is Timestamped in a Blockchain. We know the exact moment the transaction was verified. No one can modify any information once it is stored on the block. There is more to understand about the Blockchain, these are just a few basic elements.
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