Introduction to Blockchain
Blockchain is a decentralized distributed database (ledger) system. It is distributed because there is not a single repository held or owned by one person (Parties or Miner). All of them have their own copies of committed transactions of the block. Blockchain is not a drop box of transactions on the contrary it is a vault of hashed value of an asset which is tagged to its latest owner. Transactions being the trail of quantity and change of ownerships since it was the first time introduced in the Blockchain.
Blockchains can be applied to any concept which requires digital security for maintenance and management and currently Blockchains version 3.0 is the latest release. Some of the applications of Blockchains in financial domain are Crypto currency (the famous Bitcoin), Escrow transaction, Bonded Contracts, Smart Contracts, and Intellectual Property etc. One can also conceive that a voting right can also be put on a political Blockchain of a national electorate (electorate being a vote exchange) also a physical housing property can be converted into a hashed digital asset traded on Blockchain of a real estate exchange and there are endless possibilities one think of. With the advancement in IoT, a Blockchain is a perfect combination to launch smart contracts.
To understand more on Blockchain one needs to understand its building blocks, let’s see one by one:
Unit: It is a digital intangible or tangible asset which can be converted into a hashed value e.g crypto-currency, a vote, digital property, intellectual property etc…
Transaction: No of Units that can be exchanged in one single go
Block: Stack of authorized transactions
Blockchain: Irreversible blocks (ledger)
Miners: Nodes that work as authenticators and validators of transaction and forms block in a chain.
The next question comes into the mind is how transactions are executed on the Blockchain. Assume that there are two parties A & B and they want to execute a transaction between them by exchanging certain number of Units (assume a crypto currency unit such as Bitcoin). Both the parties have to be on the same Blockchain network and application but on separate node (computer). This is important because a common platform is needed for transfer and communication of protocol for request and response. In order to execute a transaction both will require keys (randomly generated encrypted/hashed values to be kept confidential). The keys can be common session keys or public and private keys. Usually it is public and private keys combination and per transaction a unique set of pairs of keys are generated. “A” (initiator with address N) will pledge a transaction with certain number of Units with his key. “B” (receiver with address M) will acknowledge this transaction with his key. Now the transaction is in the executed stage but not validated and authorized. These Transactions flow into the distributed network and remain in the queues of Miners for validation and authorization and once done the transaction is connected to a chain and chain into a block of irreversible transaction. The blocks are formed after a suitable time lets us say that number of transactions validated in 10 secs will form a block. These blocks are then stored into a decentralized distributed database/ledger (Blockchain) i.e the copy of the block will be replicated into a database maintained with A, B and the Miner (who authorized the transaction) so that none of them can deny the execution of transaction. This replication is done to address the conflict between parties should it arise. The chain is actually the quantity and trail of tag of the unit associated with the ownership. During entire transaction anonymity of both A & B is maintained because they are identified by their keys and these keys cannot be reverse engineered to identify the owner as the keys are random values generated using trusted and certified algorithms.
Miners are available in Public Blockchain (Bitcoin), they validate and authorize a transaction and convert it into a chain but only when they have completed their workloads (proof of work) between chains. The workloads are nothing but complex numerical problems which require huge computation processing and time. It is a huge investment to become a Miner. One may be wondering then why to become a Miner. For validating and authorizing each transaction the Miner is paid a fee/commission in form of Units of the Transaction. Some Miners also act as exchange house to buy and sell the Unit (Bitcoin) with fiat currency (USD) this is also called an Offchain.
Just to revise the layers of a Blockchain are the Units that are executed over a transaction which are further validated and verified by Miners to convert into chain and then into a block and finally stored into a decentralized distributed ledger.
There are different types of Blockchain:
Public Blockchain: In this type anyone, individual or a group can be a part of a Blockchain to execute a transaction or become a Miner. Example can be Bitcoin Blockchain.
Permissioned Blockchain: Consortium of entities form the Blockchain and only permissioned or licensed individual or a group can be a part of this Blockchain to execute a transaction but there are no Miner. In this type the transactions are auto validated and authorized as the parties are trusted. This is a more secured network and example can be consortium of banks or financial institutions forming a Permissioned Blockchain and parties can be legitimate entrusted customers of the bank.
Sidechain (Interchain) Blockchain: When one or more unique Blockchains interlink to form a complex set of Blockchain.
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