Before I start, if you think that blockchain is bitcoin, then you need to unlearn that and move forward. Bitcoins are based on blockchain technology but blockchain is much more than that. With that Happy Women’s Day!
Also, the scope of this article is limited to the extent of you understanding what this tech is on a high-level and to apply those concepts to understand cyptocurrencies and deFi – which might very well be the future of finance
So, with that advisory note let’s start!
A blockchain is a specific type of database. What’s a database (DB)? Take this fictitious bank statement (B.1) as an example. It’s a database on Microsoft’s excel. It’s just a record of your financial transactions with an audit trail stored electronically. Now DBs come in different shapes and sizes, but for starters we will consider the below table only as our database.
B.1
Now, this statement is personal to you and is visible to only you. If you wish, you can download a copy and make changes to 14th Feb in order to remove those bad memories
Blockchains are also databases, but what differentiates them from spreadsheets are that
1. Databases are often limited in terms of their scope. For e.g., your bank can go to the extent of maintaining a database of all the people who have an account with them. Blockchains are decentralized, there’s no account or governing power. All the transactions within their ecosystem are recorded. So all those people would bought old monk that day would leave a trail in the blockchain network
How blockchains record transactions/data?
1. This tech is based upon millions of users, sitting at their desks in front of their computers. These computers are often referred as nodes and the community of users is called as a peer-to-peer (P2P) network
2. When a transaction happens, it is sent for verification to all the nodes. To verify those transactions/ data points, each user is given a puzzle to solve. The first user to solve the puzzle sends his/her answer (called as ‘proof-of-work’) to other nodes. If everyone agrees, then a block is created. That block contains the details of that transaction along with a hash code. This block would also contain the hash code of the previous block
3. A hash code is a unique reference number allotted to every block
4. This block would then be appended to the ‘chain’ of previous blocks
5. The working is similar to Snake Xenzia, wherein the snake grows in size after gobbling those crumbs
B.2
2. They are immutable. If the transactions in the above sheet were recorded on the blockchain ledger then nobody could possibly alter them(B.1). Neither can your bank or Satoshi Nakamoto. A change can only be made by appending a new block. Consider the block excel below (B.3). All the line items can be considered as blocks in the blockchain network (except closing balance). If you make changes to the 14th Feb item, then it will change the hash code for the same and everyone in your peer network would get an error as this block is dependent on the one previous to it and the previous block on the one before that. You get the idea, right? A ‘consensus’ is required to make even a minute change. And such consensus in real world is close to impossible
B.3
3. All transactions/ data points in the blockchain network are viewable to all. Your identities would be anonymous but the transactions would indeed be visible to all
4. There’s no intermediary involved. No bank, no government. Each node has full information and there’s no bank fees/ TDS/ governing councils. Do note that when you pay for your coffee via your credit card or UPI, the transaction is recorded and subsequently processed by intermediaries. They record your details and charge you money for this. Blockchains would only record the amount transacted with a unique address, not your name and there’s no intermediary
5. They are available all the time. A bank or an org may not be available 24*7, but transactions via this network can be settled 24*7. The same applies to cross-country transactions as well
Now, before we move forward, we might need to take a little pause. While explaining blockchain, we made certain assumptions and as we move forward, it stands to reason that we unpack them
a. Our discussion points till now have revolved around transactions. But blockchains can be used to facilitate a voting system. Each individual can be given the address of the person to vote for and they can send their Boolean ‘yes’ or ‘no’ to those addresses for final counting
They can also be used to keep records of property related transactions. Wouldn’t it be nice if we actually knew who owned that piece of land at Ayodhya and when the places of worship were destroyed and rebuilt and so on?
Or for your health. A record of all the medical issues you’ve had right from your birth. To be honest, blockchain has been applied for all such similar cases in certain regions across the globe with considerable success
b. Also we assumed complete decentralisation while discussing blockchain. But it need not be, say, for a firm using this for their internal record keeping purpose. They can use this tech to maintain their supply chain wherein some or all the details are visible to all the parties available, but changes can only be made by the peers/nodes who have those rights or maybe on the basis of smart contracts, say, i.e., “only pay the supplier her due if and only if less than 2% items that reached our ports are defective”
c. Again, smart contracts are fully available in more enhanced techs based on blockchain. Part of the reason why ETH (Ethereum) is growing in demand
Moving to disadvantages!
1. Huge energy costs. Just see the number of computers involved and the ultimate computational power required
2. Speed inefficiency. Owing to these proof-of-work validations that we discussed above, the blockchain network can only process 7 transactions per second (TPS). Other cryptocurrencies like Ethereum perform better than bitcoin, but compare that to Visa which processes around 24,000 tps and you stand nowhere
3. Illegal activity. You are anonymous. You can buy or sell anything without coming under the radar of the ‘system’
Now, people are paid in ‘bitcoins’ for an activity called mining… But more on that later and with this we will take a pause here. There’s a lot going on in this space with cryptocurrencies, deFi (decentralized finance) and smart contracts. And they truly represent how our future might look like but it is important to not consume everything in one shot. Let’s look at deFi in our next thread.
