Jan 4, 2017

BlockChain

Blockchain is the biggest thing happening right now; it dominated 2016 and it will rise and shine in 2017.  In this post I want to discuss the useful technology that is changing the financial industry and has wide application for other industries too.  It is where software engineers should focus on making careers and entrepreneurs should focus for startups. Millions of pages on web are filled with blockchain and it is not easy to completely grasp it because technology's application is so huge. But to understand it we go step by step and one should have heard of Bitcoins - A crypto currency that uses a public distributed ledger - Blockchain. No central private repository (database) instead public and distributed.  Note distributed has some key benefit - No single ownership that means whole database can't be hacked (hacker needs to hack each one individually) and also if single user gets hacked no one is responsible (Bank is not responsible for your loss).  Banks see both Blockchain as threat and opportunity because on one hand blockchain might eliminate their need and on other hand blockchain might create new opportunities if they become integral part of the chain.

Layman Terms

Someone asked this on Quora and answers were good. Inspired by that I would like to mention that we all do transactions such as online payment using credit card and bank charges for the transaction and also records the transaction in its repository for tracking ( and to rollback or refund) and both buyer and seller trust bank.  But what is seller and buyer don't need this trusted intermediate then they wish to perform transaction directly - this is where Bitcoin comes in.  Few underlying ideas are important:
Distributed Ledger - The ledger (assume database) of who owns how many coins and which coins is public.
Hash - Individual's identity is a hash function, which means encrypted.  So ledger is public distributed but no-one's identity is known.
Join - Anyone can join the ledger (write only database) by generating his or her hash code.  Download the ledger on your computer and ledger will keep on syncing itself and updated all the time.
Safe - No one can tamper the ledger because its not private and central.

Revolution

In the old days we had Bitcoins like system - the times when we didn't had databases and repositories - we used distributed ledger. Then came times when trade information was kept in books hidden from public but now the technology exists where people can freely trade with each other and can keep the information without need of trusted third parties - Government, Bank, Notary, etc. Not one person/organisation controls the book (ledger) instead it is digital public distributed ledger and every transaction (trade or exchange) is logged with time, date, amount, and participants.  Every computer (node) holds the full copy of ledger (Blockchain).

Technology
Distributed Ledger - Download the bitcoin on your computer.  One you download the full node (all transactions - size more than 100 GB), you can become Bitcoin miner -
"Almost all full nodes also help the network by accepting transactions and blocks from other full nodes, validating those transactions and blocks, and then relaying them to further full nodes." - https://bitcoin.org/en/full-node
Not everyone needs to be miner instead one can posses a bitcoin wallet and start getting and spending bitcoins - Go ahead https://bitcoin.org/
A network with miners and users will be like below -
Source - https://www.youtube.com/watch?v=YIVAluSL9SU

Anyone trying to alter a transaction then it will be refused because it will make ledger inconsistent with others (hosted on other computers in network). Bitcoins can only work if more and more people join the network either by using wallet or being a miner.

One can purchase bitcoin using any currency and perform a transaction (buy or sell).  A miner will verify the transaction and once transaction is verified it will be added in the ledger.


Image Source - https://bitcoin.org/

The idea of Blockchain and bitcoin is so combined that no discussion of blockchain starts without bitcoins. The best explanation is available online on - https://www.weusecoins.com/

The key point now to note is people trust blockchain and a unit in chain can be bitcoin or anyother thing such as property - users participating in transaction decide that means one can exchange car or oil using blockchain technology.
IBM has nice explanation that it is transfer of assets (car, bonds, license, music, etc.) within network with full visibility (you have whole ledger). Organisations now need to re-engineer their business rules to work using blockchain.  
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