Today's BlockBits covers Blockchain Technology Explained, by Simplilearn. The tutorial goes into the fundamentals of blockchain technology and the problems it can solve. If you find my summary interesting, I urge you to check the video out!
First, what are the problems it is solving?
Suppose you wish to send $100 from Bank A to Bank B. In today's modern banking system, this would require days to process and a service fee to top it off.
Or you have $800 and send $500 to person A and $500 to person B, effectively double-spending. This will overdraft your account and possibly incur additional fees in the process.
Furthermore, centralized banking systems are vulnerable to hacking, fraud, and other forms of manipulation (both intentional and unintentional).
These problems are not specific to banking. Consider all the other industries in the world that operate by tracking transactions such as moving goods (supply chain), exchanging physical assets (real estate), sharing information (health care) to name a few.
What is blockchain technology?
In its simplest form, blockchain is a string of aggregated information in the form of blocks. Each block builds onto the existing blocks, thus you have a blockchain.
Blockchain is a decentralized system of trusted and secure distributed databases (also known as a distributed ledger). This system records and shares the transactions across many nodes that are part of the network so that the data cannot be modified.
Once the transaction takes place on the blockchain it is recorded/distributed across all the nodes connected to the network. Making it impossible to tamper with (immutable).
A single block is an aggregate of transactions that are verified by the blockchain miners on the network. Once it’s confirmed, the block is added to the chain. For this work, the miner gets rewarded.
What are the components of a block?
Each block on a blockchain contains 4 parts:
Data - The senders' address, receivers' address, transaction amounts.
Nonce - A random value used to vary the value of the hash value. This is a byproduct of proof of work (PoW). PoW is the verification process for a Bitcoin transaction (amongst other blockchain protocols). I’ll be summarizing this concept of transaction verification in more detail in another article.
Hash - The unique attribute of the current block. Think of this as the fingerprint of the block.
Previous hash - The key attribute that is connecting it to the previous block.
Putting it all together... How does blockchain solve these issues?
Blockchain operates as a decentralized system that requires no external third party to process a transaction. This enables blockchain transactions to take minutes (not days) and fees are inherently low or near non-existent.
Transactions are verified/validated at the point the transaction takes place. Therefore, the chance of overspending is eliminated.
Each transaction is encrypted and all transactions are recorded on a decentralized public ledger. Each transaction represents another block on the blockchain that records the transaction details and wallet address from which the transaction was made from. If a hacker wanted to tamper with a transaction/block, they’d have to change every block prior to the transaction taking place which would require a huge amount of computational power.
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