Understanding the blockchain technology

As you make a transaction, your computer sends an e-mail to each accountant to inform them. The government accountant analogy may have left you more confused.

Because this technology is foundational in nature, it could be a while before we see its widespread adoption. This could be virtually any kind of contract and executed without the help of a lawyer or accountant, which means greater speed and lower costs. Still, researchers have warned that smart contracts as they exist today have a wide variety of security vulnerabilities. Even though traditionally much of the chatter in the cryptocurrency communities has centred on disrupting the financial industry, Botsman doubts this technology will altogether result in currency exchanges bypassing the banks.

Indeed, many banks, though hardly endorsing the exchange of cryptocurrencies, are certainly waking up to the possibilities of the blockchain, which could eventually allow them to automate many systems that currently require a large in-office staff. As Brian Behlendorf, executive director of Hyperledger , explained to me at the Forum's annual meeting this year: The fact that banks are investing in this technology may sound fairly paradoxical given the context in which it evolved and gained traction.

People may have been more open to an alternative financial system, Botsman says, owing to the trust vacuum that developed in the wake of the global financial crisis. The whole point of developing a cryptocurrency is to decentralize it, he observed. Behlendorf and Botsman both agree that decentralizing systems once headed by institutions could have significant social implications.

For instance, what kind of social safety net is in place if things go pear-shaped? Instead of building numerous duplicative and redundant services, one master prime record can serve as the source, eliminating the need for reconciliation and increased post-trade processing speed.

As discussed earlier in the working section, any online transaction not only involves the risk of frauds but also includes third parties into the transaction which costs money. Here the blockchain comes in. With the distributed ledger system, there is no need for third party involvements as every node in the blockchain has a copy of the transactions done.

This also reduces the chances of re-spending also known as double spending the currency already spent as the redundancy will show. As the name suggests, these blockchains are open to public and anyone can participate as a node in the decision-making process. Users may or may not be rewarded for their participation. These ledgers are not owned by anyone and are publicly open for anyone to participate in. All users of the permission-less ledger maintain a copy of the ledger on their local nodes and use a distributed consensus mechanism in order to reach a decision about the eventual state of the ledger.

Private blockchains as the name implies are private and are open only to a consortium or group of individuals or organizations that has decided to share the ledger among themselves.

Only the owner of the blockchain has the right to make any changes to it. Example, Blockstack aims to provide the financial institutions with back office operations, including clearing and settlement on private blockchain. However, the use cases of a private blockchain are relatively small as compared to the public blockchain.

Some people may argue that a private blockchain is not of much use as the implementation concept does not differ much from that of the current systems.

Others believe that private blockchain can provide to some of the problems which bitcoin cannot such as know-your-customer KYC or anit-money laundering AML. This blockchain is basically a hybrid of public and private blockchains. Federated Blockchains operate under the leadership of a group. Federated Blockchains are faster higher scalability and provide more transaction privacy.

Consortium blockchains are mostly used in the banking sector. The consensus process is controlled by a pre-selected set of nodes; for example, one might imagine a consortium of 15 financial institutions, each of which operates a node and of which 10 must sign every block in order for the block to be valid.

The right to read the blockchain may be public, or restricted to the participants. With the basic understanding of what the blockchain technology is and how it works, in the next article we will focus at the public blockchain system and Ethereum, which is, just like Bitcoin, an application of the public blockchain.

References used for this article - Blockchainhub , Blockgeeks , Medium and Wiki. For news, project updates, technical blogs and general discussion on blockchain technology, subscribe here. Stay up to date! Block What is block What is a genesis block What does a block contain Blockchain What is blockchain How does it work What is the need for blockchain Types of blockchain Public Private Consortium The blockchain principles and fundamentals are really coming initially from the design work on the Bitcoin.

Block What is a Block? What is a genesis block? What does a block contain? Diagram taken from 'Bitcoin: This still leaves us with two important questions: What is a hash? How does it work? What is a Hash? This means that there will be people involved who the transacting parties know nothing about. This is one of the major drawbacks of the current system. Blockchain removes the need for the involvement of the third parties as it works on the principle of the distributed ledger.

Every user present in the network has a copy of the blockchain this is what distributed ledger means. Eliminating the need of the central ledger is precisely the core intent of the blockchain. In order for a block to be accepted by the network peers, miners must complete the proof of work which covers all the data in the block. The difficulty of this work is adjusted as to limit the rate of new block generation to one every 10 minutes in Bitcoin. The proof of work is the piece of data which is difficult to produce but easy for others to verify.

Producing a proof of work is a random process and hence it requires a lot of trial and error. The data structure of a blockchain is an ordered, back-linked list of blocks containing transaction details. Each block is in chronological order otherwise the prior block will be lost.

A distributed ledger is a list of shared and synchronized data which are geographically spread across many sites. The data are exactly replicated and synchronized across all the locations to maintain data integrity, availability and resiliency.

Unlike the centralized system, there is no central administrator or single point of control. If a location abruptly fails or stops functioning, the remaining location has the data and capacity to maintain the ledger or all transaction details in the absence of the failed location.

This way a distributed ledger provides real-time information and reduced error or fail rates of transactions. This also reduces the costs of infrastructure as compared to the centralized system. A distributed ledger uses a peer-to-peer network to communicate with nodes which are spread around the globe. Additionally, distributed ledger technology gives us the opportunity for economies of scale achieved by allowing the transaction to serve simultaneously as agreement, settlement, and regulatory reporting.

Instead of building numerous duplicative and redundant services, one master prime record can serve as the source, eliminating the need for reconciliation and increased post-trade processing speed. As discussed earlier in the working section, any online transaction not only involves the risk of frauds but also includes third parties into the transaction which costs money. Here the blockchain comes in. With the distributed ledger system, there is no need for third party involvements as every node in the blockchain has a copy of the transactions done.

These blockchains are also known as permission-less ledgers. Bitcoin is the best example of a public blockchain. Whenever a user does a transaction, it is reflected on everyone's copy of the block. This is because Bitcoin uses a Public blockchain. Private blockchains as the name implies are private and are open only to a consortium or group of individuals or organizations that has decided to share the ledger among themselves.

However, the use cases of a private blockchain are relatively small as compared to the public blockchain. Some people may argue that a private blockchain is not of much use as the implementation concept does not differ much from that of the current systems.

Others believe that private blockchain can provide to some of the problems which bitcoin cannot such as know-your-customer KYC or anit-money laundering AML.