And the word was Blockchain which, unless you’ve been hiding under a rock, you'll have heard about in conjunction with Bitcoin. Blockchain and Bitcoin were created by an unknown person by the name of Satoshi Nakamoto.
Bitcoin was invented to reward those who maintain Blockchain which is a distributed ledger that will cut out the various middlemen the same way the internet has already largely cut out the media.
Let's say you want to send money to a friend. You instruct your bank to do so. The bank doesn't physically transfer the money. It makes an entry in your account and another entry in your friend's account in a register which neither you nor your friend controls or owns.
What if the register burns down in a fire? Or what if your bank sends the wrong amount, or none at all? Is there a way to maintain the register among ourselves instead of the bank doing it for us?
Enter Bitcoin (replace the word 'Bitcoin' with the name of any other crypto-currency of your choice which may have whatever value you believe it has just like any other fiat currency):
More here.
Blockchain is a method of maintaining a register among ourselves. The requirement of this method is that there must be enough people who don't want to depend on a third-party. Only then can this group maintain a register of their own.
How many are enough? At least three but let's assume ten individuals want to do without a bank and keep the details of each other’s accounts all the time — without knowing the others' identity.
Everyone has an empty folder with themselves to start with. As they progress, they keep adding pages to their currently empty folders. This collection of pages forms the register that tracks the transactions.
Next, everyone in the network sits with a blank page and a pen in their hands. Everyone is ready to write any transaction that occurs within the system.
Now, if #2 wants to send $10 to #9, #2 shouts and tells everyone, “I want to transfer $10 to #9. Everyone please make a note of it on your pages.”
Everyone checks whether #2 has enough balance to transfer $10 to #9. If #2 has enough balance, everyone then makes a note on their blank pages. The transaction is then considered to be complete.
As time passes, more people in the network feel the need to transfer money to others. Whenever they want to make a transaction, they announce it to everyone else. As soon as they people listens to the announcement, they write it on their page.
This exercise continues until everyone runs out of space on the current page. Assuming a page has space to record ten transactions, as soon as the tenth transaction is made, everybody runs out of space.
It’s time to put the page away in the folder and bring out a new page and repeat the process all over again. However, before they put away the page, they need to seal it with a unique key - the jargon for this is 'mining' - which is the hash number of all the transaction on the page.
By sealing it, they make sure that no one can make any changes to it once its copies have been put away in everyone’s folder — not today, not tomorrow, not ever.
This sealing is performed by the computer which gives out a hash key and once that key is calculated (after spending time and electricity on the machine), the page is sealed with that key.
Everyone in the network does the calculation. The first one in the network to figure out the sealing number announces it to everyone else.
Immediately on hearing the sealing number, everyone verifies if it yields the required output or not. If it does, everyone labels their pages with this number and put it away in their folders.
But what if for someone the sealing number that was announced doesn’t yield the required output? Perhaps they had misheard or miswritten the transactions that were announced in the network, or they had tried to cheat or be dishonest when writing transactions, either to favour themselves or someone else in the network.
No matter the reason, the only choice for them is to discard the page and copy it from someone else. Unless they do so, they cannot continue writing further transactions, thus forbidding them to be part of the network.
So why does everyone spend resources doing these calculations when they know that someone else will calculate and announce it to them? Why not sit idle and wait for the announcement?
Good question! That’s how Bitcoin came into existence. It was the first currency to be transacted on Blockchain. Everyone who is the part of the Blockchain is eligible for rewards. The first one to calculate the sealing number gets rewarded with free money for their efforts which is minted out of thin air and added to their account balance without decreasing anyone else’s. This data 'mining' has already big business:
And that, my friends, is how Blockchain works. In the next five to ten years, we will see banking records, insurance policies, healthcare information, government services, retailing --- in short, any kind of activity that previously required trusted but perhaps not trustworthy enough middlemen --- migrate to Blockchain and eliminate fraud, corruption, manipulation, and, above all, centralised control.
Welcome to our Brave New World!
P.S. Blockchain is built on the assumption that the majority of a crowd is always honest. A few dishonest guys cannot beat the majority of honest guys. However, if the majority decides to turn dishonest and cheat the rest of the network, the protocol will fall flat on its face. It's known as “51% Attack" and it's Blockchain's only vulnerability.
P.P.S. And here's more. And here is a final word of caution.
