Why the hype around Blockchain Technology?
Nobody is a stranger to the Blockchain technology, unless you’re of stone age. But those of us who do not posses a technical background, it’s difficult for us to understand the hype around it! What is this technology? Why do people say that it can revolutionize the banking system? Why are businesses adopting this technology? etc. This blog will help you understand the basics of blockchain and why is it a ‘revolutionizing’ technology.
Imagine…
Imagine your friend asks you for some money. You tell him that you’re going to transfer him the money in 5 minutes. You open your bank’s app, click transfer, choose your friend as the receiver, enter the amount and VOILA- money sent! However, one important thing to notice here is that you did not send the money to your friend directly. Your bank sent the money to your friend’s bank, when you asked them to do so. Now the question is, that why does bank have to be a part of any transaction that you want to do? Why is the system ‘centralized’ (we’ll talk about centralized and decentralized systems in a bit)?
Even though it sounds like a very simple question, it’s very complicated. The banks have established themselves as the middlemen that we can’t get rid off. IT’S NOT TRUE! We are taught in finance to diversify and not to leave all our eggs in one basket. But over the years, we’ve been doing it! Trusting one authority for all the transactions- The Bank.
If you’ve read till here, you must be thinking- “Well, what’s the solution?” Stay with me people, coz this ride is going to be fun!
What is Blockchain?
In order to get rid of this ‘centralized’ system that banks control, blockchain technology was created.
Blockchain is a decentralized system that can be accessed by anyone who is a part of the network. It is a system of connected networks, unlike banks who are the central authorities. In a banking system, only you know how much money you have in your bank account. However, in the blockchain, everyone knows how much money you have! That’s why it is called the Decentralized system.
Consider 5 colleagues sitting with $100 each and 5 pieces of paper to record any transaction that might happen.
#1 shouts that she wants to send $20 to #3. Now, everyone would first verify if #1 has enough money in her account. If she does, then they will all record the transaction on their piece of paper. Next, #5 shouts that she wants to send the money to #2. The same process of verification and recording will happen for this transaction, and so on and so forth, until everyone has filled up their paper (finite number of transactions).
Once everyone’s paper is full, they will keep that paper in a ‘sealed envelope’ called the Ledger. Everyone on the blockchain network has a copy of the ledger, which makes the transactions transparent and minimizes the chances of fraud. How exactly does it do that? We will discuss that in detail in our blog on P2P Network!
Why are businesses adopting Blockchain? Why are banks worried?
What we have discussed so far is just the start- just an overview of what Blockchain technology is and how does it work, in layman terms. There are tonssss of things to know and learn- which we will in a series of blog posts. However, the important question is that why is it becoming demanding?
Even though blockchain technology is a shared and decentralized network, it is considered extremely safe. It is because of the continuously growing list of ‘blocks’, which record a set of transactions by a countless number of nodes (or participants) in a distributed peer-to-peer network (P2P network), who can be either an individual or an organization. PHEWW!!!
In simple terms, when a person initiates a transaction, a cryptographic hash code is generated, which corresponds to this particular block as well as the previous block. Data Miners have to ‘mine’ this block and add it to the Blockchain network. When a particular block is added in the network, the information is transmitted to all the nodes to let them know about that block. These nodes verify the transaction and if satisfied they add this block in their journal as well. A block is added in the blockchain, only when there’s a consensus, i.e. more than 50% nodes agree on that block. Agreement of more than 50% of the nodes is called the ‘Consensus Protocol’ and is verified by the ‘Proof-of-work’.
This makes it practically impossible for someone to hack the blockchain network, because in order to corrupt it, they have to hack more than 50% of the connected nodes.
Why do banks have to worry about this? It’s because blockchain is a more secure and a more transparent network. Additionally, studies have shown that the amount of resources to run the blockchain network worldwide, is way lessor than the cost of running of the banking system, making it more sustainable.
I understand that it can be really overwhelming when we see such heavy terms. That said, we will explain each and every term in a series of blogs to come, to help you understand about this booming technology.
Till then, stay tuned and watch the space!
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