BLOCKCHAIN: BEHIND THE BUZZ
By Zara Zamani, Head of Disruptive Technologies
Blockchain fever is high today. We hear “blockchain” everywhere. But what is blockchain really about? How does it work? Why is it turning into a big hype? What problems can it solve? Let’s get to know the answers to these questions here.
What is blockchain?
Blockchain is a decentralized, distributed, trustless and incorruptible digital ledger of transactions (financial transactions - such as payments, or anything of value - like a simple order) working in the shape of a Peer to Peer (P2P) network. To make it easier to understand - it is just a chain of blocks. Each block mainly contains three different pieces of digital information of the details of the transaction (date, time and amount), a digital signature of the participant in transaction and a hash, which is like a distinguishing unique name for each block. Now this block has to be added to the chain of blocks.
How does it work?
When a transaction is done, it’s time for it to be verified by a network of computers (nodes) which might consist of thousands or millions of computers which make sure the transaction is done exactly like how it is claimed. Once the verification is done and the transaction is given the pass stamp, transaction data and the parties’ digital signatures are stored in a block and the block is given a hash and added to the chain.
Distributed consensus in blockchain is achieved through different mechanisms, two of which are Proof of Work (PoW) or Proof of Stake (PoS). PoW is a mechanism mainly used in Bitcoin where there are miners, who can be any of the nodes, mining - meaning to solve puzzle or mathematical equations. The one who manages to solve the questions first will be rewarded with a new block. The PoW mechanism consumes a lot of electrical power and energy. A miner with better mining equipment can have more share in a chain or can even team up with other miners to shape a mining pool and eventually turn it to a centrally controlled network.
On the other hand, PoS doesn’t let everyone mine for blocks and so it consumes considerably less energy. Instead, it has a few validators who have deposited some amount of stake, like a security deposit, to be able to mint new blocks and not mine. The bigger the amount of the deposit, the higher the chances the node has to be the validator. The node here only receives a transaction fee as a reward, and if they make a mistake in validating a wrong transaction, they will be punished. Therefore, every node will try its best to make sure it is validating the right transaction in order to be able to make some money.
Why is everyone talking about blockchain?
As blockchain is a decentralized technology, it cannot be controlled by a single authority which means less corruption and manipulation. It also makes it more transparent, accurate and secure, with higher chances of validity.
It is cost and time efficient as the validation and verification of transactions is done immediately, rather than going through long and expensive processes of getting checked by authorities.
Where can it be helpful?
Due to its characteristics and advantages, the primary beneficiary of blockchain technology has been the finance industry, providing a more transparent and time and cost-efficient transaction, especially when it comes to international remittances.
However, blockchain doesn’t end in the finance industry and can be a great aid in developing more efficient governance, auditing, data storage and management, identity management, election land registration, and generally speaking anywhere and in any industry that needs transparency and efficiency.
Blockchain can also be a great approach to address challenges in developing countries such as weak institutions, financial inclusion and empowerment.
Today, blockchain technology is widely adopted in the banking, medical, manufacturing, logistic, transportation, cyber security and legal industries.
As the world is moving towards globalization there will be a larger and larger amount of international transactions of any type of value, which increases the demand for transparency and security and so the need for technologies like blockchain. The buzz has already started to settle and the real work has started.