A LAYMAN GUIDE TO BLOCKCHAIN AND IT’S WORKING…

We undertake a number of contracts & transactions on a daily basis; across regions, countries, industries; as individuals, as small business owners and of course as large corporates. During these transactions, a lot of documents and contracts are created and need to be stored, verified and maintained. We rely on intermediaries and ‘trust’ keepers to see our transaction through safely, seamlessly and without disruption.

Think of the last time you moved money between countries, or paid your supplier in a different country; you had to go through a process of identification and verification at your local bank, there were intermediate banks / clearing houses which assimilated, verified and passed on your information and value (Important!!) before finally, it reached the other end. Often times the ‘trust’ and value you pass on cannot be verified and then your bank calls you up to sort that out and then proceed.

The reality is that all of us have aligned ourselves to these processes, or delays, as part of our life. In fact, we are used to saying – that’s the way it works, and will in the future.

Or will it?

In Dec 1974, Vint Cerf and Robert Kahn designed the foundation of our Internet –TCP/IP. Initially, TCP/IP allowed us to connect and send emails, and then it transformed into a wonderful, organic way of communication through a computer at both ends. Today, this has ingrained itself in our daily lives.

And this is what Blockchain, I believe will do. While of course, the final state of the Blockchain revolution is many years away, the process has started. It is important to understand that Blockchain in itself is not disruptive. Blockchain, as I have learned to appreciate, is a foundational technology and will end up creating new foundations for global, economic and social structures. The world will be perceived differently – Pre Blockchain and Post Blockchain perhaps!!!

Blockchain and Core Building Blocks

Blockchain, simply put, is an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way. The ledger itself can also be programmed to trigger transactions automatically.

Blockchain, while an innovation, is not a NEW technology – it’s a coming together of three technologies

  • Distributed, Peer to Peer Network with a shared ledger
  • Private Key Cryptography
  • Incentivization Protocol – an incentive to service the network’s transactions, record-keeping and security.

Private Key Cryptography

This component of Blockchain serves to establish one of the key Blockchain concepts – SECURE DIGITAL IDENTITY. Identity is based on a possession of a combination of a public and a private key. The combination of these keys forms a very useful digital signature.

Distributed Network

This component technology helps in APPROVING TRANSACTIONS THROUGH CONSENSUS and MAINTAINING A TRUSTED SHARED RECORD

When a node (A) initiates a transaction with another node (B) in the Blockchain, by the very nature of the protocol, a new block is added to the record (Ledger). Since this ledger is shared by all the nodes in the blockchain, the next step is for these nodes to start validating the transaction to verify if indeed A has the funds for e.g. to transfer to B. Validating the transaction involves going back to the 1st transaction (block) in the chain and accounting for every transaction in the chain, before arriving at a confirmation on the transaction’s genuineness. Once a majority of the nodes verify this new transaction and confirm, it’s then that the new transaction is added to the system of records (a new Block is confirmed and added to the chain).

Incentivization

The integrity of the blockchain requires many participants to be constituting the peer to peer distributed network (and consequentially the very high-power consumption). One of the cleverest parts of the BTC blockchain is its incentive for participating in the expensive consensus-building process. Every time a new block is accepted, the system randomly rewards one participant with a reward or token. In a Bitcoin Blockchain, this is how new Bitcoins are created or “mined”.

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 Amit Bajaj

Associate Director

Amit Bajaj has worked for 20 years in IT solutions & sales for the financial services industry.

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