Understanding Blockchain - The technology underlying Bitcoins - Motilal Oswal

Understanding Blockchain - The technology underlying Bitcoins

When Bitcoins were first launched in 2009, it was the concept of a non-fiat currency that actually caught the fancy of traders and investors. At a time when most central banks were debasing their currencies, here was a non-fiat currency that could not be debased. Later in 2013, Bitcoins became popular for the actual technology underlying Bitcoins, which is known as Blockchain. Now Blockchain is a decentralized ledger maintained online which permits easy sharing and decentralization of huge amounts of data with adequate privacy checks.
Look at Blockchain as the data equivalent of the internet. The only difference is that internet content is not entirely certified but all records on Blockchain have to go through a rigorous process of review. That is what makes Blockchain useful and valuable. Apart from legal documentation and medical records maintenance, Blockchain was also used to create a crypto currency. What businesses are now focusing on is how Blockchain technology (the technology underlying Bitcoin) can be leveraged in a variety of different areas including the complex world of global financial markets.

Bitcoins and Blockchain are different..
Many people tend to confuse Bitcoin with Blockchain. Remember, Blockchain is the technology underlying Blockchain. Crypto currencies are only one of the applications of Blockchain technology. There are many other applications too. When you use Bitcoins online, you actually keep the third party payment processors like Visa, Master Card, American Express, PayPal and even the banks out of the process. Blockchain actually provides the technology to trade securely in crypto currencies like Bitcoins. The application is something like this. Bitcoin transactions are stored and transferred using a distributed ledger on a peer-to-peer network that is open, public and also anonymous. Blockchain is the underpinning technology that actually maintains that ledger.

Understanding the Blockchain process via Bitcoin mining..
The Bitcoin Blockchain is a very simple database or ledger that comprises of Bitcoin transaction records. The beauty of the Blockchain technology is that the database is distributed across a P2P network and there is no central authority that regulates it. Thus it overcomes one of the principal concerns over existing currency creating structures which are too dependent on the decisions of a central bank. Therefore, all the network participants must agree on the validity of the transaction before entering into it. Only then it will be recorded in the public ledger. This agreement is achieved through a process called mining. Let us understand in detail what mining is all about.
The job of miners is extremely complex and also very resource intensive. In fact, one of the arguments against crypto currencies and Blockchain is that it uses up a lot of resources in terms of space, computing power and electricity. It has been observed that all the Bitcoin miners put together use up as much as power as the entire country of Denmark. Miners use complex algorithms to verify the legitimacy of the transaction. The mining effort produces something that is called the “Proof of Work”. This Proof of Work can be easily verified by parties in the network. The biggest effort in the Blockchain technology is to produce the Proof of Work as it is expensive and time consuming. To be considered a valid transaction on the Blockchain network, each individual record must have a Proof of Work attached to it. This Proof of Work essential testifies that consensus was achieved about the validity of the transaction. Once the transaction has been recorded, it cannot be tampered with nor can it be changed. That is what makes Blockchain technology so unique and special.

Why Blockchain technology is expected to change the world of business..
You must have come across discussions on why and how Blockchain could change the world of business in a big way. As a whitepaper put out by IBM eloquently states, “Blockchain technology is already being used in business, it is just that it has not been classified as such and users are not exactly aware that what they are using is actually Blockchain”. Let us get back to the point of larger applications of Blockchain technology. By default, anything that is recorded on Blockchain cannot be altered. That means the complete audit trail of highly mission critical activities can be maintained. For example, people may not able to trust each other but they can surely trust the Blockchain as each recorded transaction on Blockchain has gone through the rigorous “Proof of Work”.

There are a variety of benefits of Blockchain technology. It reduces the time for finding information, creating the audit trail of an asset, settling disputes, verifying transactions etc. Secondly, the costs come down drastically as most of the maintenance is done in third party approved ledgers. Lastly, records on Blockchain cannot be tampered. Also this technology is largely fraud-proof when it comes to maintaining records.

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