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Blockchain definition – what you need to know

The Crypto Guide is designed to be a one-stop resource for all beginner to intermediate traders. The first place to start is understanding the blockchain.

What is a Blockchain?

The original blockchain is Bitcoin, which is essentially a digital currency and the network that supports it.

A lot of our financial instruments these days are digitized. We all use internet banking and bank transfers to send FIAT (conventional currencies of countries), and visa/PayPal, etc are all done through digital systems.

What makes bitcoin different is the fact that it is built on a decentralized network. This means that there are no central organizations (like banks) that control any funds or process transactions. All actions and information are processed and stored on “The Blockchain”.

The biggest problem to be solved by any financial exchange is the problem of trust. In the real world, I won’t receive my goods from a shop until I give them cash. But on the internet or over large distances, transferring funds is not instantaneous.

In the current system, banks act as that trusted intermediary, and this works because I trust that my bank has sent the money to X, and X trusts that they will receive the money from the bank.

This is not always the case though and with global networks, different currencies and corrupt/failed governments this network of trust has many problems.

Blockchain technology removes this issue of trust and the need for a central institution.

How does it work?

The blockchain is exactly what it sounds like, it is a chain of encrypted data that contains the history of all transactions and the number of bitcoins held by each individual Wallet (A wallet is like your account on the blockchain). To access your wallet or make a transaction you need a public and private “Key” (a combination of letters and numbers). The public key is like your address in the bitcoin world, people use it to send you money and you use it to look up how many bitcoins are linked to that address.

Read also: What are Smart Contracts and how do they work?

The private key is like your password. When you send funds to another address you need to enter your private key to allow the transaction to process.

Transactions on the bitcoin network are time-stamped and grouped together. This bundle is then encrypted, compressed, and added to the chain. The blocks are added by “Miners” who compete to add the next block by solving an increasingly difficult mathematical problem. Whoever solves it first adds the new block, and gets a bitcoin in return. (This is the only way that new bitcoins are made).

Source: Investopedia
Source: Investopedia

In the image above, the dark blue blocks are the past batches of transactions that have been confirmed on the chain. All of the miners are now competing to add the next block. Say for example “Miner 2” solves the problem first and adds its block to the network. It gets given a bitcoin reward that can be spent on that chain and all of the miners start mining the next block.

However, what if one miner (Miner 3) solves the problem just after miner two and wants to add their block instead. This will cause a fork in the chain.

Miner 3

Miner 3 will also get a bitcoin, but this will only be able to be spent on their chain. As everyone else is busy mining on the chain that finished first, if Miner 3 tries to spend their bitcoin on the main chain it won’t be accepted. Every miner will always only choose the longest chain, as if they don’t it means they waste all of the energy trying to get bitcoin that can’t be used. This ensures that all of the computational power of all of the miners is focused on processing transactions quickly on the longest chain and gives no incentive to trying to cheat the system.

This feature also protects the network from any attacks trying to change the number of bitcoins in a wallet or transaction. To be successful an attacker would need to undo all of the blocks that came after the transaction they wanted to alter and then add all of the transactions back on again. By this time the network of miners will have progressed many blocks past them and the altered chain will never be the longest, causing it to fail.

The network is protected by the fact that the operation is distributed amongst thousands of parties, trust is removed as there is no financial incentive to doing anything other than mining the longest chain. In this structure, more than 50% of the miners need to do something before it will be accepted.

When you or I send a bitcoin to someone else, it simply needs to wait for a few blocks to be confirmed (To ensure the transaction is on the longest chain), and then it has been completed. This means we can send money anywhere in the world 24/7 without having to wait days for a bank to process the transaction and without any complicated currency conversions.

Other Blockchains

Bitcoin was the first, but blockchains don’t need to simply be a financial vehicle. Blockchain technology can be used to perform and secure many different utilities. For example, Ethereum is a blockchain that supports mini-programs called “Smart Contracts” as well as transactions. This allows contracts between two parties to be secured on the blockchain, and once the program’s inputs are met, it will execute accordingly. This allows many apps and other networks to be built on what is essentially a supercomputer, distributed across the whole world. (Blockchains can’t be shut down as there are thousands of separate nodes all keeping it alive).

Read also: Hodl meaning in crypto and other terms you should know

Blockchains can be used for data storage (Factum), gaming (Game), monetary (Bitcoin, Ripple). The list is endless.

All of these blockchains require an “asset” to reward the thousands of people that collectively maintain and protect the network, and to provide a unit of value to be used on the blockchain itself. This is where cryptocurrencies come in. Every blockchain will have its own cryptocurrency, the purpose of which will be unique to the use case.

Use of Blockchain Technology for Reputation Management

With time social networking platforms are becoming more popular and thus playing a larger role in every individual’s life. Businesses of all scales are making their online presence felt. A few years back hardly anyone knew about Instagram, Twitter, or Facebook but now these platforms are frequently used. For all the latest news and trends, millions around the world are checking these sites or networks. Social networking allows users to connect without ever meeting.

Technology is bringing in many changes in the lives of people. All the latest technological advancements are powering social transformation. Blockchain is the next big thing that is going to bring considerable change around the world. Already this concept has created a buzz. Originally it was behind the concept to purchase Bitcoin but now it’s being used to develop many concepts. Top businesses and companies are investing a huge amount in Blockchain technology.

Source: Vinodsblog
Source: Vinodsblog

What’s Coming Next?

To get a clear picture of what happens when information from private and public sources is stored in a singular profile let’s peep into the whole new social credit system of China. Since the starting of 2014, China was piloting a concept to quantify an individual’s reliability or honesty based on his or her debt payments, charitable donations, and various other factors. This new feature is providing advantages to all honest people in different spheres starting from an online dating site to the healthcare market. Not many countries and its government will promote such a system but now it’s coming in handy.

Now it seems quite reasonable that within the next few years, someone will start taking advantage of broad data storage and design an app which aggregates data from different other apps to create a reputation for any individual. Online reputation is becoming important and in days to come it will be a huge deciding factor. Though many know about the role of the Blockchain technology behind purchasing Bitcoin its use in various other concepts is still uninformed to a good section. The all-new concept of online reputation looks possible with this technology. This means your Uber ratings and ratio of both, as well as swipes on Tinder, can play an important role.

How Effective Will It Be?

As of the present date, some may feel this to be different but in many ways, it could be convenient. People these days are very curious to know and have an impulse about new things, knowing information about overall reputation can be of great help. Imagine an app or system which will help you know about the person or individual before linking or associating yourself with. There will be justice in a different system that exists. For instance, online reputation will be considered based on how an individual treats their Uber drivers before investing their time. Or is worth it to figure what share or percent of their Instagram followers like their photo.

What Will This Mean for Business?

This whole concept will mean a lot for businesses of all scales. The idea of social responsibility and corporate ethics could change hugely if details about the quality of leaders and employees’ daily interactions become public. It may sound crazy now but companies can be blacklisted as irresponsible of for instance most of its employees don’t tip well at eateries or cafes. This social acceptance surveillance of human behaviors can actually change the way how talents are hired. People with a higher reputation score can actually get hired easily or may be offered the best salary packages.

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