What is blockchain with respect to the Bitcoin?

Bitcoin is breaking the internet yet again. In the past few months, you would have come across news headlines, Facebook posts or overheard people discussing the ever-growing price of a single bitcoin. While most people understand the bitcoin is a digital currency, they are yet skeptical over its limited usability and acceptance in daily transactions. People not familiar with cryptocurrencies assume that it is like any other asset, say real estate or gold which can be purchased with adequate money, which, however, is not true.

So what makes the Bitcoin so coveted yet so elusive?

Well, keeping it short, the answer is Blockchain.

In this post, we’ll look at blockchain only with respect to bitcoins, but keep in mind that it is a piece of technology that can revolutionize any and every other industry and service, government or private sector.

Blockchain is simply a ledger or a register that keeps track of transactions in the form of blocks that are taking place between bitcoin owners. Each block contains the record of transactions taking place. Additionally, it contains a time-stamp, the amount transacted among other things.

In Picture: What a block looks like to the public

The blockchain is updated in real-time. It is a distributed ledger, which means everyone on the network can see what it contains, who sent the BTC and who received it. So this means that whenever a party transacts using BTC, everyone on the network can validate it. To me, this sounds like digital democracy

Further, each block has a hash associated with it, in simple terms this is like a fingerprint or signature, thus acting as an identity for that block. Each block also contains the hash of the previous block, excepting the first block called the Genesis Block, because it has nothing before it. This system of hashing gives room to security because if you want to tamper with the data in one block, you will have to change its hash value and that would mean changing the hash value of every subsequent block, because each block consists of its own and its predecessors hash, both required for authentication. The parties who want to add a block are called miners. So how does one add a new block to the chain? All one has to do is perform a series of mathematical computations, a method called the proof-of-work.

In Picture: A block contains the values shown

This method consists of a challenge (a puzzle) and a proof (a solution). Now once you come up with a proof, you run them together through a cryptographic hash function (SHA-256 to be specific.

To the more informed, both the proof and challenge are strings, you concatenate them and input it into the function). A cryptographic hash function has a series of steps such as turning input sequence to binary, converting to ASCII text, converting to hexadecimal system, inverting the sequence and so on in a particular order. It is extremely difficult to find two different inputs that generate the same output; also it is equally hard to reconstruct the original input given the output hash value. This is as good as saying: 'I have a number, say 12876472, and it is the result of an addition between two numbers. What could be those numbers?'  Yes, exactly, the number of possibilities is enormous. Note that this is an over-simplified explanation of a feature of the function called ‘One-way hash functions’. Each transaction has a hash associated with it and combing two transactions’ numeric sequences and running it through the hash function generates another hash (more popularly called ‘digest’). As you combine the hashes of every two transactions you keep halving the number of hashes, and at the end you have a final hash. A final hash of a block must start with a certain number of zeros. The probability of calculating a hash that starts with many zeros is very low, therefore many attempts must be made (introducing a slight change in the final hash) and there is no way around it, no shortcuts at all. It’s just like a numeric lock, you need to try out many sequences of numbers before you find the right one that unlocks it. The salient or remarkable feature in this system is that once a user (or node) claims to have found the hash, all other competing users immediately start working to verify the claim and it is much, much easier to verify the hash than to find it yourself.

In Picture: Each block consists of the hash of the previous block

What’s really happening is that bitcoin is a reward for adding a new block to the set of existing blocks, called the blockchain. The user who added a block is rewarded with 12.5 Bitcoins (a fixed value set by the network, value halves every 210,000 blocks added), also note that, a miner who wants to add a block has liberty to choose the transactions it wants to include in the block, this choice maybe influenced by the fact that each time someone spends their bitcoin, they beforehand declare a transaction fee that the miner will receive if he includes this transaction in his block. The present scenario is such, that it takes 10 minutes to add a block to the blockchain. Sadly, this means that if you were thinking of purchasing a McChicken using your Bitcoin Wallet, McDonald’s will receive the payment only after at least 10 minutes of your initiating the transaction.

And finally, why is the price of a bitcoin so high?

Every miner who is looking to add a new block has to calculate the right hash, and to do that tremendous computing power is necessary. It is an energy intensive process, requiring lots of computers to work in collaboration and hence requires electricity. The bitcoin miner sets the price so as to recover the price he pays for running his devices and that should tell you how much electricity is needed to mine these coins.

SNEAK PEAK INTO THE FUTURE

Blockchain is a promising technology that has tremendous potential. Let’s have a look at some of the industries and services that can be disrupted if it enters those sectors.

1) Financial Services: The seemingly obvious one, given that the blockchain is a ledger of transactions. Imagine if a large company like Apple which sells products, buys raw materials, pays its employees, accounts for assets and liabilities on its balance sheet, decides to implement blockchain. Then all of this would be on an openly accessible, verifiable and errorless platform. Importantly, Apple can easily choose the parties or people to whom these are accessible to. Remember, the data on blockchain is nearly impossible to edit or modify and adds a time-stamp to each block, so this easily eliminates chances of any kind of fraud. Such companies have to do a lot of regulatory reporting about their finances, and usually hire third parties such as Deloitte or PWC to do it for them. In our present system, bank examiners have to rely on opaque, privately controlled ledgers and accounts to match the records in the books. But if all accounting was on a shared, public, not editable-ledger, it would bring automation and streamline the entire process bringing extraordinary transparency and accountability. This level of transparency can benefit a company in a number of ways; it’ll lower the cost of audit, streamline their financial division and change how the market values them. Which company are you more likely to be investing in, one who shows you what goes on quarterly, or one who shows you what’s happening all the time? Apart from auditing, the areas which blockchain can significantly impact are retail banking, insurance and risk management, prediction markets, money lending and exchanging, to something even as simple as obtaining a credit card, among a thousand other facets of financial services. Since no third party or centralised agency is required to authenticate your transactions, this conveniently bids a goodbye to Paytm or Paypal who earlier vouched for your transactions at the risk of leaking your private data.

2) Government, Politics and Elections: Another area requiring high transparency is governance. Imagine a scenario, where each and every single rupee that is paid as tax can be tracked. Since data can’t be overwritten in the blockchain, one can keep account of each rupee the Government is utilizing and its source. The blockchain integrates trust, accountability and security. It will be nearly impossible for Governments to hide, misinform, cheat and squander the slightest of taxpayer’s money without them knowing. Politicians need to be scrutinised continuously to ensure they keep poll promises, moreover during elections, records of donations each party receives can be made transparent and open. The culture of preaching ideology and propaganda can be drastically mitigated; ensuring political and social debates aren’t hijacked by specific ideological groups. Blockchain voting is a system where say there is a two-party election taking place, and each voter assigned a bitcoin that they will spend to choose their candidate. All that they have to do is to send that bitcoin to their candidate’s wallet and at the end of the process, the one with more bitcoins wins the election. This kind of a system eliminates the fear of fake voters, casting multiple votes and assures the voter that their vote was indeed cast and counted. Similarly, implementing blockchain also can transform the existing Athenian judiciaries of countries.

3) Disrupting new Age Services(Read:Uber and airBnB)

This gives rise to the market of Distributed Apps or DApps. Consider AirBnb. While using its version on the blockchain, both renters and occupants can contact each other (without anyone storing messages as happens on Airbnb’s database), exchange details and carry on business as usual. Since the network works on reputation, both you and your room owner want to give their best. This model works best for privacy upkeep, data safety and risk reduction. You don’t keep your credit card details on a database, no hacks no leaks. No Government can pressurise this system to give away your details, no surcharges for international payments, instantaneous settlements and most importantly you save most of the 15% fee you’d owe Airbnb! :) An identical service can be conceptualised for Uber. A valid replacement, considering the controversies Uber has gotten entangled in in many countries. With the blockchain in place, it’ll disrupt the disruptors of today. It’ll create a new business model and an interactive platform for buyers and sellers.

The Troubles in the Implementation of Blockchain

• It’s a job-killer.

With the advent of automation looming, self-driving cars might see the rapidly decline of maybe Uber? Or say those financial services which the blockchain replaces, Western Union’s 500,000 points of sale around the world cold face elimination. Blockchain’s rigid contracts and codes can cause an upheaval in less skilled sectors and it can easily perform relatively routine tasks. Is it time to redefine the minimum wage for workers and redefine human work given the work machines perform?

• It can safeguard crime.

Early on, Bitcoins were used in trafficking drugs, counterfeit notes, child pornography giving the cryptocurrency a shady character and is a valid reason authorities don’t feel comfortable handling it. The level of anonymity Blockchain promises is a good incentive for criminals too. However, since all transactions can be kept track of, it might be easier to ‘follow the money’ to find the crook. As it has always been, the problem might be that cyber-criminals could figure out a way to beat the yet-unbeatable-blockchain-network. Remember, there’s never been a computer system that’s proven unhackable.

• Energy consumption is unsustainable.

Processing and protecting the more than $3 billion worth of bitcoins requires $100 million worth of electricity. At its upper estimate, the Bitcoin network is consuming electricity roughly equal to that of the island-nation Cyprus. Activists are further concerned, when so much water goes into cooling the computer systems when California is going through a drought. With more miners entering the scene, the computation required is increasing and so is electricity consumption. Bitcoin supporters defend their stance by comparing all the ACs cooling ATMs, bank branches, bright lobbies (HVAC system) to their consumption. Moreover, miners who want to get ahead in their game constantly upgrade hardware and mining equipment has a life of 3-6 months. Imagine the junk generated and the infrastructure needed to recycle it.

• Domination of the first generation.

Just like internet, companies comprising the first generation will take control. Most of our digital experience has been privatised, we use proprietary stores to acquire new apps on our phones/ tablets and our consumers of a walled ecosystem. Similarly, a wealthy organisation or individual may aim to capture a blockchain by buying off 51% of the nodes, he could capture most mining power and could decide which transactions to include in the block. He could fork the block to create a new block to circulate his undeclared assets and could also blacklist addresses associated with free speech. The network is also going to be susceptible to the influence of marketing and advertising. And there is no stopping this from happening. It is only when 51% of the network is independent can the blockchain’s success be relied upon.

There is a lot left to say. In every section, there is scope for more application, in more services and in more sectors. There are many more concerns and perils associated with the Blockchain. The most important challenge is its acceptance in society. Money is a social construct and such a radical change will take time. We need sufficient legislation and Government cooperation to naturalise this technology. But for a moment, let’s sit back and think. Just how the internet made information trivial and not a privilege, similarly blockchain has the potential to open up a truly honest and transparent world of finance and governance. Internet grew to mobile devices, gave birth to companies like Google and Facebook and transformed our daily lives and routine activities in an unprecedented manner. Internet created jobs, platforms for entertainment, e-commerce and so much more. Maybe it’s time to take a giant leap ahead. Its time to embrace a future based on a technology more suited for the problems we’ve faced since a long time. Blockchain has a lot of scope for innovation and it’s really hard to predict the course of development and its implications for the future. Could we have predicted back in the 90s when Internet was getting popular, about a service like Google Maps or say Shazam?

Until then, let’s alertly wait, watch and look for opportunities. Maybe this is the Utopian future humanity has always pictured?

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REFERENCES:

• BLOCKCHAIN REVOLUTION- BY DON AND ALEX TAPSCOTT
• KHAN ACADEMY
• IMAGES- Youtube channel : 'SAVJEE',  blockchain.info