BLOCKCHAIN 101
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BLOCKCHAIN 101

Blockchain and Cryptocurrency are the two words, which are used interchangeably so let’s clear that first and say “Cryptocurrencies are the applications that use the concept of Blockchain and Bitcoin is one of them”.


What is Cryptocurrency?


It is an internet-based medium of exchange which makes use of cryptography (Method of securing the data with the help of encryption techniques in such a manner that the data is available only to the intended users) conduct financial transactions.


In simpler words, it is the digital currency/asset which serves as the medium of exchange to secure financial transactions. Main features include decentralization, transparency, and immutability. These all are achieved with the help of Blockchain. A cryptocurrency like Bitcoin consists of a network of peers. Every peer has a record of the complete history of all transactions and thus of the balance of every account.


Suppose a transaction says, “Mr. Martin gives X Bitcoin to Miss Alice“ and is signed by Martin‘s private key, it‘s basic public-key cryptography. After signed, a transaction is broadcasted in the network, sent from one peer to every other peer. This is basic p2p-technology. (Peer-to-Peer technology) . The transaction is known almost immediately by the entire network but is confirmed only after the specific amount of time as confirmation is the critical concept in cryptocurrency. As long as a transaction is pending it has the risk of getting forged. After getting confirmed by the miners, it is spread in the network and is now an immutable record that is added in Blockchain.


What is Blockchain?

“The Blockchain is an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value.” – Don & Alex Tapscott, authors Blockchain Revolution (2016). In simpler words, it is a time-stamped series of an immutable record of data that is managed by a cluster of computers not owned by any single entity. Each of these blocks of data is secured and bound to each other using cryptographic principles.


3 pillars of Blockchain

  • Decentralization
  • Transparency
  • Immutable


Blockchain network has no central authority, thus decentralized. It has a transparent nature as the information stored in the ledger is available to everyone and can be shared but cannot be changed as it is immutable. Also does not carry any transaction cost.


Basic Working :
A node starts a transaction by first creating and then digitally signing it with its private key (created via cryptography). A transaction can represent various actions in a blockchain. Most commonly this is a data structure that represents the transfer of value between users on the blockchain network. Transaction data structure usually consists of some logic of transfer of value, relevant rules, source and destination addresses, and other validation information.
A transaction is propagated (flooded) by using a flooding protocol, called Gossip protocol, to peers that validate the transaction based on preset criteria. Usually, more than one node is required to verify the transaction.
Once the transaction is validated, it is included in a block, which is then propagated onto the network. At this point, the transaction is considered confirmed. The newly-created block now becomes part of the ledger, and the next block links itself cryptographically back to this block. This link is a hash pointer. At this stage, the transaction gets its second confirmation and the block gets its first confirmation. Transactions are then reconfirmed every time a new block is created. Usually, six confirmations in the network are required to consider the transaction final.


Cryptographic Keys:


Suppose Mr. A and Mr. B have to communicate over a network, each of them holds a public key and private key. Combination of both the keys provide a secure digital unique identity like digital signature, which is a strong control of ownership. But alone this is not enough for establishing digital relationships. Authentication and Authorizations are the two factors that are also important, that are implemented using a distributed network.
It is easy to imagine that wallet apps will transform in the coming years to include other types of identity management.
The blockchain gives internet users the ability to create value and authenticates digital information. Business applications will result from this are:

1. Smart Contracts

Distributed ledgers enable the coding of simple contracts that will execute when specified conditions are met. Ethereum is an open-source blockchain project that was built specifically to realize this possibility. Still, in its early stages, Ethereum has the potential to leverage the usefulness of blockchains on a truly world-changing scale.
At the technology’s current level of development, smart contracts can be programmed to perform simple functions. For instance, a derivative could be paid out when a financial instrument meets a certain benchmark, with the use of blockchain technology and Bitcoin enabling the payout to be automated.

2. The Sharing Economy

With companies like Uber and Airbnb flourishing, the sharing economy is already a proven success. Currently, however, users who want to hail a ride-sharing service have to rely on an intermediary like Uber. By enabling peer-to-peer payments, the blockchain opens the door to direct interaction between parties — a truly decentralized sharing economy results.
An early example, OpenBazaar uses the blockchain to create a peer-to-peer eBay. Download the app onto your computing device, and you can transact with OpenBazzar vendors without paying transaction fees. The “no rules” ethos of the protocol means that personal reputation will be even more important to business interactions than it currently is on eBay.

3. Governance

By making the results fully transparent and publicly accessible, distributed database technology could bring full transparency to elections or any other kind of poll taking. The app, Boardroom, enables organizational decision-making to happen on the blockchain. In practice, this means company governance becomes fully transparent and verifiable when managing digital assets, equity or information.

4. Supply chain auditing

Consumers increasingly want to know that the ethical claims companies make about their products are real. Distributed ledgers provide an easy way to certify that the backstories of the things we buy are genuine. Transparency comes with blockchain-based timestamping of a date and location — on ethical diamonds, for instance — that corresponds to a product number.

5. File storage

Decentralizing file storage on the internet brings clear benefits. Distributing data throughout the network protects files from getting hacked or lost.
InterPlanetary File System (IPFS) makes it easy to conceptualize how a distributed web might operate. Similar to the way a BitTorrent moves data around the internet, IPFS gets rid of the need for centralized client-server relationships (i.e., the current web). An internet made up of completely decentralized websites has the potential to speed up file transfer and streaming times. Such an improvement is not only convenient. It’s a necessary upgrade to the web’s currently overloaded content-delivery systems.

6. Prediction markets

The crowdsourcing of predictions on event probability is proven to have a high degree of accuracy. Averaging opinions cancels out the unexamined biases that distort judgment. Prediction markets that payout according to event outcomes are already active. Blockchains are a “wisdom of the crowd” technology that will no doubt find other applications in the years to come.
The prediction market application Augur makes share offerings on the outcome of real-world events. Participants can earn money by buying into the correct prediction. The more shares purchased in the correct outcome, the higher the payout will be. With a small commitment of funds (less than a dollar), anyone can ask a question, create a market based on a predicted outcome, and collect half of all transaction fees the market generates.

7. Protection of intellectual property

As is well known, digital information can be infinitely reproduced — and distributed widely thanks to the internet. This has given web users globally a goldmine of free content. However, copyright holders have not been so lucky, losing control over their intellectual property and suffering financially as a consequence. Smart contracts can protect copyright and automate the sale of creative works online, eliminating the risk of file copying and redistribution.

8. Internet of Things (IoT)

What is the IoT? The network-controlled management of certain types of electronic devices — for instance, the monitoring of air temperature in a storage facility. Smart contracts make the automation of remote systems management possible. A combination of software, sensors, and the network facilitates an exchange of data between objects and mechanisms. The result increases system efficiency and improves cost monitoring.

9. Neighbourhood Microgrids

Blockchain technology enables the buying and selling of the renewable energy generated by neighborhood microgrids. When solar panels make excess energy, Ethereum-based smart contracts automatically redistribute it. Similar types of smart contract automation will have many other applications as the IoT becomes a reality.

10. Identity Management

There is a definite need for better identity management on the web. The ability to verify your identity is the lynchpin of financial transactions that happen online. However, remedies for the security risks that come with web commerce are imperfect at best. Distributed ledgers offer enhanced methods for proving who you are, along with the possibility to digitize personal documents. Having a secure identity will also be important for online interactions — for instance, in the sharing economy. A good reputation, after all, is the most important condition for conducting transactions online.
Developing digital identity standards is proving to be a highly complex process. Technical challenges aside, a universal online identity solution requires cooperation between private entities and government. Add to that the need to navigate legal systems in different countries and the problem becomes exponentially difficult.

11. AML and KYC

Anti-money laundering (AML) and know your customer (KYC) practices have a strong potential for being adapted to the blockchain. Currently, financial institutions must perform a labor-intensive multi-step process for each new customer. KYC costs could be reduced through cross-institution client verification and at the same time increase monitoring and analysis effectiveness.
Startup Polycoin has an AML/KYC solution that involves analyzing transactions. Those transactions identified as being suspicious are forwarded on to compliance officers. Another startup Trade is developing an application called Trust in Motion (TiM). Characterized as an “Instagram for KYC”, TiM allows customers to take a snapshot of key documents (passport, utility bill, etc.). Once verified by the bank, this data is cryptographically stored on the blockchain.

12. Data management

Today, in exchange for their data people can use social media platforms like Facebook for free. In the future, users will have the ability to manage and sell the data their online activity generates. Because it can be easily distributed in small fractional amounts, Bitcoin — or something like it — will most likely be the currency that gets used for this type of transaction.
The MIT project Enigma understands that user privacy is the key precondition for creating of a personal data marketplace. Enigma uses cryptographic techniques to allow individual data sets to be split between nodes and at the same time run bulk computations over the data group as a whole. Fragmenting the data also makes Enigma scalable (unlike those blockchain solutions where data gets replicated on every node).

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