Blockchain Basics: What is it & How does it work

In today’s world, if we want to send money to someone in another country, we have to use an intermediary like our banks, Western Union, Paypal, etc. We trust these intermediaries to get the money to the right person safely.

However, there are problems we’ve seen with this model:

1. They run a centralized business (i.e. all the data is stored with a company or in 1 place) where each intermediary collects the data of the people it deals with. This means that if your bank is hacked, all the accounts with that bank are in jeopardy. While banks and other intermediaries invest heavily in cybersecurity, there are instances where some of them get hacked every now and then.
2. This centralized model generally excludes people from the global economy. E.g., people who don’t have enough money to have a bank account.
3. They are INCREDIBLY SLOW! While it takes a second for an email to go from 1 part of the globe to another, it can take days, weeks for money to move within the banking system across the same places.
4. And on top of that, they take a piece of every transaction they process. The amount in fees that we have to pay to send money across countries can be sometimes hefty.

This is where Blockchain comes in.

The blockchain is simply a

• public registry or ledger or library
• that is located and running in millions of computers around the world (decentralized)
• which contains information of who owns and transacts what
• and where you can add data to but not change what’s already on it

How does it work?

When someone buys Bitcoin, the transaction is recorded on a ledger on millions of computers around the world. After about 10 minutes, that transaction and all other transactions that happened in that time form something called a block. When a block is formed, all the miners within that network compete to solve a tough problem to validate that block.

The 1st miner to solve this problem validates the block and gets a reward in Bitcoin if it’s on the Bitcoin blockchain. When that block is validated, it is added to all the previous blocks. In 10 minutes, that process starts all over again. This process creates a series or collection, or chain of blocks. And that chain of blocks is what is called THE BLOCKCHAIN.

What is contained in a block and is the blockchain secure?

A block consists of 3 things:

1. The data of all the transactions that happened in a time frame, E.g., for the bitcoin blockchain, the data would be the sender’s “bitcoin address,” the receiver’s address, and the amount of Bitcoin that was sent
2. the hash of that block and
3. the hash of the previous block

A hash is a unique identifier. Think of it like a fingerprint. It is unique for every block, and there are no 2 hashes that are the same.

Remember, in our definition of blockchain; we said we could add data to it but cannot change anything on it.

If someone changes the content of a block, the hash will change as well. And remember, each block has its hash and the hash of the PREVIOUS block.

Let’s say you have blocks 1, 2, 3

If you change something on Block 2, its hash will change.

Meanwhile, block 3 still carries block 2’s old hash as its previous hash. This means there will now be no block carrying that hash. So that will invalidate all the blocks that were created after block 2.

To make the blocks valid again, the hacker will have to validate all the blocks after block 2. Remember, it takes around 10 minutes to validate every block, and new blocks get created while you’re validating.

If someone wants to hack or change something within 1 block, they would have to hack that block and all the following blocks on that blockchain across all the computers where that blockchain simultaneously to change what is that ONE BLOCK. This is, therefore, infinitely more secure than the status quo of centralized intermediaries.

Fun fact:

A miner is a computer, not a person. It is a small computer made to solve very complex mathematical problems. It looks something like this

You might be wondering if just 1 miner ends up solving all the problems, couldn’t that miner add fraudulent data to the blockchain?

Well, no. The way each problem is structured, it is mathematically impossible for 1 miner to solve all the problems. Because the problems get incrementally difficult for each miner to solve, and all the miners within a network tend to use the same software for the project.

Since the problems are really difficult, it stresses out the miner to solve each problem. You know how your computer’s fans start going crazy and lag when you run heavy software work on it? That’s how the miners also do. So, the miner who solved the previous problem is unlikely to solve the next problem.

To run a mining operation, the miner needs electricity and a cool environment. Miners expend a lot of electricity because of the high-level work they are doing. As such, people who own mines tend to go to cities where the cost of electricity is relatively cheap, like Texas and cooler places like Iceland, Russia, Canada. For example, the largest bitcoin mine in the US at full capacity will use enough power to power 150,000 Texas homes during peak demand!

This is where the environmental concerns of mining activities lie. One of the ways we have learned to combat climate change is to limit/reduce electricity usage, and when tech like the Bitcoin blockchain expends this much energy, it’s a problem.

Is there more than 1 blockchain?

Yes. Every cryptocurrency network typically has its own blockchain. There is the Ethereum Blockchain, Doge blockchain, etc., and of course, the oldest and most popular, the Bitcoin Blockchain.

Each blockchain has its unique attributes. For example, the Ethereum Blockchain allows people to build smart contracts.

What is a smart contract?

It’s a digital contract that is stored on the blockchain and self-executes. The contract handles the enforcement, management, performance, and payment of agreements between people.

An example of this in practice would be in insurance.

Let’s say a company offering natural disaster insurance. And let's also assume that the government publishes data about these natural disasters on a blockchain somewhere.

An insurance company can make a contract that accepts a monthly fee from the insured and automatically pays out a fixed amount of money if a real natural disaster happened (and the government added it to the blockchain). A bit difficult, and not all types of insurances are fit to be handled through a smart contract.

Hold on. Let’s backtrack a bit. If there’s more than 1 blockchain, how can the blockchain replace intermediaries if we can’t even agree on 1 of them? I mean, we only have 1 internet.

Well, you’re right. We only have ONE internet NOW. And that is the key distinction.

What even is the internet? It is a vast network that connects computers all over the world. Also called the network of networks.

Before the internet as we know it was created, there were several networks of computers dating as far back as the 1950s, where airlines, defense commands and control had a network of computers within their companies or bases.

The internet as we know it came about almost 2 decades after the 1st iteration of the internet was created.

Blockchain technology is still in its early stages. The inventors and researchers are still tinkering with it and figuring out use cases for it. Don’t expect it to be just 1 thing or as developed as the internet. The internet has almost 5 decades under its belt, while blockchain has less than 2.

So what are all the different blockchains trying to do?

My guess is either compete for mass adoption or as later iterations of the blockchain come along; they can link all the blockchains into 1 universal ledger, which would be cool! That would be the blockchain of blockchains (like how the internet is the network of networks)

Now that we know what the blockchain is and how it works, how can we use it?

The most well-known use is in cryptocurrency. Crypto can be used to send and receive money locally & internationally in minutes. Compared to our current financial services industry, where you have to wait days or weeks for Western Union to complete your transaction and pay a lot of money in fees, this is several times faster and cheaper. This is one of the many innovations in Financial Technology. Learn more via this link: Fintech

Here are 4 other ways of using Blockchain that you may not already know of

Land Ownership

Several land dispute cases are currently dragging on in courts for YEARS because more than 1 person is laying claim to the same piece of land.

Also, many people have been displaced from their land by other people and governments worldwide. This would not happen with the blockchain. How?

Imagine if all land titles existed on a blockchain. The record is permanent, cannot be hacked. Anyone can see the changes and transactions that have happened to every title. It’d be impossible for more than 1 person to claim land ownership when there is an immutable record that everyone can see that carries the history of ownership.

Land is so important for economic prosperity. When you own land, you can borrow against it. Use that money as capital to start a business. Develop the land into a farm or build a house on it and rent and while renting the house, borrow against the house and still get money for a business. The potential is endless.

Solving this issue of land ownership will help preserve the wealth of people who otherwise would have had it stolen or tied up in dispute cases for decades. This is an example of how blockchain can improve global prosperity.

Create a true sharing economy

The current sharing economy as we know it is simply collecting money for a few companies. E.g. when Airbnb links you and a homeowner; it collects fees from the homeowner (and sometimes the renter) to carry out that service.

Imagine if, on the blockchain, there was an application owned by everyone who has a room to rent. When someone wants to rent a room, they go into the blockchain database, input all the criteria as you do with Airbnb, and it brings options for you to choose from.

The blockchain also has reviews (since the blockchain cannot be hacked and all data is validated, there wouldn’t be any fake reviews as we see today). The blockchain also handles the contracting using a smart contract and handles the payment.

Cut out the middleman and create a real sharing economy

You might be wondering, but if the blockchain becomes the new middleman, wouldn’t we have to pay for that?

No. The blockchain is a network of computers. It’s not in 1 place. No one person owns the blockchain.

Reclaiming our Data

As we exist in the digital age, we create data. From our social media accounts to bank accounts, to government ID, which we use to authenticate our identity when we sign up to certain platforms, the maps app we use, etc., our data is scattered around, and we DO NOT OWN it. We do not own the data we generate. This is why companies like Facebook, YouTube, Twitter, etc., can use our data to sell us ads and sometimes even sell our data directly to companies.

There are companies working on creating a box that contains & collects all the data that belongs to you that’s currently available anywhere online. The box will only give the piece of information required to do something. We do some transactions where the seller doesn’t even need to know who we are, but in today’s world, we give them that data anyways. This box will only give such a company the info needed to complete that transaction. The box will exist on the blockchain & allow you to lease your data out to companies who need it if you want to. So, you can own & monetize your data! Or keep it private if you want.

Intellectual Property

A popular example of this is in NFTs.

Another example would be in music. If you only pay for Spotify to listen to ONE artist, do you think all your Spotify subscription went to that artist? No.

At the end of every month, Spotify totals all the streams for that month and apportions it to every artist according to how many streams they contributed to the total.

So, let’s say Spotify as a platform got 10 billion streams and made $1 billion in 1 month. In that month, Drake contributed 1 billion streams (cos he’s Drake), Taylor Swift brought in like 900m, Billie Eilish, Doja Cat, Olivia Rodrigo, etc., pull in another 1 billion, and your fave alternative artist only pull in like 1,000 streams in total.

Drake would get 10% of the revenue Spotify got that month, while your fave gets like 0.00001% of the total pie, which is $100 in that month or $1,200 every year. Even if those 1,000 streams came from 1,000 people who only paid Spotify to listen to that 1 artist in that month, they’d still probably get $100.

What does the blockchain do?

Artists can upload their songs to a blockchain. If you want to listen to a song, you can pay directly to the artist using the blockchain. If you want to put the song in a movie, the IP rights are specified, so you make the required payments and get the rights to use the song in a movie.

These are just a few examples. Several companies are working on different ways to use Blockchain to solve different problems. Blockchain is still pretty young, and soon, we’ll see how much of it is used. This could be the next wave of the internet, or it could ultimately fail. In time we’ll see, but it’s exciting. If you want to learn more about the Blockchain revolution, the future potential for Blockchain, and where the world is going, you can check out this course.

Final Thoughts

I'm fascinated by the concept of a technology we don't know exists becoming a technology that in the future we don't know how we existed without it

If you are curious to learn more about the Basics of Blockchain and want to explore if there is a career there for you, you can check out this course on Blockchain Basics.