In this article, I will Explain blockchain in the simplest way that even a 4-year-old will understand or at least, will try to get a grasp.
Everyone has been talking about blockchain lately and it seems we all know what it is – except you, but what exactly is Blockchain?
Even if you’re hiding under a rock, I am sure you’d have heard of the word Blockchain
It’s time to break them down. Blockchain 101: where it all begins
Who Invented Blockchain?
Satoshi Nakamoto launched the first blockchain in 2009; however, Blockchain technology was first outlined in 1991 by Stuart Haber and W. Scott Stornetta, two mathematicians who wanted to implement a system where document timestamps could not be tampered with. In the late 1990s, cypherpunk Nick Szabo proposed using a blockchain to secure a digital payments system, known as bit gold (which was never implemented).
A brief history of blockchain:
A cryptographically secured chain of blocks is described for the first time by Stuart Haber and W Scott Stornetta
Computer scientist Nick Szabo works on ‘bit gold’, a decentralized digital currency
Stefan Konst publishes his theory of cryptographically secured chains, plus ideas for implementation
Developer(s) working under the pseudonym Satoshi Nakamoto released a white paper establishing the model for a blockchain
Nakamoto implements the first blockchain as the public ledger for transactions made using bitcoin
Blockchain technology is separated from the currency and its potential for other financial use, and inter-organizational transactions are explored. Blockchain 2.0 is born, referring to applications beyond currency
The Ethereum blockchain system introduces computer programs into the blocks, representing financial instruments such as bonds. These become known as smart contracts.
What is Blockchain?
The easiest way to explain it is by saying that: Blockchain is a database that is not managed by a single company. Instead, it’s managed by multiple people, making it a peer-to-peer database and thereby, making it decentralized.
But why do we need something this complex?
To build trust.
Everyone is skeptical of each other when it comes to money especially transacting with strangers.
But we have other platforms that build trust between 2 strange parties and don’t resolve this complex stuff – you said!
See here to read: Escrow services: How it works, benefits, and 8 Escrow payment solutions you can use in Nigeria.
Yes, you’re right but Blockchain technology is much more than just transacting, there is a lot more juice to it which I will unveil as we thread on.
Let’s use the following scenario as an example
Imagine a friend of yours, traveling around the world, asks you for $10. You say yes and you open your Bank’s app and make the transfer. You text your friend saying that you wired him the money and that he’ll get it soon. But, did you see what happened behind the scenes?
What happens behind the scenes of bank transactions?
What happened was that you relied on your bank as the mediator of that transaction. The moment you click “OK”, the Bank registers the Amount and Date and places it in their internal register stating: “You transferred X amount to Y person the day Z”
Your bank sends a code to the recipient’s (your friend) bank notifying them about the transfer via the SWIFT (Society for worldwide interbank financial Telecommunication) network.
Note: This also comes with challenges
The challenges of wiring money
The challenge of wiring money from Person X to Person Y has a cost.
What does this cost cover?
The mediator’s infrastructure costs. Because: anytime you wire money to someone, the Bank has to keep paying for their servers’ power, human power (workers), money costs (building tax or rentage, procurement cost), etc.
Understanding the problem of money transfer
You might say “But, it costs me nothing to handle $50 to my friend in the physical, why can’t I replicate the same online?” you see my friend, there is a saying that goes thus “Nothing is free even in Freetown” there is a cost for everything. Banks that do a free transfer to other banks as a business model actually brunt the cost with other sources of revenue or with funds raised from VC (venture capital), especially for a fintech startup. So financial institutions take charges to compensate for the service they render as a mediator.
You might also ask; why can’t I send the money directly to my friend?
You can’t because:
- There is no infrastructure in place for that and even if there is, the creator or developer will have to deduct fees perhaps transaction charges as a means to keep the system up and running like financial institutions do anytime we perform transactions. More on these in my next blog post.
- Trust issues: we don’t only wire money just to our friends; we buy things from random people too and that’s why you need other middle entities like SWIFT, and Blockchain to build trust in every transaction we make and mediate each one of those transactions we make.
And this is what the Blockchain technology aims to address
Just Like SWIFT and other middle entities, The Blockchain solution was built to serve as a mediator in every transaction we make: to build trust.
Back to our trust challenge right?
How does Blockchain technology build trust among its users?
Blockchain builds trust by keeping a record of every transaction organized in “blocks” and all the “blocks” in a “chain”. And makes these records accessible to the general public anyone can access the data stored on the blockchain, unlike other middle entities whose transactions are privy to the public.
Note: No one can edit the data stored on the blockchain, I repeat no one can edit or manipulate data stored on the blockchain and the identities of the transacting parties are privy.
It is also imperative I inform you that the only acceptable currencies in blockchain transactions are cryptocurrencies registered on the Blockchain network. E.g. Bitcoin, Ethereum, ripple e.t.c.
The second generation
Other blockchains include those that run the several hundred “altcoins” – other similar currency projects with different rules – as well as truly different applications, such as:
- Ethereum: the second-largest blockchain implementation after bitcoin. Ethereum distributes a currency called ether, but also allows for the storage and operation of computer code, allowing for smart contracts.
- Ripple: a real-time gross settlement system, currency exchange, and remittance network, based on a public ledger.
You might also wonder or want to ask if there is another use to the blockchain solution aside from wiring money. Yes there are
Types of Blockchain
- Public blockchain
- Private Blockchain
- Hybrid blockchain
- Public Blockchain
A public blockchain is a type of blockchain that is free, permissionless, and open to all. With a public blockchain, anyone can join the network and have identical privileges to view, validating information or transaction within the network. The ledger is public to everyone and the transactions are viewable by everyone within the network, but the identities of the transacting parties are never revealed.
One of the best and largest examples of a public blockchain is Bitcoin which uses some mechanism to incentivize participating parties. This in turn increases the number of participants in the network and makes it more robust. In this aspect, it is like the Internet where anyone can join the open network and participate by creating new content or improving upon existing ones.
- Private Blockchain
A private blockchain is a blockchain technology that is privy to the public. The access to a private blockchain will be limited to the parties involved in the creation of that network, or those granted access to it by the network starters. Only a selected group of members within the network have the privileges to view, modify, and authorize transactions. In this aspect, it is like an intranet. It is also decentralized, immutable, transparent, and highly secure like a public blockchain.
Some examples of a private blockchain are Quorum, “an Ethereum-based distributed ledger protocol with transaction/ contract privacy and new consensus mechanisms” created by JP Morgan; Corda, “an open-source blockchain project designed for businesses to transact directly between one another, in strict privacy”; Hyperledger, which is an “open-source collaborative effort created to advance cross-industry blockchain technologies”. Hyperledger is hosted by the Linux Foundation and includes leaders in finance, banking, supply chains, manufacturing, and technology.
- Hybrid Blockchain
The third type of blockchain that’s not very common is the hybrid/consortium blockchain. A hybrid blockchain provides the best of both worlds: a public blockchain that enables high transaction speeds and a private blockchain that ensures security through access restrictions.
Hybrid blockchains offer the benefits of both public and private blockchains. They consist of the public blockchain (that all participants are a part of) and a private network that restricts participation to selected members. Hybrid provides a blockchain solution that is a better fit for highly regulated enterprises and governments as it enables them to have the flexibility and control over what data is kept private versus that shared on a public ledger. These organizations also require faster transaction times, security, and auditability features that cannot always be provided by public blockchains.
A hybrid blockchain provides most of the benefits of a private blockchain like efficiency and transaction privacy, without giving operational control to only one entity. It is an idea similar to trusting a council of elders. The council members are known trusted entities and they can decide who has read access to the blockchain ledger. Consortium blockchain platforms have the same advantages as a private blockchain but operate under the leadership of a group instead of a single entity. This platform is suited for collaboration between organizations.
Other use of blockchain aside from Banking and Finance
New Use Cases what can we do with Blockchain other than wiring money?
- NFT marketplaces. Read more on NFTs here: NFT explained to a 4-year-old
- Personal identity security: blockchain users can store their personal data on the blockchain network and secure it with a personal code to restrict other users from accessing it.
- Secure sharing of medical data
Healthcare providers can leverage blockchain to securely store their patients’ medical records. When a medical record is generated and signed, it can be written into the blockchain, which provides patients with the proof and confidence that the record cannot be changed. These personal health records could be encoded and stored on the blockchain with a private key, so that they are only accessible by certain individuals, thereby ensuring privacy.
- Supply chain and logistics monitoring:
Just like the IBM food trust blockchain, suppliers can make use of blockchain to record the origins of materials that they have purchased.
What is IBM Food Trust Blockchain and how does it work?
The IBM Food Trust blockchain is a revolutionary piece of technology that allows brands to trace the journey their food products take to get to the end consumer.
In the past, when an outbreak of E. coli or listeria, or salmonella hits a brand’s food product, it has taken weeks to discover how the product became contaminated. This not only causes customers distress but can also lead to financial loss for businesses, as well as sick people who may have lost faith in a brand’s ability to provide healthy and safe products.
By using blockchain technology, brands are able to trace their food products from origin all the way through each stop it makes on their way to end consumers. When any contamination is suspected, brands are able to quickly track their products all the way back through each stop back to its origin. This allows them not only to discover where the problem occurred but also what else that product may have come in contact with during its journey. This speeds up the identification process for contaminated foods and saves lives in the process.
blockchain could be used to facilitate a modern voting system. Voting with blockchain carries the potential to eliminate election fraud and boost voter turnout. Using blockchain in this way would make votes nearly impossible to tamper with. The blockchain protocol would also maintain transparency in the electoral process, reducing the personnel needed to conduct an election and providing officials with nearly instant results. This would eliminate the need for recounts or any real concern that fraud might threaten the election.
Difference between Blockchain and other middle entities like SWIFT.
|Governance||Decentralized data network.
Blockchain is a database that is not managed by a single company. Instead, it’s managed by multiple people, making it a peer-to-peer database and thereby, making it decentralized.
|Centralized data network. Banks, SWIFT, and other middle entities are managed by a single company.|
Know your customer.
|Anyone or anything can participate in Bitcoin’s network with no identification. In theory, even an entity equipped with artificial intelligence could participate.||Bank accounts and other banking products require “Know Your Customer” (KYC) procedures. This means it is legally required for banks to record a customer’s identification prior to opening an account.|
|Ease of Transfer||An internet connection and a mobile phone are the minimum requirements.||Government-issued identification, a bank account, and a mobile phone are the minimum requirements for digital transfers.|
|Privacy.||Bitcoin can be as private as the user wishes. All Bitcoin is traceable but it is impossible to establish who has ownership of Bitcoin if it was purchased anonymously. If Bitcoin is purchased on a KYC exchange then the Bitcoin is directly tied to the holder of the KYC exchange account.||Bank account information is stored on the bank’s private servers and held by the client. Bank account privacy is limited to how secure the bank’s servers are and how well the individual user secures their own information. If the bank’s servers were to be compromised then the individual’s account would be as well.|
|Security||The larger the Bitcoin network grows the more secure it gets. The level of security a Bitcoin holder has with their own Bitcoin is entirely up to them. For this reason, it is recommended that people use cold storage for larger quantities of Bitcoin or any amount that is intended to be held for a long period of time.||Assuming the client practices solid internet security measures like using secure passwords and two-factor authentication, a bank account’s information is only as secure as the bank’s server that contains client account information.|
|Approved transaction||The Bitcoin network itself does not dictate how Bitcoin is used in any shape or form. Users can transact Bitcoin how they see fit but should also adhere to the guidelines of their country or region.||Banks reserve the right to deny transactions for a variety of reasons. Banks also reserve the right to freeze accounts. If your bank notices purchases in unusual locations or for unusual items they can be denied.|
|Transaction speed.||There’s nothing like delayed gratification or unremitted transaction in blockchain technology because it is a borderless network, with no region, country, or continent differentiation. Blockchain makes you a Davos man.||Unlike what we experience with other middle entities where it (can) take days to remit transfer of funds depending on the participating countries and the mode of transaction.
|Account seizure.||If Blockchain is used anonymously governments would have a hard time tracking it down to seize it.||Due to KYC laws, governments can easily track people’s bank accounts and seize the assets within them for a variety of reasons.|
|Transfer fee||This is known as the gas fee in the blockchain. And it varies not according to the participating countries, regions, or continents but according to gas prices in reality.||Card payments: This fee varies based on the card and is not paid by the user directly. Fees are paid to the payment processors by stores and are usually charged per transaction. The effect of this fee can sometimes make the cost of goods and services rise.
Checks: can cost between $1 and $30 depending on your bank.
Wire: Outgoing domestic wire transfers can cost as much as $25. Outgoing international wire transfers can cost as much as $45.
Advantages and limitations of Blockchain technology
Blockchain technology is a revolutionary idea, and it’s one that has the potential to impact many different industries. It’s important to understand what blockchain is in order to be able to make an informed decision about whether or not it’s right for your business, so here are some pros and cons of using blockchain:
Advantages of Blockchain
– Improved accuracy by removing human involvement in verification
– Cost reductions by eliminating third-party verification
– Decentralization makes it harder to tamper with
– Transactions are secure, private, and efficient
– Transparent technology
– Provides a banking alternative and a way to secure personal information for citizens of countries with unstable or underdeveloped governments
Disadvantages/limitations of Blockchain
– Significant technology cost associated with mining bitcoin
– Low transactions per second
– History of use in illicit activities, such as on the dark web
– Regulation varies by jurisdiction and remains uncertain
– Data storage limitations
Benefits of Blockchain
Blockchain technology has several benefits that make it appealing to businesses and customers alike. Blockchain is promising because it:
- Is secure: Before being recorded in the blockchain, transactions are approved by consensus, encrypted, and linked to the previous block. Malicious actors cannot change this data because these transactions are then stored across a network of computers, rather than a centralized database. Blockchain can help prevent fraud in industries like supply chain, financial services, legal, government, and healthcare due to these advantages.
- Has worldwide adoption: Blockchain has been adopted worldwide and has the support of many investors in every industry.
- Is automated: Operations are fully automated through software. Private companies need not run any operations.
- Is open: Open source technology is used in the development of blockchain. The open-source community carries out its operations.
- Uses a distributed architecture: Records are stored and maintained in all nodes of the network, which makes it distributed mode. If any node goes down, it can be retrieved from the nearby node.
- Is Transparent: As a distributed ledger, Blockchain presents a unique opportunity for transparency. The data on the blockchain is available to anyone who wants it—you can even view Bitcoin’s code and data on sites like Github and Sourceforge. This means that users essentially control their own financial records, without having to rely on a third party. It also means that you can easily audit your own cryptocurrency wallet or make sure you’re only engaging with trustworthy organizations.
- Helps in Banking the Unbanked: A huge number of people in developing countries do not have access to traditional banking systems. They’re forced to rely entirely on cash for all of their financial transactions, which makes saving money nearly impossible. Using blockchain-based cryptocurrencies like Bitcoin allows people to access banking services without having to go through the time-consuming and paperwork-heavy process of opening up a bank account at a local branch, which can be more difficult in rural areas where banks may not exist at all.
- Low transaction cost: The greatest benefit of blockchain is the reduced transaction costs.
Traditionally, you would have many different databases (ledgers) that had to be reconciled with each other and a third-party intermediary who had to make sure everything was correct. With blockchain, all parties can access the same database, eliminating the need for reconciliation and third-party intermediaries. This also helps eliminate fraud because there’s only one ledger that cannot be tampered with.
- Swift transaction: Blockchain is also faster than traditional ways of completing transactions because it does away with a lot of the paperwork and paper-heavy processes by streamlining them. It’s more efficient and saves time.
- Lastly, it is efficient, auditable, and traceable: If you have a complex supply chain, it can be really difficult to trace back an item to its source. With blockchain’s audit trail feature, you can see exactly where your items came from and every step they took on their journey from the sourcing of raw material to production all the way through transportation to delivery. IBM already does this.
As mentioned before, the Blockchain isn’t a server running by one single company; instead, it runs on multiple PCs of multiple people. People spread across the world. It keeps a record of every transaction, making it possible to track every transaction
And how do we know every transaction is real? We know every transaction is real because it keeps every “transaction data” in a “chain” of blocks that are processed and verified. But who runs the verification? How can we trust it? And, that’s the topic for our next blog.
Investopedia: Blockchain Explained
Cloud credential council: What Exactly Is Blockchain?
ICAEW: History of blockchain