Blockchain and Bitcoins 101 – Part 3
Continued From – Blockchain and Bitcoins 101 – Part 2
Hash cash Proof of work allow miners to give a proof of their work so that they can be rewarded.
Okay now we know there are miners, there are hardware requirements for faster mining, miners work is verified and they are rewarded accordingly. Fair enough!
But what is the work? The work is solving bitcoin math. The entire process of bitcoin mining is like a game. It is like solving a challenge. We will come to it later. Understanding the blockchain technology is most important, before going into the math.
Consider this example:
John and Smith are friends. John wants to sell a unique photograph to Smith. He will go to Smith and sell it to him. He doesn’t require any other persons help or involvement of any kind to give this photograph to Smith. Since smith got the photograph he knows that the unique copy is with him now. John had it and now it is given to Smith. Simple. Smith can resell it to anybody else, as he may wish.
Now if there was no photograph but a digital photo. How would you ensure that it was unique and no other copy of it existed? May be John could sell the photo to Smith and also Cathy. There is no guarantee that what Smith bought was unique. John could be doing business making false claims.
To avoid this there must be a third person who can monitor and ensure that nobody gets cheated.
Here comes record keeping in the picture.
For assurance that only Smith received this image and that the image was not copied and given to someone else, we can maintain a record keeping book. When John sells the photo to Smith there will be an entry made into the record book that the original photo has been sold.
Who will maintain this record book? a third person can! But how do we trust the third person? Also, one of the most important feature of a bitcoin is its nature of being decentralized.
The best possible solution to this, keeping fair game in mind, was to allow all the participants to maintain the record keeping book, in a distributed manner.
That is exactly what is done in blockchain technology. Every buyer and seller will have a copy of the record book. On addition of every new transaction, the record book will be updated. Note that everyone’s record book will be updated.
Now as everyone has a record book, there are less chances of fake transactions getting mentioned into it. Everyone will not approve of the suspicious entry.
This is blockchain – the distributed record book – the public ledger.
Note that blockchain is largely dependent on verifiers. Only if the transaction is verified it will be added in the record book.
Here the photo could very well be bitcoins!
Bitcoin is a record of transaction. When we say bitcoin, please don’t imagine anything like a physical currency. It is a record, information of a transaction.
Everyone who has a copy of the record book maintains it by validating the transactions. Here everyone matters. No central authority. The transactions are listed in a chain like fashion, hence the name blockchain. Who lists the transactions? We will see in the next part.
History of any bitcoin transaction can be traced back to the point where the bitcoins were produced. Blockchain implements multiversion currency control (MVCC).
India’s first transaction on blockchain
ICICI is the first bank in the country that has successfully executed transactions in international trade finance using blockchain technology in partnership with Emirates NBD.
Remember you need a blockchain for cryptocurrencies to work!
Next in series – Blockchain and Bitcoins 101 – Part 4