A Blockchain is a record or you can say a ledger of all bitcoin transactions that has ever taken place, either a sale or a purchase.
It is similar to a ledger that a bank would maintain to record all transactions of their customers for future reference. However, that’s where the similarity ends. In a bank, the ledger is controlled by the bank. Only the bank can see the transactions and documentation. Banks have its own security and access system to secure the ledger and other transactions. They can alter any transaction and have access to it.
But in Blockchain system, a copy of the ledger file is shared between thousands of contributors globally, also called miners. Even you can become a miner by simply downloading the open source bitcoin software from the internet. New Bitcoin transactions are added in the Blockchain by a consensus of a majority of the miners, explained below. People do mining because they receive new created bitcoins in return for their efforts and complex calculations by their hardware mining computers/devices. Once a transaction is undertaken in the Blockchain, it can never be erased or modified.
Why is it called as Blockchain?
Imagine a physical ledger we used to maintain accounting documentation before computers. It used to a register. At the end of a fixed period, for example, a day, an accountant would typically check all the documentation, note the balances and then sign at the end of the page. This would mean that transactions till this page are now fixed and no new entries can be made in the past.
Similarly, in the Blockchain, this phase is fixed at around 10 minutes. Miners collect all the bitcoin transactions globally executed in the last 10 minutes. They then record it together which is called a block.
In our physical ledger example above, each page is linked with the previous page with running totals. Similarly, in the Blockchain, each block is also linked with the previous block creating a chain of blocks and hence the name.
How Blockchain works?
It would feel common sense that the only way to secure a ledger would be to trust a central authority like a bank or a credit card company. However, the Blockchain is an invention to securely maintain such a ledger without any such central authority but with a democracy in which miners win to do the right thing.
So miners collect all the transactions in the bitcoin network over the last 10 minutes. The miners then enter into a competition and a winning miner is declared. The miner who wins, creates the new block with all the new transactions. All the other miners then update their Blockchain file to this new version and the competition starts all over again. The miner who wins is determined based on 2 conditions.
First, the miner who has the most common version of the Blockchain. So for example, if a miner cheats and enters a wrong bitcoin transaction to benefit himself, he will have a minority version of the Blockchain as no one else will have that transaction in their version. So he will lose.
Second, the first miner who will solve a complex mathematical puzzle will win. Solving this mathematical problem is a combination of luck and computing power. For example, in a lottery, the more tickets you have (computing power) the more your chances of winning. However, that does not guarantee a win. The miner with even 1 lottery ticket (very low computing power) also has a chance, though much lower than the miner with say, a 1,000 tickets (high computing power).
So the miner with the most common version of the Blockchain and who first solves the mathematical puzzle wins, updates the chain and in return gets a reward of newly created bitcoins. Currently this reward is 25 bitcoins every 10 minutes. At today’s rate of about Rs. 28,000 per bitcoin, that is about Rs.7.25 lacs.
Why are financial institutions excited about the Blockchain?
For example, Before the Internet, to provide voice calling between India and the US would require a multibillion dollar company like AT&T to lay its own cable between the 2 countries and use it. Calls used to be very expensive because this infrastructure would be very expensive. With the Internet, a company like Skype can simply make an app and use the Internet to do voice calls. And now, forget voice calls, even video calls are free.
Similarly, banks, credit card companies and so on have to deploy infrastructure to secure their ledgers. This infrastructure has to be created and maintained by each company separately. And it is very expensive to do so.
Similarly, like Internet these companies now have the option to record their transactions on the Blockchain at a very low cost. These transactions are recorded for lifetime and they do not have to worry about its security. Hence, they have the opportunity to save billions of dollars through this.
Hence, they are excited about the technology looking to the potential it has for the financial ecosystem.
Private vs Public Blockchain?
You must have also heard about few financial institutions who wants to create their own private Blockchain. A private Blockchain is a bitcoin style ledger but which does not use the bitcoin network. Also, it does not use bitcoins as its token to record transactions. They want to do this because they think this could be a better and cheaper way to secure databases than what financial institutions nowadays do.
But the public Blockchain which runs on bitcoins is quiet cheaper and much efficient and secure. Private Blockchains are similar to private intranets. Intranets have failed and out of date, everyone has realized that it is far better to do everything on the ‘public’ Internet.
I think it will play out exactly like this with private Blockchains. In a short time, everyone will realize it is cheaper and ‘more secure’ to use the public bitcoin Blockchain.
Will Blockchain work without bitcoin?
The Blockchain powered by bitcoin will work with bitcoin. And this is the biggest and most secure Blockchain the world currently has. To talk Blockchain and bitcoin separately, as is the case recently, is a misconception. Blockchain to be used for other applications, bitcoins must succeed in its original Purpose first. For miners to secure the Blockchain, the only encouragement they get is Bitcoins. For mining power to keep growing, bitcoins demand and eventually its price should keep increasing in value over time. Which means bitcoins needs to continue to fulfil its potential as a global currency.