100DaysOfBlockchain: #2 - How Transactions Work and Blockchain Features
In the previous blog post we discussed the importance of Blockchain in terms of transactions.
I will start but giving you a real-life example while explaning transactions in the current banking system. I am currently living in Lithuania but my family lives in Spain. Imagine myself transferring money every now and then to my family based in Spain. For me to do this, I need to access (or go to) my bank which will act as a third party and send the money to my parents. With a bit of luck my family will receive the money in a couple of hours. With less luck, it will happen between 2 to 5 days.
The time that takes for someone to make a transaction (in 2021!) cannot be that long. That is the first issue that we currently have in our banking system. However, there are way more issues than just that one:
- Because we are using a third party, in this case the bank, the transaction cost is actually very high (plus other costs added to the transaction, like cross-border fees that are accounted).
- It is fairly easy for hackers to commit fraud through online banking systems, resulting in personal account's hacking too.
We can now take the same previous example, and try to see how Blockchain technology can improve the transaction scenario. From my wallet I can initiate a transaction towards my family memebers with their public address (this is like a bank account number, as reference). The transaction will be instantly made and my family does not have to wait hours or even days to receive it.
We discussed in day #1 that blockchain is a decentralized ledger. If you are not familiar with this term, a ledger is basically - in simple words - a balance that is computer by the bank at the end of a period of time (e.g. end of a business day) which inlcudes all withdraws and deposits to calculate the amount of money in a particular bank account. Eventually, this becomes what we so know the opening balance in that particular bank account the next morning, which remains the same all day until it is revise again at the end of the business day. As opposite to this, Blockchain comprises of a single ledger which is shared among all the participants.
In practice, when a new transaction is requested, it is then broadcasted to a network of peer-to-peer computers which are scattered across the world (see it as various miners which are part of the network). This network of computers then (each of them) solves equations to confirm the validity of the transaction. Once validated, the transactioin becomes a part of the new block created. This block is then chained together with the other blocks from the Blockchain creating a long history of all transactionis that are permanent. This is how - basically - a new transaction is completed.
We can divide the Blockchain transaction in four major features:
Cryptographically sealed: it becomes impossible to delete, edit or copy already created blocks and put it on network. The cryptography algorithm alters the readable text/data (plaintext) to a non-readable format (ciphertext) and back to readable text/data (encription-decription). I hope this concept is easy to understand. Majority of people don't really see how the use cryptography on a day to day basis. However, they do. If you use any sort of messaging app like WhatsApp, Messenger, Telegram, etc. they are using encriptions. Chryptography ensures high level of robustness and trust. It is almost impossible for the chain to faail. Even if a failure occurs, the Blockchain remains available. The data stored in a Blockchain is immutable.
Distributed ledger: all participants are independently validating information without a centralized authority. Even if one node fails, the remaining nodes continue to operate, ensuring no disruption.
Consensus-based: a transaction can only happen if all the parties in the network approve it.
Decentralized network: it eliminated the need for central authorities to run the network. The entire control is at the hands of individual users. This makes the entire system fair and secure.
What other issues did I miss in this post that are being solved by Blockchain technologies?