For every monetary transaction that we do in our day to day lives, we have three parties involved namely the giver, the receiver, and a central authority who authorizes our transaction. To trust any transaction, we are dependent on a third party to validate our transaction. The first hurdle to cross in any transaction is trust. To trust any transaction be it buying a piece of property or transferring money to the bank we have the three people involved. The moment a third part says the Government or Bank is involved the costs go high due to validation. Typically, there are multiple third parties like a legal, bank, Government is involved to make a valid transaction. Blockchain is a technology with decentralized secure transactions and avoids middlemen. Blockchain is a technology created to decentralize any transaction involving currencies, land registration, the supply chain in manufacturing, etc.
Blockchain is a solution that involves three different aspects of technology namely game theory, cryptographic science, and software engineering. The objective of blockchain technology is to ensure immutable, anonymous, secure transactions that ensure privacy and is typically done in a decentralized manner. Game theory is the study of mathematical models that helps in resolving conflicts between different parties involved in the transaction. Cryptographic science involves the cryptographic algorithms to secure a transaction and the software engineering enables the application that delivers the transaction involving cryptographic science and game theory. Decentralization is critical to any blockchain technology and therefore uses a distributed ledger to do the transaction. Let us take a few examples of blockchain examples that one can use it in our day to day lives which can possibly help us.
How does a blockchain work?
In short blockchain can be defined as distributed ledger of transactions stored as immutable blocks connected to one another forming a chain, the validity of which, has been agreed by peers on a decentralized network secured by cryptography.
There are several components in a blockchain;
Node: The owner of the block
Block: Contains bundle of transactions
Miners: Create blocks and get rewarded by transaction fees.
Transaction Value: A percentage of the transaction value goes to the miner.
There are five steps in a transaction namely the following
Initiate the transaction, broadcast the transaction, validate the transaction, confirm and propagate the transaction.
The above five steps are done for any blockchain based transaction. To illustrate the same let us take an example of Bank Transaction and see how possibly a blockchain will work.
Assume that a transfer of money happens from Person A to Person B. Person A log into his Net Banking App and identified Person B who is holding an account in another Bank. Person A transfers the money using IMPS or NEFT framework. The banking software verifies Person B’s account and gets the money credited. The update of the transaction happens in both banks as the banks have two different ledgers. Person A’saccount gets deducted with the money and Person B account gets credited with the money. The entire control of the transaction is with the banks which acts as a third party and possibly a transaction fee is charged. Now in a blockchain based transaction the same thing happens in the following manner. Person A wants to transfer money to Person B. Transaction is represented online as a block. Block gets distributed across the network. Network verifies that the transaction is valid. Block is added to the network and a permanent record is created for transfer of Person A’s ownership of the money to Person B. The above transaction achieves the following
- Autonomy: It does not have interference from a third party as the entire transaction is carried out without help from the banks. This leads to a reduction in transaction costs.
- Transparency: The documents are encrypted, and it is available over the public ledger which can be seen by people who are authorized to see the transaction.
- Backup: The transaction is recorded on a network of computers and therefore a single point of failure is completely avoided. This entire transaction is very transparent.
- Savings: There is no transaction cost to the banks/any third party involved.
- Reduction in Errors: Chances of errors are minimized.
This is how every blockchain transaction happens for a given transaction. Blockchain helps in a peer to peer transactions without the involvement of a central authority.
There is a typical notion that blockchain and bitcoin are the same. Blockchain is a technology and Bitcoin is one of the applications enabled by Blockchain. The Blockchain technology was created by a whitepaper published by Satoshi in 2009 and that became the enabler for the blockchain technology. Here are few more examples of Blockchain below
Pharma Drug Supply Chain: Drugs are manufactured and shipped to the distributors. The distributors are delivering the same to the retailers. The counterfeit drugs are the biggest problem in a Drug supply chain. Novartis, one of the largest drug manufacturers in the world is experimenting with blockchain where, the time a drug is created, a ledger is created which is vetted by various parties in the supply chain and the retailer who gets the final right to deliver the drug to the customer vets the validity of the drug. Every Drug can be validated by the customer from the time of manufacture, the time it reached the distributor, and wherever the Drug changed hands to say hospitals/patients are everything recorded in a distributed ledger. There is no central authority and each person involved in the transaction vets the same. This helps for better compliance in the Drug Supply Chain.
Cryptocurrency: The most widely used blockchain application is the cryptocurrency and there are thousands of cryptocurrencies in supply. It is a digital currency and the holder of the currency is the owner. Whereas conventional currency (also known as FIAT Currency) is printed and Digital Currency is generated. The Digital Currency value is associated with the holder and the value of the currency depends on the demand for the currency. The demand for the currency depends on the value associated with the currency. The value of the currency can be associated with the price of oil, the price of groceries, and so on. Unlike the FIAT currency, Digital currency does not have a Government regulator. Examples of Cryptocurrency are Bitcoin, Ethereum, etc.
Media: The biggest problem in the Digital Music industry is the ownership of music and copyrights are abused a lot. The blockchain technology can be used to build accurate ownership rights. Explicit transfer of artist royalty fees can be recorded.
Governance: There are a lot of applications that require Governance and verifiability. A typical example is buying expensive gold or expensive car spare parts, where one would like to track from the creation or to the manufacturing time and to the point the commodity reaches the consumer. This is usually done by a central party. Blockchain avoids expensive Governance processes and therefore helps to build robust Governance without involving third parties.
Conclusion: One must study the lifecycle of an application and see if Blockchain can be used. A simple database transaction update in multiple places could be a cheaper option but the need for transparency, accountability and to eliminate the third parties in a transaction can be reasons to choose Blockchain technology. In short, there is always a trade-off between where to use the blockchain and where not to use the blockchain.