Before jumping to some technicality of this jargon, first let’s study how money changed from barter to gold, from gold to paper, and maybe soon to digital currency.
We are all familiar with our paper money thus far, which is in the form of USD, INR, or EUR. Every nation’s central bank issues this money in the form of a trust, securing the value represented by it.
The issue with this currency is that as more money is printed and pumped into the market, people start spending more, which raises demand and causes inflation.
In layman’s words, when more money is issued, its value declines and its purchasing power falls. The value of the same amount of money will decline with time. The amount of actual currency in circulation has decreased dramatically since the advent of digital payments like UPI, credit cards, debit cards, and others.
So what if the central bank start printing more digital money and keep track on the computer? That’s what happen now. We Trust bank< Bank Authority trust ledger on their computer. This creates problems such as:
1. Corruption: Because a central bank has control over the quantity of money and can print more of it, they have unrestricted influence over your money.
2. Poor management: Inflation is brought on by massive money printing to save other bankrupt businesses (Eg: 2008 Recession). The issue here is, when banks print more money, the value of people’s money decreases.
3. Control: You give the government complete control over your money, and they decide when you can withdraw money and whether it is legal tender or not (for example, during the demonetization process or the PMC fraud, when individuals are unable to withdraw their own, hard-earned money).
This brings us to our first decentralized money chapter!!
The BlockChain Technology and Bitcoin
The Story of blockchain starts in 2008 when an online document was published on the internet by a guy called Satoshi Nakamoto. Where it suggested a way to create digital money called Bitcoin and the following was the motive behind it
- No central authority
- Digital with transparent ledger
- Limited supply.
Bitcoin is a decentralized, transparent distributed ledger system. Since the majority of money is now digital, banks have their own private central ledger. Because of the authority they possess, they are able to create, alter, or destroy the facts.
Bitcoin is a transparent ledger where we can see all the transactions and account statements online. In fact, it also has privacy where we can know the balance of each account but we can’t know the name of the person holding the account.
Here an anonymous guy sent some bitcoins to another. We can see the amount, time, and date but the privacy of the person is still maintained because of the public address.
This ledger is known as a decentralised ledger since it is open to the public and not managed by a single central authority.
If you want to manipulate transactions and ledger on a blockchain, you need to take down multiple nodes that are working to maintain it. The best part is we can’t trace the person who manages it.
Blockchain is an open source anyone can be a part of maintaining the ledger and earn rewards for it. It can be Me, You, or any random person sitting at a corner of this world.
Here the ledger is approved by many nodes so if one wants to manipulate it, one won’t have the power to do it. No government or central bank has the right to freeze your account or create more bitcoins in the future.
What is Blockchain?
Let’s go to the details of blockchain!!
Blockchain is a digital ledger that has blocks consisting of transactions that will be connected to the previous block by the chain. It means every new block will have a part summary of the previous block and with the help of that summary, each block is connected.
So if you want to change the current block, you will have to change the summary and data of the previous block as well.
How does it work?
Blockchain tried to create a solution that is trusted by people. It can be created, verified and updated by us.
The foremost thing to create trust in blockchain, we require a peer-to-peer network. A computer is called a Node (Note: In blockchain Nodes are computer that works to mine data). With the help of the internet, Nodes can be connected with each other to share information and update the blockchain with the latest transactions.
The right to become a miner, and help blockchain with more nodes is not restricted, anyone from anywhere can be a part of and contribute to this network.
As anyone can be a part of this network, what if some bad nodes come and try to manipulate the data and transactions?
The god of Bitcoin (Aka. Satoshi Nakamoto) already gave us a solution called cryptography. Cryptography helps you to communicate with each other in a secure way without disclosing it to bad nodes. Cryptography helps you to verify the message and prove the authenticity of your message.
But how can we decide who will be a node and how can we mine data without rules?
There is one concept called a Consensus Algorithm. Consensus Algorithm: this is a kind of rule which is followed by everyone working on the network. There are multiple Consensus algorithms such as Proof of Work which is used by bitcoin and Proof of stake which is used by Ethereum and more.
Proof of work helps to add rules to the network on how to add new transactions and earn rewards. For mining, your node needs to solve some complicated math problem that requires a lot of computational power.
1. The more powerful Node you have the more speedily it can solve the problem and mine the data in the blockchain.
2. If you solve the problem first then you get right to mine data and earn rewards.
These rewards are given so, one person who uses so much energy to solve and mine data will have some rewards to help network in the future.
What if People don’t follow the rules or consensus algorithm?
Let’s get this with a small case study, Say suppose you are a miner with the best GPU power and start mining data. You will get some rewards to do that, which will be bitcoin. But what if a person wants to destroy this ledger?
So here when a bad node tries to destroy or manipulate the ledger,
1. They won’t receive any reward as bitcoin
2. They will lose all the energy they invested to destroy the network.
As earlier mentioned that blockchain is a block consisting of transaction which is connected to the previous block with a chain. So, if a bad node wants to manipulate the current block he needs to change all the past transactions which is impossible and he will be caught and removed from the race of mining data.
Blockchain was created to give power to a decentralized network where you have rights and no single person can change the rules. The blockchain can’t be manipulated because of the connection between all the previous blocks. If you hold a node to solve the computational power, you can earn rewards by contributing to the ledger.
Bitcoin was created as digital money which will work on blockchain and everyone will have access to the ledger to see what are the transactions going on, what are the current supply and all.
Blockchain helps to give power back to people with peer-to-peer networks, cryptography and other components which creates a trustable environment.
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