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BLOCK CHAIN, WAY MORE THAN BITCOIN


INTRODUCTION:

Block chains are incredibly popular now-a-days. But before understanding what is a block chain and how do they work, let's see how current digital finance system works.

Let's say that you buy a book on Amazon. You would immediately pay it using Paytm. Paytm charges your credit card. Credit card charges your bank account. Before it gets to the bank account of the seller there are couple of intermediaries involved. These intermediaries take transaction fee because they all are part of this buy.

Who is paying them?

Obviously, It's you!!

Unless if you are using a cash transaction, there will be no intermediaries. You give money to seller and you take the goods. There is no fee taken. It would be great if we have the same system on the internet.

Bitcoins does the same. Bitcoins are developed on a technology called blockchain.

But blockchain is way more than bitcoin. Blockchain technology is more attractive and probably the most disruptive technology in the future financial services industry.

WHAT IS A BLOCK CHAIN?

Block chain is a chain of blocks that contain information. It is an open distributed ledger.

"The blockchain is an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value."
Don & Alex Tapscott, authors Blockchain Revolution (2016)

Once some data has been recorded inside a block chain, it becomes very difficult to change it. Each block contains some Data, Hash of the block and Hash of the previous block.

DATA:

Data is the transactional information which will get stored in the block. Data that stores inside the block, depends on the type of the block chain

Example: Data inside a bitcoin block

000.JPG

HASH:

Hash is an encrypted value which identifies the block and all its content and it is always unique. Once the block has been created, it's hash is been calculated. Changing something inside the block will cause the hash to change. In other words, hash is very useful to detect the changes to the block. If the hash value changes, it will no longer be the same block.

HASH OF PREVIOUS BLOCK:                                                              

Every block stores the hash of the previous block. It effectively creates chain of blocks and this technique makes the block chain so secure.

00.jpg

HOW DOES IT WORK?

Here, we have a chain of 3 blocks. Each block has data, hash and hash of previous block. Block 3 points to block 2 and block 2 points to block 1. As the block 1 cannot point to previous block it doesn't have a previous block has value and this block is called as Genesis block.

11.jpg

 WHAT HAPPENS DURING DATA TAMPERING?

Let's say we tamper with the second block. This causes the hash of the block to change. In turn, that will make block 3 and all following blocks invalid because they no longer store the valid hash of previous block. So, changing a single block makes all the following blocks invalid.

PROOF OF WORK:

Using hashes is not enough to prevent tampering. Computers these days are fast and can calculate thousands of hashes per second. One could effectively tamper with the block and recalculate all the hashes of the other blocks to make the block chain valid again. So, to mitigate this, block chains have something called as Proof of Work.

It is a mechanism which slows down the creation of new block. In case of bitcoin, it takes about 10min to calculate the required proof of work and add a new block to the chain. This mechanism makes it very hard to tamper with the blocks, because if you tamper with one block, you need to recalculate the proof of work for all the following blocks. So, the security of the block chain comes from its creative use of hashing and the proof of work mechanism.

DECENTRALIZATION:

There is one more way that block chains secured themselves and that is by being distributive. Instead of using a central entity to manage chain, block chain uses a peer to peer network and everyone is allowed to join. When someone joins this network, they get the full copy of the block chain. The node can use this to verify that everything is set in order.

2.jpg

 Let's see what happens when someone creates a new block

New block is broadcast to every mining node in the network. Miners in the network approve the transaction if it is valid and adds this block to their block chain. All the nodes in this network creates consensus. They agree about what blocks are valid and which aren't. Blocks that are tampered with will be rejected by other nodes to the network. So, to successfully tamper with the block chain one need to tamper with all the blocks on the chain and redo the proof of work for each block and take control of more than 50% of the peer to peer network. Only then your tampered block will be accepted by everyone else. This is almost impossible to do.

CONCLUSION:

Block chains are constantly evolving. Bitcoins are just the beginning of block chains. In the future, the block chains that manage and verify online data could enable us to launch companies that entirely run by algorithms which means making self-driving cars safer, help us protect our online identities and even track the billions of devices connected on internet of things. These innovations will change our lives forever and it's all just beginning.

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