It’s 2022, and you still can’t wrap your head around the concept of digital currencies or ‘Crypto’ and the underlying Blockchain Technology.
You are not alone. It’s been 13 years since the anonymous gentleman (possibly gentlemen) Satoshi Nakamoto laid down the workings of the first crypto, Bitcoin, in his/their 2009 whitepaper.
Since then, the crypto space has grown exponentially, and Blockchain Technology has spurned off a slew of narratives – other practical use cases aside from digital currency. These range from DeFi to NFT to the Metaverse.
You know it’s the next big thing, and you may have probably dabbled into crypto in one way or the other.
You probably joined in conversations where terminologies like ZK-rollups, Sharding, and Decentralized Ledger Technology were used, and you nodded sagely, pretending to understand.
But like most of us, you secretly wish you could wrap your head around the Blockchain thingy and how it exactly works.
It all seems incredibly complex and confusing, the sole preserve of programmers and mathematicians.
However, without a single math bone in my body, I set out to learn all I could about this new technology. And I guess the best way to learn something is to write about it (or at least attempt to).
So, I’m going to try and break down complex terminologies and concepts so that my 6-year old and I can understand. I’ll employ the most straightforward analogy to make things clearer as much as possible.
You must bear with me—I’m learning, just like you.
So let’s dive in together.
First, the basics.
What is Blockchain?
Imagine a community. They decide to do away with physical cash as a means of exchange. Instead, they record all financial transactions in a large notebook or ledger kept and maintained by Oga Sabinus. Everyone’s account balances are carefully recorded and updated after each transaction. When Amaka buys yam from Emeka for N10, Oga Sabiunus subtracts this amount from Amaka’s balance of N100 and registers her new balance as N90. he then adds N10 to Emekas’s previous balance of N500, making it N510.
This worked for a while, then one day, Oga Sabinus decided to start charging a fee for his services. That was not all; he started getting corrupt small-small, taking bribes, and adding money for people at will. He even added N50 to Nkechi, one fine smallie he’s been eyeing.
People found out and the village was in an uproar. They kicked out Oga Sabinus and banished him from the land. But then, who can be trustworthy enough to keep the communal ledger?
A wise man solved the problem brilliantly.
Everyone in the community will have their notebook or ledger and record each transaction publicly as it takes place. That way, nothing on it can be manipulated. Everybody has access to the records, and periodically, all will gather at the village square and compare records for discrepancies. Say you take Andrews N60 and add it to your balance in your copy of the ledger when there was no transaction between you, other people will, of course, disagree with your records, and you may end up with a mass beating for trying to be smart.
You get the gist?
This rough analogy describes how decentralized ledger technology (DLT) works.
Don’t be confused by this new term; DLT refers to a digital database across multiple locations. It doesn’t require a central authority to authorize transactions.
Blockchain is simply a type of DLT, but it’s now so popular that it’s stuck in people’s minds as the same thing, just the same way we refer to all detergent as “Omo.”
Blockchain is a decentralized ledger technology in which the shared database of transaction records must be encrypted, confirmed, and verified.
Now take our imaginary community. Instead of using a physical notebook to record these transactions, they now go digital, using interconnected computers that we’ll call nodes. To make it easier, transactions are batched into “blocks” before recording them rather than adding them one after the other on the decentralized ledger.
Each block contains transaction data such as sender, receiver, and amount. Once a block is created, a hash is calculated for it. A hash is a hexadecimal set of numbers that represents or identifies the content of a block. And like a fingerprint, it’s unique.
So a block contains its hash and the hash of the block before it. Any alteration of the data inside a block will also alter its hash. And once a hash is changed, the block is no longer the same block.
It gets interesting.
Since a new block has to contain the hash (think fingerprint) of the previous block to be added, they form a continuous secured chain, or a blockchain (chain of blocks, see?)
This is what makes the Blockchain so secure. Once you change the data inside one, it changes the hash, which means the next block will become invalid since the hash of the previous block it contains no longer matches the hash of that block.
However, this is not enough to secure the Blockchain because modern computers are very powerful and can successfully recalculate and change the hash of a block and all others following it to make the Blockchain valid once again.
Enter the proof of work. This is a mechanism that slows the rate at which new blocks are added. It achieves this by requiring the miners (the folks who compile and add blocks to a blockchain) to prove that they have expended a ridiculous amount of computing power by being the first to solve a complex mathematical puzzle before adding a block. This makes it almost impossible to mess with the Blockchain. Because if you manipulate the data in a block, you’ll have to recalculate the proof of work for all the following blocks.
The combined use of hashing and proof of work makes for water-tight security. There’s an additional security measure, decentralization. Instead of being managed by a central authority, the chain is governed using a peer-to-peer network system that anyone can be part of.
When you’re a part of this network, you have a copy of the complete Blockchain. This helps the network ensure everything is in order.
When the network forms a new block, it is distributed to each node on the network, which then verifies that the data in the block is still intact. When confirmed to be okay, each node adds a copy of this new block to their copy of the Blockchain.
All the nodes in the network form a consensus and agree on which blocks are valid and which are not. To successfully tamper with a blockchain, you must alter all the blocks on the chain, recalculate the proof of work for each block and then control more than 50% of the peer-to-peer network. Only then can your tampered block become accepted by everyone else—something virtually impossible to achieve.
While Blockchain’s most visible use is in cryptocurrency systems, where they keep a secure, decentralized, and immutable record of financial transactions, the technology can also be used to store various records such as product inventories. It can also be used as a digital notary, voting, collecting taxes, and many other use cases.
