Before we discuss further Blockchains, let’s see what is in a name? A “blockchain” is a public database that stores the information about the financial activities of the network of computers which are called the “blockchain”. The transactions are recorded into the ledger, which is in the form of a database. The most popular form of the ledger is the ledger called the blockchain. In the future, this Ledger will be replaced by something else, but the two forms are mostly interchangeable.
You can think of the ledger as being like a telephone directory where you type in a number and it gives you the phone number of the person or business to call. This would be the Blockchain. At the moment the major function of the Blockchains is for the purposes of tracking the most valuable digital asset (in this case bitcoins) and international currency trades. The Blockchains can be applied to any digital asset including currencies, stocks, ownership rights, e-mail addresses, and even patents. However, the main purpose of Blockchains is for the purposes of money transfer.
In the bitcoin network, there are two types of transactions: “mining” and “proof-of-work”. The mining activity is the responsibility of users of the bitcoin network who add new blocks to the ledger. When a user conducts a transaction, they must send their proof of work to the network. The third-party validation is performed by the company called a validator which stores the public key of the sender of the transaction, plus the public key of every one of the entities that together hold the validating private keys.
As a generalization, the second type of transaction is referred to as “proof-of-work” whereas the first type is called “mining”. In the traditional way of doing things, miners control the distribution of new blocks to the network by making sure that enough customers have agreed to the creation of the block. This can be likened to a vote, with miners having a vote to decide whether or not they want to add a particular transaction into the ledger. But with the use of the new Blockchains, the power to decide for the miners resides solely with them.
Unlike before where a transaction could be held in the hands of the customer and the payment processor, the new Blockchains are made available to everyone’s view regardless of whether they hold a valid account balance. With the help of a digital signature, the buyer and the seller can sign an agreement that would certify their agreement. The digital signature also acts as a guarantee that the owner of the asset has indeed transferred his asset into the custody of the seller. This is because the digital signature is actually a piece of code that stands behind the assets on the ledger. By ensuring that the digital signature is legitimate, the Blockchain ensures that only legitimate owners can conduct certain transactions on the ledger.
But unlike the traditional way of using the ledger, the blockchain does not store any files; rather, it works by maintaining a log of all transactions that are done on the network. All these activities are logged into a public ledger that can be accessed by anyone via the internet. But unlike the conventional public ledgers, the blockchain allows its users to make an unlimited number of transactions without being limited to just a single partner. The power of the decentralized system lies in the fact that users of the ledger can agree to extend their transaction history on the network and therefore expand their network with new partners at any time they like.
One of the biggest advantages of the blockchain is that it reduces the costs incurred during the establishment of the transactions. Since there are no central organizations that maintain the ledger, the costs that would have been incurred to set up a system to come out of the user’s pocket instead. And since the transactions are entirely held digitally, the centralization of the ledger itself is rendered useless – there is no need to invest in hardware or software to keep track of the ledger.
The blockchain also provides users with privacy, which is most often overlooked. The use of the decentralized system makes it possible for users to control the sending and receiving of the same transactions. An address that has a specific hash value tied to it is called the hash address. But if that address happens to change, the transaction will be attributed to the new hash value and will be displayed in the ledger.