Understanding Blockchain and What Problems Does It Solve

What is Blockchain? This question comes up first when people hear about this new technology. The founder, Satoshi Nakamoto, is not even a real person but a pseudonym or maybe a group of people. This raises even more questions and makes it also a bit mysterious.

Blockchain allows digital information to be distributed but not copied, over the internet. In this case, it uses Bitcoin, a form of digital money, to be transferred over the online web. A Blockchain uses blocks of data which are called a chain.

Blocks

These blocks are part of a distributed network of computers. The data is secured by cryptographic principles and are related to each other. When data is added to a block, a timestamp occurs and the record cannot be changed anymore.

This doesn’t sound very spectacular but still, this technology has some disrupting possibilities. First, it has no central owner and is thereby a democratic system. Second, it has transparency and the information added to the ledger can be seen by anyone who is interested in it.

Explanation and the idea behind Blockchain

A Blockchain carries no transaction cost. The Blockchain passes information from A to B in a fully automated and secure way. When a computer(called a node) wants to start using the network, it has to create a block first. This block will be distributed over the network and verified by the other nodes on the network.

Nodes

These nodes can be thousands even millions, it totally depends on the size of the total network. When a block is accepted by the network, it will be added to the chain. At this moment the total chain is updated with this new block of data. All the nodes over the network will immediately store this new chain on their hard disk. This is very crucial because this makes falsifying the chain almost impossible.

Decentralization

The reason why is because now you have thousands or even millions of copies with this unique chain stored locally. This decentralized storage of data protects the safety of the chain and the total network. Bitcoin, the first Blockchain ever created, uses it to store digital transactions on the network but it can be used in many ways.

Railways as real world use case

For example a railway company. You can buy tickets on an app or website. After this transaction, the credit card company takes a fee for its service. Blockchain comes with the idea to remove the third party out of this transaction process. In this case, the credit card company will be removed. The railway operator does not just save money on transaction fees but it can outsource it’s ticketing process entirely to the Blockchain. So how does this work?

In this scenario, a ‘ticket Blockchain’ exists. When a passenger buys a ticket, a block(or ticket) will be created and added to the ‘ticket Blockchain’. After the creation of this block, the Blockchain will validate if the transaction is valid. If valid, the ticket will be added to the chain and the passenger has bought a ticket. Also, this ticket will be stored on the chain and can be tracked at any time if needed.

To summarize, the use of this Blockchain is totally free! When there is a transaction needed between two parties, the Blockchain can be used to save transaction fees.

Smartcities

Currently, more than half of world population is living in cities and this amount of people living in urbanization will continue to rise in the coming years. Government and companies who deliver digital services to this growing population has to face new challenges. This collecting of digital data of their citizens has turned ordinary cities all of the world into so called smartcities.

Nowadays these smart cities use centralized systems to store data of their users to deliver services. Smart Cities use a variety of inputs and sensors to collect, process and interpret data in order to manage assets and resources efficiently.

What problems does Blockchain solve

You can imagine that these cities with their centralized systems can also be misused by bad actors. To collect data and store it at a central party comes with the following problems:

— Fraud and manipulation

— High costs for security and trust

— Public funds and taxation

Funds and Taxation

Let’s zoom in to the last one which is public funds and taxation. Nowadays public funds are controlled by central parties which also increases the possibility of corruption which is a very traditional problem.

A blockchain network used the right way can powerfully lower the incidence of fraud. All transactions be handled on this Blockchain network can be tracked and traced which introduces real transparency. Currently, in the public sector when funds needs to be given this is done in a biased way and a honest level playing field doesn’t really exist.

Another advantage the Blockchain brings is the re-introduction of data sovereignty. Citizens will have control over their own private data and can decide what data they are willing to share and are incentivized for it in digital tokens(Bitcoin for example).

Also with the transparent nature of the Blockchain citizens have the possibility to track the transactions at any time. This gives them clear insight in which funds are being spend to public services like transportation, railways and metro systems or police department.

Conclusion

Decentralization of data will be the next step in the evolution of the online web. Alternative solutions for paying online with cryptocurrencies are growing on a global scale now.

Currently, people aren’t happy with the way big online companies like Facebook or Google handles our private data. By having Blockchain technology implemented the right way(!) users all over the world be back in control over their own data.

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Understanding Blockchain and What Problems Does It Solve was originally published in Hacker Noon on Medium, where people are continuing the conversation by highlighting and responding to this story.