BLOCKCHAIN TECHNOLOGY

Blockchain: Fundamentally a distributed ledger

When I think of blockchain the first thing that comes to my mind is that
it is fundamentally a ledger. Not only that, it is a distributed ledger. One
universal ledger that is shared with everyone.
Ledgers are everywhere. Your land records, the balance in your bank
account, the votes you cast in an election, the stock market transaction,
all of these are simply ledgers.
A ledger is simply a book that records ownership details of an asset. And
whenever there is a transaction, it records the transfer of ownership.

Given that it is a record that captures ownership of an asset, it is a very

sensitive book. Nobody should be able to change the details arbitrarily.
This is especially true when two unknown people are transacting. A third
party is needed to ensure trust between two unknown people. People who
do this are called intermediaries.
Banks, revenue department, election commission are all examples of
intermediaries.
Imagine a world in which there is no intermediary. This is what a
blockchain-run world looks like.
A lot of assets in the world are simply an entry in the ledger. This is
particularly true in the world that is deeply financialized. Most of the
money does not exist in physical form but as an entry in ledgers.
When you pay ₹100 to a shopkeeper for exchange of goods on say a UPI
app there is no physical money that travels. It only changes the ledger that
your bank maintains on your behalf on one hand and the ledger that the
shopkeepers bank maintains on his/her behalf on the other.
This looks simple but it’s a tedious process. This becomes more tedious
if you were to transfer money to a friend in a different country. Then there
are multiple ledgers that change along the way. Your bank in India, your
friends bank in another country, the SWIFT network etc. More the
number of intermediaries, more the number of ledgers, more tedious the
process and higher the cost of transaction.
Imagine if instead of multiple ledgers there was one universal shared
ledger on the cloud. This is called a distributed ledger.

Understanding Distributed Ledgers with Analogies

Blockchain: Old wine in a new bottle
The Yapese islanders and their Rai stone
In around 500 AD, people of a small pacific island in Micronesia had
designed for themselves a unique ledger system that would help them
trade goods and services.
They used large immovable stones called Rai stone made of limestone to
trade for goods and services. Every time a good was exchanged or a
service rendered, all the people would assemble around a Rai stone to
witness the transaction. Say A wanted to sell 1 Kg rice to B in exchange
of a Rai stone. Everyone in the island would assemble around the Rai
stone to witness transaction. In effect what really happened was the
creation of a shared memory of the transaction. This is like a ledger entry
but in the minds of all the islanders. Nobody could tamper with this
shared ledger unless at least 51% of the Yapese arrived at a consensus to
cheat.
This is an example of a distributed ledger and this is exactly what a
Blockchain is.
Imagine every transaction that happens in the world today happens this
way. In other words, what if every transaction occurs in the presence of
everybody in the world. No one can cheat unless 51% decide to cheat.
But how do we assemble all the people in the world to witness the
transaction. Simply use the internet. With internet you can implement this
concept globally. For instance, make a google doc and share it with
everyone. If 51% of the computers in the network agrees, record the
transaction in the google doc. This is what a blockchain is, a distributed
ledger.

However, one problem with this kind of shared ledger is that everyone
can see. Also wait a distributed ledger is universal meaning it is accessible
to everyone. Anyone can tamper it right?! Anybody can fudge it. How do
you trust unknown people accessing your financial details. In short, a
distributed ledger which is openly accessible to everyone has no integrity.
Blockchain technology has a way to bring integrity to the
distributed ledger. (you can remember this as the second most
important thing ). How does it happen? So we have to find a way to
somehow hide the content of the transaction but still use the advantage
of the shared ledger. This is where cryptography comes into the picture.
We use cryptography to create a sort of ‘fingerprint’ of the transaction
and whenever someone tries to tamper the transaction, the fingerprint
changes alerting everyone in the network. Essentially in this shared digital
ledger you are not really seeing the content of the transaction but a
‘fingerprint’ of the transaction. This is how privacy and security are
ensured in a blockchain.

Another bit we need to understand is the word consensus here. It is

essential to record a transaction in the ledger. In Yapese Island the
transaction was recorded in the shared memory of the community when
A and B executed the transaction in everybody’s presence. In blockchain
a transaction is initiated by one party and is consummated only after the
second party agrees, authenticates, and ratifies it. In other words, only
after there is consensus the transaction is added to the ledger.
In a blockchain this is achieved through various means. These means are
typically proof-of-work and proof-of-stake.

Securing the Distributed Ledger with Cryptography

While a distributed ledger offers transparency, concerns about privacy and
security arise. Blockchain addresses these concerns by using cryptography.
Rather than displaying the content of transactions openly, a blockchain
shows a cryptographic "fingerprint" or hash value. This fingerprint
changes if anyone attempts to tamper with the transaction, alerting the
entire network. Cryptography ensures privacy and security within the
blockchain ecosystem.
Consensus Mechanisms in Blockchain
To record a transaction in the ledger, consensus among the network
participants is crucial. In blockchain, a transaction is initiated by one party
and finalized only after the second party agrees, authenticates, and ratifies
it. Various consensus mechanisms, such as proof-of-work and proof-of-
stake, are employed in blockchain to achieve this agreement. Proof-of-
work involves solving complex puzzles that require significant
computational power, ensuring that only serious participants can add
transactions to the blockchain. Proof-of-stake, on the other hand, means
that the transaction needs to be verified and agreed upon by the majority
of stakeholders. These consensus mechanisms ensure collective decision-
making, preventing any single person or group from controlling the
blockchain.
Key Functions of Blockchain
Blockchain technology serves several purposes:
1. Only the rightful owner should be able to create a transaction. This
is achieved using digital signatures, which use a combination of
public and private keys to prove ownership.
2. Transactions should be unchangeable. To achieve this, blockchain
uses hash values, which are unique codes representing each
transaction. Any alteration to the transaction will result in a change
in the hash value, alerting the network.
3. The history of transactions provides ownership details. Hash
referencing links each transaction to the previous one, creating a
chain of transactions and hence the name blockchain. This ensures
the integrity and immutability of the ledger.
4. Appending a transaction to the ledger requires consensus from the
majority of participants. Consensus mechanisms like proof-of-work
and proof-of-stake ensure that transactions are agreed upon by the
network before being added to the ledger.

Technologies in Blockchain
Blockchain integrates various technologies to implement a distributed
ledger. It utilizes digital signatures for creating transactions, hash values
for security, and hash referencing for recording ownership details.
Consensus mechanisms like proof-of-work and proof-of-stake ensure the
integrity of the ledger.
The Goal and Characteristics of Blockchain
The primary goal of blockchain is to manage ownership rights of digital
goods. Blockchain exhibits several characteristics, including being
immutable, append-only, ordered, time-stamped, open and transparent,
secure, eventually consistent, providing provenance, and operating in a
trust-less environment.
Scope and Applications of Blockchain
Blockchain has a wide scope of applications:
1. Proof of existence: Blockchain can be used for registries like land,
patents, and licenses.
2. Proof of non-existence: Blockchain can facilitate registries for
complaints, crime data, and sexual offenders.
3. Proof of time and order: Blockchain can provide a trusted record of
the sequence and timing of events.
4. Proof of identity: Blockchain can be used for identification
purposes, such as beneficiary identification, Aadhar, voter ID,
driver's licenses, and passports.
5. Proof of authorship: Blockchain's security features make it suitable
for online publishing and content writing.
6. Proof of ownership: Blockchain can manage ownership rights of
various assets like property, cars, digital currencies, insurance, and
shares.
Applications of Blockchain
Blockchain can be applied to manage ownership rights of various digital
assets, including digital currency, micropayments, digital goods, identity
proof, notary services, tax, voting, and record management. These
applications have the potential to revolutionize industries by increasing
efficiency, reducing fraud, and promoting transparency.

Non-Fungible Tokens (NFTs)

NFTs are used to represent uniqueness in the virtual world.
They address the problem of copying digital assets like art, currency, or
digital twins.
By attaching a unique code to each asset, NFTs prevent duplication and
enable the representation of one-of-a-kind digital items using a set of 0s
and 1s.

What all can an NFT do?

• Identity management in the virtual world
• Deed for virtual assets
• Enable virtualize the real world
 • Virtual versions of physical items
• Value-carries over Web3.0
• Can act as digital passport to entry into a virtual world like virtual
museums.

Characteristics
• Non-transferable and unique
• Unique digital collectibles backed by a blockchain network
• Gives proof-of-ownership.
• But does not stop you from exchange or duplication of actual digital
data stored.
• Can be traded like any asset but not exchanged like currency as it is
non-fungible i.e it cannot change forms.

Conclusion
Blockchain technology and NFTs are poised to revolutionize various
industries and open up new possibilities in the digital world. By leveraging
distributed ledgers, cryptography, consensus mechanisms, and the
representation of uniqueness through NFTs, these technologies provide
secure, transparent, and decentralized solutions for managing ownership
rights and transactions. As their adoption continues to grow, we can
expect to see significant transformations across multiple sectors.