What is Conventional Way? And why is there an issue?
Usually, for a conventional transfer of "Payments," there is an intermediary for "Trust" reasons, a bank or other banking entity that records the transactions.
For this model to work, there should be an active need for "Trust" entities for it to function properly, which for some reason or another can fail. *cough* 2008 *cough*. To add to it, there are chances of Fraud,
What is the solution to this problem?
In 2009, Satoshi Nakamoto made the first reference to Bitcoin in the paper titled.
"Bitcoin: A Peer-to-Peer Electronic Cash System" which offered a decentralized "Trust" entity that did not need any third-party "Trust" entity.
Blockchain explained:
4 friends Bruce, Chuck, Arnold, and Sylvester, use a "ledger" to tally up the payments they
have made to each other, which they settle monthly. (Something like Splitwise App but with "Trust")
Ledger:
T1 -> Bruce pays Chuck $1000 for damaging the vents.
T2 -> Arnold pays Sylvester $700 for destroying the garden with a Minigun.
T3 -> Sylvestor pays Bruce $500 for punching his wall.
T4 -> Chuck pays Arnie $1500 for smoking Arnie's entire Cigar collection without asking.
Protocol:
1. Anyone can add lines to the "Ledger."
2. End of every month, you settle up
Here there is one issue anyone can just put up a line in the "Ledger," right?
To counter this, you require a signature for each statement in the "Ledger" from the person who pays the other.
Can't Signatures be forged?
To counter that, there are two signatures, the Public one that all 4 shares with each other and the Private one, which they keep to themselves.
So the Protocol for adding a line in the signature is followed by asking that only the sender can verify.
So an Example of the line is:
T1 -> Bruce pays Chuck $1000 for damaging the vents, BRUCE, (Bruce secret signature)
T2 -> Arnold pays Sylvester $700 for destroying the garden with a Minigun, ARNOLD, (Arnold's Secret Signature)
T3 -> Sylvestor pays Bruce $500 for punching his wall, SYLVESTER, (Sylvestor's Secret Key)
T4 -> Chuck pays Arnie $1500 for smoking Arnie's entire Cigar collection, CHUCK, (Chuck's Secret Key)
The Statements are then verified with a True and False value when the transaction is done.
So can't we reuse the line for verification?
No! each Line has a unique code attached to it not to reuse the line.
What if one Person leaves after having a loss and unable to pay it?
For this, you put an initial amount of money in the box for which you get sort of a Ledger Chip, which can be traded with each other every time someone has a transaction.
E.g., Everyone pays 2000$ initially in place of 20 Ledger Coins
so 1 Poker Coin = 100$
I come thus by saying you cannot spend more than 2000$ each
So Bruce cannot spend more than 1000$ after his first spending
Therefore this transaction is invalid
T1 -> Bruce pays Sylvester $1200 for damaging the elevator XXXX
It will be overdrawn!
This is somewhat the concept of the Bitcoin (BTC)
But isn't Blockchain supposed to be Decentralized?
Yes, the Blockchain is decentralized as everyone gets a copy of the ledger, and all the transactions are noted down.
When Bruce pays chuck 10 "Ledger" Coins, he announces it on the microphone to the whole Suburb, who then notes it down in their ledger.
How do you make sure that there is a tally in all ledgers, i.e., the Ledgers are the same?
It is challenging to agree that Bruce's ledger is correct and the same as what Chuck has.
So for this, we have different solutions depending on the Crypto network
We will cover this in a different topic someday
Now, let us assume that when
T1 takes place
Bruce screams "1001000100011110101001001001" using a loudspeaker
which then is noted by everyone and put on their computer. It updates the ledger automatically.
This particular process uses cryptographic hash functions like SHA256. So it is unlikely to break the encryption.
Why is it then called a BlockChain?
This particular System is fascinating as several ledgers come together called the blocks, So when T1-T4 happens, we call it a block. To verify that we have this block in the chain of ledgers, Bruce screams a "1001000100011110101001001001" along with a Proof of Work so that the computer outputs viola! You have passed! Thus adding this ledger to the blockchain.
This requires a lot of computer power due so wouldn't that lead to a loss?
Yeah, So to reward this job is done by external computers called the Miners who create the blocks while running the Cryptographic Hash Function one after another; these Miners are rewarded with Ledger Coins so that there is some reward for the Hit, and Trial approach of these Miners cause it is really tough to crack Cryptographic Hash Function.
What if there is a wrong computation?
It rarely happens, but if there is an issue, we consider the Miner, who has a longer chain.
Trust computational work!
It will be continued in Part 2!
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