Blockchain and Bitcoin are the most trending keywords at present. The blockchain is highly used for transaction management replacing the transaction management systems at current. The need for replacing the existing transaction management system occurs only when there are certain drawbacks.
The drawbacks of the existing transaction management system include extra transaction fees and the fear of hacking or data tampering in the data transfer from the sender to the receiver.
The blockchain is the encrypted technology that uses authorized blockchain network to complete a transaction that not only lowers the transaction charges but also uses a decentralized system that doesn’t include any third party in the transaction making it secure from the hackers.
In order to know about the Blockchain Technology, Blockchain network and Bitcoins, one should understand the need of this technology at the present banking scenarios and some issues in the existing banking system that lead the evolution of Blockchain technology.
Issues Faced in The Existing Banking System
A person using the current transaction management system of banking can have several kinds of problems, but there are two major problems that were the reason to start the Blockchain technology, they are high transaction fees and fear of getting hacked by any third party or even data tampering
1. High Transaction Fees in The Existing Banking Systems
In order to make a transaction on a banking channel in the present day scenario, bank charges high transaction fees. Suppose you want to do a transaction from your account to any others account, then the receiver will end up receiving less amount from it based on the percentage of the specific bank portfolio.
The percentage of the transaction fee is very high with respect to the money sent by the sender.
2. Double Spending Problems
As of today, people are also going for double spending, which is a unique problem where digital money is spent twice. The user has is able to make two purchases with the amount less than the purchase value that means the user is able to buy a commodity worth more than the available amount in the account.
This may cause more than the required spending and increased expenses without the idea of the user.
3. Hacking Problems
At the present day scenarios, banking systems are prone to hacking, which means that a third party can access an account and can use it for their purpose or even tamper the data easily.
Hackers can also attack the banking accounts and financial institutions and can gain unauthorized access to the data and can do the transfer on your behalf and can also transfer of money to some other illegitimate accounts.
The number of frauds in India in the year 2017 was a huge number that shows the current banking system is prone to many hacks that are can amount to huge costs to the sender and receiver.
Problems Solved By The Blockchain Technology
Blockchain Technology has emerged to solve some of the serious issues in the existing Banking system such as High transaction fees, double spending as well as Hacking problems as follows
1. The Solution To The High Transaction Fee:
Bitcoin is a decentralized system that allows you to do a value transfer transaction at a lower transaction fee that is very low when compared to that of the existing Banking channels. In the end, the receiver can receive the true value of the money sent by the sender by the Blockchain networks.
Reason: Blockchain technology follows the decentralized system where no third party such as government, banks and any financial institutions involved and thus the transaction fees are reduced drastically between the sender and receiver.
This is the primary objective of Bitcoin or Blockchain technology that promises the removal of all types of intermediates in the transaction from a sender to receiver.
2. The Solution For Double-Spending
Bitcoin is a cryptocurrency that runs in the Blockchain network and the double spending issue is solved by the basic structure of Blockchain that involves verification of the transaction where you cannot transfer more amount than that of the present value based on the basic validation of Blockchain.
Reason: If you are trying to spend the same bitcoin in the second transaction after the first transaction has been confirmed, then the second transaction will not get verified and gets invalid. This happens because, after the confirmation of the first transaction, the balance will be verified that also includes validating the user’s address identity.
If you are trying to spend more than that of the balance in the account, then the miners or the validators of the Blockchain networks discard the request and therefore the transaction becomes invalid. Therefore, double spending becomes impossible in the Blockchain network.
3. The Solution For Hacking Problems
In a blockchain network, each block is linked to its previous block and the transaction becomes invalid for a specific bitcoin which has already been sent.
Public ledger: A public ledger records all bitcoin transactions and is accessible to everyone those who are associated with the system. Moreover, it is a 100% transparent system that makes all the transaction visible to all other associates.
If a user joins the block then he also gets a copy of all other transactions since the initiation of the Block. The first block of the Blockchain is called “Genesis Block”. Although the public ledger is accessible to everyone, only the address and the transaction details are visible to the users in the Blockchain network.
By looking at the address, one cannot figure the owner of the address, thus this keeps the Blockchain safe from data tampering.
Reason: Each block on the Blockchain is aware of who is its previous block as per the creation of Blockchain. If a hacker tries to hack one block then the hacker will have to change the entire subsequent chain ahead of the block that requires huge computation power for the hacker in order to make the changes across the block that is quite impossible.
What is A Blockchain?
The blockchain is a decentralized system of secure and trusted distributes databases and ledgers. The databases record and share the transaction details across many nodes which are part of the network assuring that the data is modified.
Each and every transaction that happens on a Blockchain network is distributed across all the nodes on the Blockchain and every participant has a copy of the ledger that cannot be erased or modified.
In simple terms, a chain of the block containing the information is called as Blockchain. When a transaction occurs, its related information is recorded into a block and thus a transaction occurred in a corner of the block gets registered in a Block and gets validated by the miners of the public ledgers and then added to the main Blockchain.
A block contains aggregated transactions in a single block which a miner has to validate and in view of that the miner gets rewarded.
Components of A Blockchain
Bitcoin networks use an SHA-256 hashing algorithm to generate 256-bit length hash. A block consists of four major components that include a previous hash, data that are aggregated, nonce value, hash of the block itself.
- Previous hash is an attribute which connects a block to its previous block. The previous hash attribute consists of the hash value of its previous block.
- Data consists of the details of the sender’s address, the receiver’s address and the transaction amount. There can be multiple transactions among multiple senders and receivers. Each block will consist n number of transactions and each transaction will have the sender’s address, the receiver’s address and the transaction amount.
- The nonce is a random value used to vary the output of the hash value in the proof of work (POW) algorithm used by the Bitcoin. Proof of work is the process of transaction verification done in the blockchain.
- Hash is the fingerprint of the current block where it takes the input value of the previous hash, data, and nonce and produces the output value of fixed length.
Features of Blockchain
- A Blockchain is a decentralized public distributed ledger that doesn’t allow any intermediate and records transactions across many computers.
- It can also be called as a distributed ledger that has been shared by all the users associated in a specific Blockchain network.
- The miners, as well as users, can also verify the transactions by getting access to the transaction records in the Blockchain network that makes it quite impossible for cyber attacks and data tampering.
Blockchain eliminates unauthorized access by using SHA-256 which is a cryptographic algorithm. Blocks are kept secure based on this cryptographic algorithm that is tough enough to secure the block from hackers.
Every user in the Blockchain network possesses their own keys. Any user, who onboard in a typical blocks chain networks, has been provided by the private key and public key.
- Private keys are known only to the senders and can be used to confirm that the origin of the transaction is legitimate.
- Public keys are used to uniquely identify every user of the Blockchain networks but are also shared with the other associates in a specific network.
The Process of Transaction Verification
The transaction verification in the Blockchain network follows step by step process from sender to receiver and the process follows as
- Suppose the sender wants to send a message, the sender will pass the message to the hash function and generate a hash value of the message.
- After the hash value has been created, it will be passed to a signature algorithm and with the private key, a digitally signed document is created.
- The transaction message, the digitally signed document, and the public key are transmitted to the receiver.
- At the receiver end, the transaction message is passed to a hash function to get the hash value and this hash value is compared with the hash value obtained by passing digital signature and public key through a verification function.
So, basically when the hash value matches with the persisted hash value in the signed document then only one can get access to the account that is nearly impossible.
- Both the values are compared as the hash function creates a digital function of the data which is called a digital print. It has a unique property and cannot be reversed as it is a one-way encryption.
Proof of Work (POW) Algorithm
POW is a method to validate the transaction in a specific blockchain network by solving a complex mathematical puzzle that is called mining. Finding the nonce value is the complex puzzle that users or miners need to solve in the Blockchain network. Users those who are trying to solve a complex puzzle are called miners and the puzzle is solved by determining a nonce which generates a hash value.
Moreover, miners verify transactions within a block and add it to the main blockchain after they confirmed and verified the transaction. Miners compete against each other to solve the complex puzzle and the miner who solves it first gets rewarded.
After the puzzle is solved by the miners, the transactions that are within the block become valid and the bitcoins associated with the transactions can be moved to the receiver.
Overall, Blockchain Technology is an advanced Technology that has some developed and advanced features conquering the problems existed in the existing banking transaction management system.
Moreover, the advanced encryption options as well as the reduction in the transaction fees in the technology not only makes the transaction safe and secure but also provides more benefits than that of a transaction in a banking channel.
The enhanced cybersecurity systems it is nearly impossible to attack by the hackers and thus becomes the safer and secure transaction management system when compared to the banking systems of present transaction scenarios.