Blockchain Technology: Decentralized Peer-to-Peer Network
To better understand what Blockchain is and how it operates we’ll explore one of the three main components of Blockchain Technology more in-depth: Decentralized Peer-to-Peer network.
Before diving deeper into how things are different from P2P Networks and how they’re leveraged with Blockchain, we first need to have a basic understanding of how things are done today.
Once we have an understanding of these fundamentals we’ll outline the specific steps Blockchain takes to complete a transaction.
How Traditional Transactions Are Completed In Todays Business Model
Let’s say, for example, there are two parties: Seth and Candice. In this example, Seth would like to send Candice $10. Seth could do this in a number of ways by either visiting a bank branch or using the bank Web Portal.
In this example, Seth will use the Web Portal. Seth would need to:
- Authenticate user his username and password
- Place the transfer order
- Wait for the bank system to confirm if/when the transaction is completed
- Send funds to the party (Candice)
You can begin to see, though the steps are few, require a lot of work by the bank. Specifically, in order to support this type of online banking, the bank has to establish Seth’s identity, access management systems and authenticate Seth’s credentials.
Behind the scenes, the bank needs to develop a web portal and a backend system to verify whether Seth has the right account with the bank and has enough money to pay Candice to transfer the $10 out of his account, and put $10 into Candice’s account.
The bank has to maintain a ledger to record the details of the transaction in a database and show the balance each person has.
Today’s Business Model Using A Distributed Network
We’re seeing today that customers’ needs are changing. The traditional brick and mortar business model are being replaced by the digital banking and commerce model. This requires technology changes for the bank as well.
Today, banks deploy a distributed system model to serve the needs of their customers. The fundamental issue with these centralized or distributed system model is a single point of failure. These could come in the form of:
- Malicious network attacks
- System failures
- Security and Privacy breaches
Or these failures come from business failures in the bank itself, which can cause millions of people to lose their homes due to the bankruptcy of the big banks during a global financial crisis.
It could happen due to currency failure itself, such as the currency collapse in Venezuela, where the lifetime savings of average citizens suddenly became worthless overnight. Also, the payment may be blocked due to government censorship.
What this really boils down to is trust. The problem with traditional (fiat) currency is all the trust required to make it work. Citizens have to trust the central bank not to devalue the currency. Consumers have to trust the bank to manage their money. But history has shown again and again that trust is often breached.
The New Decentralized Peer-to-Peer Network Model
Satoshi designed an elegant decentralized Peer-to-Peer Network electronic cash system, and the technology behind that – blockchain – is the solution; where transactions are maintained in a distributed shared ledger and replicated across a global Peer-to-Peer Network.
Security and privacy are ensured with cryptographic technologies, and transaction integrity is achieved through a consensus mechanism.
As new transactions are made, they are broadcasted to all network nodes, and over time all transactions that have occurred are sequenced together in the public ledger and made available in all replicated network nodes.
We learned how today’s banking systems work and maintain a ledger in either a centralized or distributed network model. By understanding this, we also learn of the many single points of failure present in this model and how the system of trust often fails.
Additionally, we learned how the new distributed peer-to-peer network model works and how it integrates with Blockchain. Next, we’ll be looking into how specifically Blockchain works, explaining each transaction step in detail.
Read on to the next segment, Blockchain Technology: How Does Blockchain Work?