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What Is Blockchain?
So what is blockchain and how does it work? As the behind the scene details can get rather complicated, we’ll keep it simple. And since it came along as a method of verifying financial transactions, we’ll explain it from that point of view.
What Is Blockchain?
The most important factor of blockchain is that it allows the transfer and exchange of bitcoin currency without the need for a bank. But how is that done?
In terms of bitcoin, blockchain is used to create somewhat of a community “ledger” for “monetary transactions” through the internet, and can even be automated to trigger specific actions.
Bank Vs. Blockchain
Traditionally, we transfer money through a central unit (i.e. banks) which normally keeps track of everyone’s information. Banks have access to all current balances as well as incoming and outgoing transactions, while we are only granted access to our own account information.
The banks verify that the funds exist in order to complete transactions, and process the actual transfers accordingly. Banks are trusted to allow valid transactions and deny impossible requests (ex. insufficient funds). Since banks are regulated and trusted, we can feel safe that our money is being handled properly.
On the other hand, blockchain works a bit differently. Essentially, all users hold a copy of the digital ledger.
Blockchain operates a network of nodes, each node being a single user who owns and uses bitcoins. Everyone bitcoin owner has their own copy of the bitcoin ledger, which is a massive document with every single transaction on it.
When a user transfers money to another, a unique “block” is created that contains privacy information, encryption, and its own unique digital signature that cannot be reproduced. When a transaction occurs, the block is simultaneously added to every single existing ledger.
Since every user has a ledger, no one user can start creating or duplication transactions. If the transaction is not found on every existing ledger, then the transaction is fraudulent. This is how the need for one central agency to verify the legitimacy and existence of funds or transactions is eliminated.
Encryption protects every single transaction, ensuring transactions remains private and authentic. Nearly everything in the blockchain process is encrypted. While the thought of everyone having access to the digital ledger may seem scary, every copy is encrypted, limiting users from prying at the details. However, the correct user will be able to verify the authenticity of a transaction.
Here’s where it gets a bit more complicated. Bitcoin’s rules require a password, like a digital signature, to prove authenticity of a message and unlock and spend funds. This digital signature is created via mathematical algorithm that cannot be copied, and a different unique signature is required for every transaction.
Along with this, each signature requires both a private and public key to unlock and verify. The private key is the true password, but the signature acts as a liaison that proves you have the password without revealing what it is. The public keys are then the “send to” addresses in bitcoin.
So in order to verify that you are the true owner of the public key, a private key is generated when sending a message. Other nodes then use this signature to verify that it corresponds to the public key. And since the signature depends on the message it will be different for every transaction so that it cannot be reused for another transaction, assuring you that it wasn’t just copied or modified.
The Process, Simplified
As an example, let’s say John sends five bitcoins to Sally. John’s digital signature will produce an encrypted “key.” Sally will receive a verification “key” to unlock the code that John is sending her. Every ledger is then updated with the new transfer of funds. Within this process, the ledgers are checked for the validity of the transaction, as well as verifying that John has the five bitcoins to transfer by reviewing John’s past transaction history. Once everything checks out, the ledger is updated with the new transaction plus the new balances of John and Sally’s accounts. Because the transaction has its own unique identifier, it cannot be reproduced or duplicated.
Overall, blockchain helps to increase speed and security as actions are being verified at various points rather than through one system.
Blockchain For VoIP?
While this technology is undoubtedly changing the banking industry, how can it make an impact on telecommunications?
A proposed thought is that blockchain could influence the authentication process. If implemented, blockchain could possibly eliminate the need for a carrier between almost any method of communication.
Recently, the provider EncryptoTel emerged, boasting its use of blockchain-based VoIP communication, however, it is still in its infancy. We have yet to see how, or if, blockchain technology will make its way into the telecommunications industry.