Blockchain came into vogue in 2008 as the underlying technology for Bitcoins, which has been hailed as the world’s first decentralized cryptocurrency. In the words of its creator (who used the pseudonym ‘Satoshi Nakamoto’), Bitcoin was created since there was a need for “an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party“1.
Bitcoin can be likened to a digital token having the nature of virtual cash, operating on a peer-to-peer network. Bitcoins can be bought, sold and traded on crypto-exchanges and can be used to pay for goods and services. Bitcoin holders use a decentralized peer-to-peer network based on blockchain technology to transfer their Bitcoins to each other or third parties. These transfers of Bitcoins are recorded by each node in the network, thereby creating an immutable ledger of such transactions. Bitcoins are stored in a ‘digital wallet’ on a smartphone or computer. A digital wallet includes a public key and a private key, which together permit the Bitcoin holder to authorize every Bitcoin transaction that such holder participates in. Each transaction is contained in a block, which after verification by the nodes, gets added to the blockchain, thereby recording each of such transactions permanently.
The Bitcoin network is sustained through “mining”. Bitcoin mining is the process of creating new Bitcoins which are then given to the nodes in the network. Since there is no single central server verifying the transactions which occur in a Bitcoin network, it falls upon every person on the network to verify the transaction. These people are called miners. The miners are given a complex math problem to solve and the miner who first solves the problem adds the verified ‘block’ to the blockchain. The fastest miner is given a chunk of Bitcoins as a reward for their efforts. Bitcoin mining, however lucrative it may sound, is an incredibly sophisticated process that requires specialized computers with advanced processing powers. Every Bitcoin which currently exists has been created through this method.
Types of Blockchains – Public and Private
A public blockchain is one in which anyone can join the blockchain network and participate within the blockchain. Public blockchains are decentralised, in the sense that no one has control over the network. Bitcoin and Ethereum are examples of public blockchains.
A private blockchain is one where only permitted participants can join.
Since every node in a blockchain stores details of all transactions, which can be scrutinised by anyone in the network, malicious users may access and trace public keys and addresses to specific persons. If and when an individual user of a blockchain is traced, every transaction undertaken by such an individual through blockchain may be permanently exposed.
A person’s private key is used by him/her to sign as well as verify every transaction that s/he makes on a blockchain. Each private key creates a unique digital signature for every transaction that the key-holder undertakes, thereby verifying that the key-holder has ownership of the assets which are being transacted and that s/he has the authority to undertake the transaction. Since private keys are crucial to accessing and safekeeping assets on a blockchain, users are required to store them safely. If the private key becomes available to a stranger, the assets stored on the blockchain could be compromised. Storing the private key on a computer, flash-drive or telephone can pose potential security risks if the device itself is lost, stolen or hacked. If such a device is lost, the user will cease to have access to his/her private key, and in turn, his/her assets, such as cryptocurrency. Storing it on a physical media, such as a piece of paper, also leaves the private key vulnerable to loss, theft or damage.
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