Ledger is a file or book which contains records from transactions.Eg: In a centralised service like Paypal, whose ledger do we trust? Paypal is the trusted authority so they’re the ones who keep track of your money and records from transactions.But in a decentralised payments network, there’s 6,000 computers around the world trying to update the ledger, who’s ledger do we trust? This is innovation here that is where the blockchain comes in.
It’s really a process where we figure out how we update the ledger that is shared, here is how it works:Every X number of minutes or seconds, the blockchain gets updated with a new block of transactions made by members of the system.Now to figure out which computer updates the blockchain; all these computers (called miners) are all competing against each other to solve a very energy-intensive randomised mathematical problem and the more processing power each computer puts in, the greater chance of the computer winning. Similar to a lottery, the more tickets you buy, the greater your chance of winning.So, about 10 minutes later, one computer will come out and notify that it has solved the mathematical problem.
The other computers in the network will check and verify that first the solution to the mathematical problem is correct and second that all the transactions included are valid. If more than 50% of the computers agree, then that block of transactions is included.Blockchain is a distributed ledger, a shared ledger that multiple parties are using. It allows multiple parties to collaborate without having the parties to trust each other and it’s really good at three things:1.) Transparency 2.) Authentication3.) AuditingWhat problems can we solve with this new technology: The overall banking world, one example of blockchain in the banking world is correspondent banking.
Correspondent banking is when you send an international payment and your money just kind of disappears, and when you ask, say a week later for your money, the banks say that they have sent the money already but you, as a receiver, has not gotten it yet. So what is happening in the background is your money is skipping from one bank to another correspondent bank to another one and the reason why we have this system here is because it is not feasible for each individual bank to go out and do a partnership with the 10,000 other banks around the world. The big problem for this from this is that each bank has a copy of their own ledger, there’s reconciliation happening at the end of each day, manual entry, its very common for errors to occur, so it ends up being very costly and slow. But if all the banks in the world connected to one shared ledger, the sending bank can connect directly to the receiving bank, therefore making your money get their much faster and if the sending banks requires liquidity to do the foreign exchange, they’ve got thousands of banks to deal with that they can do a partnership with.That’s just one area of banking which the blockchain can help. Other key areas where the blockchain can help are: Syndicated LoansPeer-to-peer loansBond issuance 6/12/00 5:45 pm: Watched another video regarding how cryptocurrencies work: “Ever wonder how Bitcoin (and other cryptocurrencies) actually work?”Notes from video consist of:Ledger – Trust + Cryptography = CryptocurrencyA problem with Public Ledgers is that anyone can add a line.
This means that there is nothing to prevent someone from charging people extra even though it was not agreed upon by the person they are charging. So how are we supposed to trust that all of these transactions are what the sender meant them to be?Well this is where the first bit of cryptography comes in: Digital Signatures.The idea here is that the person being asked to give money can add a signature besides the transaction to prove that they have seen it and approved of it. Note that it should be infeasible for someone to forge that signature.Some may ask: “Couldn’t you just copy the digital signature?”. The way it works is that everyone generates what is called a public key private key pair each of which looks like a string of bits.Private key can also be called a secret key as the name implies you want to keep it to yourself.In the real world, your handwritten signature looks the same no matter what document you are signing but a digital signature is much stronger because it changes for different messages.
It looks like one string of 1s and 0s commonly something like 256 bits and altering the message even slightly completely changes what the signature on that message should look like.Producing a signature involves a function that depends on the message itself and the private key. The private key ensures that you’re the only one to produce that signature and the fact that it depends on a message means that no one can just copy your signature from a prior message you have signed..