Table of contents
Photo by Hello I'm Nik on Unsplash
Recap
Last week we explained "The Byzantine General's Problem" which is used as an analogy to describe the challenge of establishing consensus in a decentralized network where some nodes can be dishonest or nodes are connected using an insecure network.
Blockchain Protocol
Let us take a moment to go through the below visualization which depicts the flow of a typical transaction in traditional banking:
- Customer logs into the banking system.
- System checks the customer login & password with that in the customer database
- Customer Initiates transaction
- Transaction is checked and validated (Does the customer have required funds? Is he or she authorized to do such transactions? etc)
- Transaction is authorized
- Transaction forms part of transaction database
There are control mechanisms at various stages as :
- There is a secure banking system which the customer has access to once the bank on boards a customer.
- The system validates the customer login and password
- The transaction is checked for validity & accuracy by the system or a banking staff
- The transaction is again checked before authorization either by the system itself (through customer 2FA or authorization password) or by another senior staff.
So, basically there is an infrastructure & rules around which traditional banking carries on its activities in line with the below framework :
- Central Bank rules & regulations
- International laws
- Internal Policies & Procedures
All of the above processes, infrastructure, framework & rules (and maybe more as Financial Services is one of the most regulated sectors) are the protocols around which traditional banking functions & thrives.
Now, let us take a moment to visualize a blockchain :
At a very high level, the major infrastructure in a blockchain is nodes & protocols. (It is not that simple but for now, this will suffice!!) .
A Blockchain Protocol is a set of underlying rules that define how a blockchain will work. Based on the underlying rules of the protocol, it is possible to build a BUSINESS ecosystem. Usually, protocol's rules comprise everything from how tokens can be issued, how value is created, & how interactions happen on top of the protocol. (Source : here)
For example, the Bitcoin whitepaper laid out a set of computing rules for the distributed database. The Bitcoin protocol includes algorithms that regulate the mining function across the network. The difficulty of the Proof of Work algorithm is adjusted dynamically by the protocol. The protocol also halves the rate at which new bitcoins are created every 4 years.
Protocols ensure :
- Decentralization as the nodes will behave as per the underlying protocols of the network without any central entity fixing the rules as per their whims & fancies.
- Adequate checks and balances against double spending.
- Security on the Blockchain
With that understanding, let us move forward.