KT Explainer series: What is blockchain technology?

This is a part one of a five-part series that takes an in-depth look into the fascinating world of blockchain technology, cryptocurrencies, the metaverse, and NFTs

by Dhanusha Gokulan

Published: Tue 24 May 2022, 5:39 PM

Last updated: Fri 17 Jun 2022, 6:53 PM

Of late, cryptocurrencies, the metaverse, and non-fungible tokens (NFTs) have become the ultimate buzzword. If you don’t have it, you are uncool. If you don’t know anything about it, better not mention it.

Cryptocurrency has made several teenagers and college dropout billionaires, yet, is this digital cash the next revolution? Couples find love and get married on the metaverse, but is the wedding legally binding?

NFTs are everywhere these days. From the Bored Ape Yacht Club, an exclusive collection of 10,000 unique Bored Ape NFTs, to Twitter founder Jack Dorsey’s first-ever tweet converted into an NFT.

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And from Emirates Airlines announcing its foray into utilitarian NFTs to Dubai’s Museum of the Future’s collection, the explosion of information from the blockchain universe leaves one wondering – what is going on here? Moreover, all of this boils down to a single question. What exactly is the point of it all?

To understand the fast-evolving and highly volatile world of digital currencies, Khaleej Times has created a simple five-part explainer that delves into the basics of this technology and answers the most pertinent question - how can one make money in this elusive new world?

The first part explains blockchain technology - the decentralised online ledger system that makes all crypto-based transactions possible.

What are digital assets?

According to the Garter Finance Glossary, a digital asset is anything stored digitally and is uniquely identifiable that organisations can use to realise value. Examples of digital assets include documents, audio, videos, logos, slide presentations, spreadsheets and websites.

However, what is the difference between cryptocurrency and digital assets? While the two terms are used interchangeably, they are different in several ways. A digital asset is a non-tangible asset created, traded and stored in a digital format. However, in the context of the blockchain, digital assets include crypto tokens and cryptocurrencies.

Meet Musfir Khawaja, the co-founder of NFTOne.me, an online marketplace that connects the world to Middle East-based creators and digital assets.

Supplied photo

The resident expert on all things digital, Khawaja’s company immortalised the Pontifex carpet gifted by His Highness Sheikh Mohamad Bin Zayed Al Nahyan, President of the UAE, to Pope Francis in September 2016 as an NFT. Sheikh Mohammed gifted the Pope the carpet woven by Afghan women during a visit to the Vatican.

How was a carpet, which one can touch and feel, converted into an NFT- a digital art? More on this in the following series.

What is blockchain technology?

Khawaja said to understand the trade of cryptocurrencies; one must understand the workings of blockchain technology. He explained, “Simply put, a blockchain is a decentralised system of recording information in a network of computers that makes it impossible to change, hack, or cheat the system.”

A single centralised system does not manage the system as the data in this network is encrypted by cryptographic encryption. “No central authority, like banks, can control this decentralised system.”

How does it work?

Providing a real-world example, Khawaja said, “I owe money to X, who owes that money to Y. In a digital banking system, these transactions can be easily compromised. However, no one can overpower the blockchain or delete any of the information written on that ledger in the digital world.”

Blockchain technology is a structure that stores these transactional records, also known as the block, of the public in several databases, known as the ‘chain’ in a network connected through peer-to-peer nodes. Every transaction in this ledger is authorised by the owner’s digital signature, which authenticates the transaction and safeguards it from tampering.

Simply put, the digital ledger is like a shared spreadsheet shared among several computers in a network, in which the transactional records are stored based on actual purchases.

What’s fascinating is that anybody can see the data, but they can’t corrupt it. Examples of blockchain are Bitcoin and Ethereum, which are constantly growing as blocks are being added to them, said Khawaja. “in this case, Ethereum is the blockchain, and Ether is the currency.”

Who invented the blockchain?

In 2008, a developer or group of developers working under the pseudonym Satoshi Nakamoto released a white paper establishing the model for a blockchain. The first decentralised cryptocurrency ever created is Bitcoin, first released as open-source software in 2009.

Khwaja said, “Interestingly, the true identity of Bitcoin remains a mystery.” Satoshi Nakamoto is the pseudonym for whoever penned the original Bitcoin whitepaper, available online for free, and is the identity credited with inventing Bitcoin itself, explained Khawaja. Nakamoto is worth approximately $48 billion. Since the release of Bitcoin, many other cryptocurrencies have been created.

How do transactions get into the blockchain?

Key steps a transaction must go through before it is added to the blockchain:

Step 1: Authentication

A transaction is requested and authenticated with no bank or regulator controlling the transacts. It is done using cryptographic keys, a string of data (like a password) that identifies a user and gives access to their ‘account’ or ‘wallet’ of value on the system.

Each user has a private key and a public key that everyone can see. Using them creates a secure digital identity to authenticate the user via digital signatures and ‘unlock’ the transaction they want to perform.

Step 2: Authorisation

Once the transaction is agreed upon between the users, it needs to be approved or authorised before adding it to a block in the chain.

Step 3: Block is sent to every node

For a public blockchain, the decision to add a transaction to the chain is made by consensus. This means that most “nodes” (or computers in the network) must agree that the transaction is valid.

Step 4: Nodes validate the transaction

Step 5: What is mining? Nodes receive a reward for proof of work, typically in cryptocurrency.

The people who own the computers in the network are incentivised to verify transactions through rewards. This process is known as ‘proof of work’. This requires the people who own the computers in the network to solve a complex mathematical problem to be able to add a block to the chain. Mining solves the problem, and miners are usually rewarded for their work in cryptocurrency.

Step 6: Block is added to the existing blockchain

Step 7: Update is distributed across the network

Step 8: Transaction is complete

In part two of the series, Khaleej Times looks at the various cryptocurrencies, including Bitcoin, and how one can make money by trading them. Buy? Or Hold On for Dear Life (HODL)?

*With inputs from EuroMoney.com

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