If you’ve attemptedto dive into this mysterious thing called blockchain, you’d be forgiven for recoiling in horror at the sheer opaqueness of the technical jargon that is often used to frame it. So before we enter exactly what a crytpocurrency is and how blockchain technology might change the planet, let’s discuss what blockchain actually is.
In the simplest terms, a blockchain is just a digital ledger of transactions, not unlike the ledgers we have been using for hundreds of years to record sales and purchases. The event of this digital ledger is, actually, more or less identical to a traditional ledger in so it records debits and credits between people. That is the core concept behind blockchain; the difference is who holds the ledger and who verifies the transactions.
With traditional transactions, a payment from one person to some other involves some type of intermediary to facilitate the transaction. Let’s say Rob desires to transfer £20 to Melanie. They can either give her money in the shape of a £20 note, or he can use some type of banking app to transfer the money directly to her bank account. In both cases, a bank could be the intermediary verifying the transaction: Rob’s funds are verified when he takes the money out of a cash machine, or they’re verified by the app when he makes the digital transfer. The financial institution decides if the transaction is going ahead. The financial institution also holds the record of transactions made by Rob, and is solely accountable for updating it whenever Rob pays someone or receives money into his account. Quite simply, the financial institution holds and controls the ledger, and everything flows through the bank.
That’s lots of responsibility, so it’s important that Rob feels he can trust his bank otherwise he would not risk his money with them. He must feel certain that the financial institution will not defraud him, will not lose his money, will not be robbed, and will not disappear overnight. This importance of trust has underpinned pretty much every major behaviour and facet of the monolithic finance industry, to the extent that even if it was learned that banks were being irresponsible with your money through the financial crisis of 2008, the federal government (another intermediary) chose to bail them out as opposed to risk destroying the last fragments of trust by letting them collapse.
Blockchains operate differently in one key respect: they’re entirely decentralised. There is no central clearing house such as for instance a bank, and there is no central ledger held by one entity. Instead, the ledger is distributed across a vast network of computers, called nodes, each which holds a copy of the entire ledger on their respective hard drives. These nodes are connected together using a software application called a peer-to-peer (P2P) client, which synchronises data over the network of nodes and makes sure everybody has the exact same version of the ledger at any given point in time.
When a new transaction is entered right into a blockchain, it is first encrypted using state-of-the-art cryptographic technology. Once encrypted, the transaction is changed into something called a block, which will be basically the word used for an encrypted number of new transactions. That block is then sent (or broadcast) to the network of computer nodes, where it is verified by the nodes and, once verified, offered through the network so that the block may be added to the finish of the ledger on everybody’s computer, under the list of previous blocks. This is called the chain, hence the tech is called a blockchain.
Once approved and recorded to the ledger, the transaction may be completed. This is the way cryptocurrencies like Bitcoin work.
Accountability and removing trust
What’re the benefits of this technique over a banking or central clearing system? Why would Rob use Bitcoin instead of normal currency?
The clear answer is trust. As discussed earlier, with the banking system it is critical that Rob trusts his bank to protect his money and handle it properly. To make certain this happens, enormous regulatory systems exist to verify the actions of the banks and ensure they’re fit for purpose. Governments then regulate the regulators, creating sort of tiered system of checks whose sole purpose is to help prevent mistakes and bad behaviour. Quite simply, organisations such as the Financial Services Authority exist precisely because banks can’t be trusted on their own. And banks frequently make mistakes and misbehave, as we have seen too many times. When you have a single source of authority, power tends to have abused or misused. The trust relationship between people and banks is awkward and precarious: we don’t really trust them but we don’t feel there is much alternative.
Blockchain systems, on one other hand, don’t need one to trust them at all. All transactions (or blocks) in a blockchain are verified by the nodes in the network before being added to the ledger, this means there is not one point of failure and not one approval channel. If a hacker desired to successfully tamper with the ledger on a blockchain, they would need to simultaneously hack countless computers, which will be almost impossible. A hacker would also be more or less unable to bring a blockchain network down, as, again, they would have to have the ability to shut down each computer in a network of computers distributed across the world.
The encryption process itself is also a vital factor. Blockchains such as the Bitcoin one use deliberately difficult processes for his or her verification procedure. In case of Bitcoin, blocks are verified by nodes performing a deliberately processor- and time-intensive number of calculations, often in the shape of puzzles or complex mathematical problems, which show that verification is neither instant nor accessible. Nodes that commit the resource to verification of blocks are rewarded with a transaction fee and a bounty of newly-minted Bitcoins. This has the big event of both incentivising individuals to become nodes (because processing blocks like this calls for pretty powerful computers and lots of electricity), whilst also handling the process of generating – or minting – units of the currency. This is called mining, as it involves a considerable amount of effort (by some type of computer, in this case) to produce a new commodity. It also means that transactions are verified by probably the most independent way possible, more independent than the usual government-regulated organisation such as the FSA.
This decentralised, democratic and highly secure nature of blockchains means they can function without the need for regulation (they are self-regulating), government and other opaque intermediary. They work because people don’t trust one another, as opposed to regardless of.
Let the significance of this sink in for a while and the excitement around blockchain starts to create sense.
Where things get really interesting could be the applications of blockchain beyond cryptocurrencies like Bitcoin. Considering the fact that one of many underlying principles of the blockchain system could be the secure, independent verification of a transaction, it’s easy to imagine alternative methods by which this sort of process may be valuable. Unsurprisingly, many such applications happen to be being used or development. Some of the best ones are:
Smart contracts (Ethereum): essentially the most exciting blockchain development after Bitcoin, smart contracts are blocks that have code that really must be low energy blockchain executed to ensure that the contract to be fulfilled. The code may be anything, as long as some type of computer can execute it, but in simple terms it indicates that you should use blockchain technology (with its independent verification, trustless architecture and security) to produce a type of escrow system for any type of transaction. For example, if you’re a website designer you might create an agreement that verifies if a new client’s website is launched or not, and then automatically release the funds for your requirements once it is. No longer chasing or invoicing. Smart contracts may also be used to prove ownership of an asset such as property or art. The possibility of reducing fraud with this process is enormous.
Cloud storage (Storj): cloud computing has revolutionised the internet and brought about the advent of Big Data which includes, consequently, kick started the new AI revolution. But many cloud-based systems are run using servers stored in single-location server farms, owned with a single entity (Amazon, Rackspace, Google etc). This presents all the same problems while the banking system, in that you data is controlled with a single, opaque organisation which represents a single point of failure. Distributing data on a blockchain removes the trust issue entirely and also promises to increase reliability because it is really much harder to have a blockchain network down.
Digital identification (ShoCard): two of the largest issues of our time are identify theft and data protection. With vast centralised services such as Facebook holding so much data about us, and efforts by various developed-world governments to store digital information regarding their citizens in a main database, the possibility of abuse of our private data is terrifying. Blockchain technology offers a potential solution to this by wrapping your key data up into an encrypted block that can be verified by the blockchain network if you need to prove your identity. The applications of this add the obvious replacement of passports and I.D. cards to other places such as replacing passwords. Maybe it’s huge.
Digital voting: highly topical in the wake of the investigation into Russia’s influence on the recent U.S. election, digital voting has always been suspected of being both unreliable and highly susceptible to tampering. Blockchain technology offers a way of verifying that the voter’s vote was successfully sent while retaining their anonymity. It promises not merely to cut back fraud in elections but also to increase general voter turnout as people will be able to vote on their mobile phones.