If you’ve attempted to dive into this mysterious thing called blockchain, you’d be forgiven for recoiling in horror at the sheer opaqueness of the technical jargon that’s often used to frame it. So before we enter into exactly what a crytpocurrency is and how blockchain technology might change the entire world, let’s discuss what blockchain actually is.
In the simplest terms, a blockchain is a digital ledger of transactions, not unlike the ledgers we’ve been using for more than 100 years to record sales and purchases. The event with this digital ledger is, in fact, pretty much identical to a conventional 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 anyone to another involves some type of intermediary to facilitate the transaction. Let’s say Rob really wants to transfer £20 to Melanie. He can either give her money in the proper execution of a £20 note, or he can use some type of banking app to transfer the money straight to her bank account. In both cases, a bank could be the blockchain carbon credit intermediary verifying the transaction: Rob’s funds are verified when he takes the money out of an income machine, or they’re verified by the app when he makes the digital transfer. The bank decides if the transaction is going ahead. The bank also holds the record of most transactions produced by Rob, and is solely responsible for updating it whenever Rob pays someone or receives money into his account. In other words, the bank holds and controls the ledger, and everything flows through the bank.
That’s plenty 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 confident that the bank won’t defraud him, won’t lose his money, won’t be robbed, and won’t disappear overnight. This requirement for trust has underpinned pretty much every major behaviour and facet of the monolithic finance industry, to the extent that even if it absolutely was learned that banks were being irresponsible with your money throughout the financial crisis of 2008, the federal government (another intermediary) chose to bail them out rather than risk destroying the last fragments of trust by letting them collapse.
Blockchains operate differently in a single key respect: they’re entirely decentralised. There is no central clearing house such as a bank, and there’s 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 to one another using a software program called a peer-to-peer (P2P) client, which synchronises data over the network of nodes and makes sure that everybody has the exact same version of the ledger at any given point in time.
Each time a new transaction is entered in to a blockchain, it’s 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 term employed for an encrypted number of new transactions. That block is then sent (or broadcast) into the network of computer nodes, where it’s verified by the nodes and, once verified, offered through the network so the block could be added to the finish of the ledger on everybody’s computer, under the list of most previous blocks. This really is called the chain, hence the tech is known as a blockchain.
Once approved and recorded into the ledger, the transaction could be completed. This is one way cryptocurrencies like Bitcoin work.
Accountability and removing trust
What are the features of this system over a banking or central clearing system? Why would Rob use Bitcoin rather than normal currency?
The solution is trust. As mentioned before, with the banking system it is important that Rob trusts his bank to protect his money and handle it properly. To ensure this happens, enormous regulatory systems exist to verify what 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 simply help prevent mistakes and bad behaviour. In other words, organisations just like the Financial Services Authority exist precisely because banks can’t be trusted on their own. And banks frequently make mistakes and misbehave, as we’ve seen way too many times. When you yourself have just one 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’s much alternative.
Blockchain systems, on the other hand, don’t need you 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’s not one point of failure and not one approval channel. If your hacker desired to successfully tamper with the ledger on a blockchain, they would need to simultaneously hack an incredible number of computers, which will be almost impossible. A hacker would also be pretty much unable to create a blockchain network down, as, again, they will have to be able to shut down each computer in a network of computers distributed around the world.
The encryption process itself can also be a key factor. Blockchains just like the Bitcoin one use deliberately difficult processes for their verification procedure. In the event of Bitcoin, blocks are verified by nodes performing a deliberately processor- and time-intensive series of calculations, often in the proper execution 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 function of both incentivising individuals to become nodes (because processing blocks like this involves pretty powerful computers and plenty of electricity), whilst also handling the process of generating – or minting – units of the currency. This really is known as mining, as it involves a considerable amount of effort (by a computer, in this case) to produce a new commodity. It entails that transactions are verified by the most independent way possible, more independent than the usual government-regulated organisation just like the FSA.
This decentralised, democratic and highly secure nature of blockchains means that they’ll function without the necessity for regulation (they are self-regulating), government or other opaque intermediary. They work because people don’t trust one another, rather than regardless of.
Allow the significance of this sink in for a while and the excitement around blockchain starts to produce sense.
Where things get really interesting could be the applications of blockchain beyond cryptocurrencies like Bitcoin. Given that one of the 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 type of process could be valuable. Unsurprisingly, many such applications already are being used or development. Some of the best ones are:
Smart contracts (Ethereum): the most exciting blockchain development after Bitcoin, smart contracts are blocks which contain code that must be executed in order for the contract to be fulfilled. The code could be anything, provided that a computer can execute it, in simple terms it indicates that you can use blockchain technology (with its independent verification, trustless architecture and security) to generate a type of escrow system for almost any transaction. As an example, if you’re a net designer you could create a contract that verifies in case a new client’s website is launched or not, and then automatically release the funds for you once it is. You can forget chasing or invoicing. Smart contracts may also be getting used to prove ownership of a property such as property or art. The potential for reducing fraud with this method is enormous.
Cloud storage (Storj): cloud computing has revolutionised the internet and caused the advent of Big Data that has, in turn, kick started the newest AI revolution. But many cloud-based systems are run on servers stored in single-location server farms, owned with a single entity (Amazon, Rackspace, Google etc). This presents yet problems while the banking system, in that you data is controlled with a single, opaque organisation which represents just one point of failure. Distributing data on a blockchain removes the trust issue entirely and also promises to improve reliability because it is really much harder to take a blockchain network down.
Digital identification (ShoCard): two of the biggest 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 about their citizens in a central database, the potential for 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 which can be verified by the blockchain network once you need certainly to prove your identity. The applications with this range from the obvious replacement of passports and I.D. cards to other places such as replacing passwords. It could be 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 to be both unreliable and highly at risk of tampering. Blockchain technology offers a method of verifying that a voter’s vote was successfully sent while retaining their anonymity. It promises not just to cut back fraud in elections but additionally to improve general voter turnout as people will have the ability to vote on their mobile phones.