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 is often used to frame it. So before we get into what a crytpocurrency is and how blockchain technology might change the world, let’s discuss what blockchain truly is.
In the simplest terms, a blockchain is a digital ledger of transactions, not unlike the ledgers we have been using for hundreds of years to record sales and purchases. The function of this digital ledger is, in fact, pretty much identical to a traditional ledger in that it records debits and credits between people. That is the chief concept behind blockchain; the difference is who holds the ledger and who verifies the transactions.
With traditional transactions, a payment from one person to another involves some kind of intermediary to ease the transaction. Let’s say Rob wants to move £20 to Melanie. He can either give her cash in the form of a £20 observe, or he can use some kind of banking app to move the money directly to her bank account. In both situations, a bank is the intermediary verifying the transaction: Rob’s funds are verified when he takes the money out of a cash machine, or they are verified by the app when he makes the digital move. The bank decides if the transaction should go ahead. The bank also holds the record of all transactions made 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 by the bank.
That’s a lot of responsibility, so it’s important that Rob feels he can trust his bank otherwise he would not risk his money with them. He needs to feel confident that the bank will not defraud him, will not lose his money, will not be robbed, and will not disappear overnight. This need for trust has underpinned pretty much every major behaviour and facet of the monolithic finance industry, to the extent that already when it was discovered that edges were being irresponsible with our money during the financial crisis of 2008, the government (another intermediary) chose to bail them out instead of risk destroying the final particles of trust by letting them collapse.
Blockchains function differently in one meaningful respect: they are thoroughly decentralised. There is no central clearing house like a bank, and there is no central ledger held by one entity. Instead, the ledger is distributed across a great network of computers, called nodes, each of which holds a copy of the complete ledger on their respective hard drives. These nodes are connected to one another via a piece of software called a peer-to-peer (P2P) client, which synchronises data across the network of nodes and makes sure that everybody has the same version of the ledger at any given point in time.
When a new transaction is entered into a blockchain, it is first encrypted using state-of-the-art cryptographic technology. Once encrypted, the transaction is converted to something called a block, which is basically the term used for an encrypted group of new transactions. That block is then sent (or broadcast) into the network of computer nodes, where it is verified by the nodes and, once verified, passed on by the network so that the block can be additional to the end of the ledger on everybody’s computer, under the list of all past blocks. This is called the chain, hence the tech is referred to as a blockchain.
Once approved and recorded into the ledger, the transaction can be completed. This is how cryptocurrencies like Bitcoin work.
Accountability and the removal of trust
What are the advantages of this system over a banking or central clearing system? Why would Rob use Bitcoin instead of normal money?
The answer is trust. As mentioned before, with the banking system it is basic that Rob trusts his bank to protect his money and manager it properly. To ensure this happens, enormous regulatory systems exist to verify the actions of the edges and ensure they are fit for purpose. Governments then control the regulators, creating a sort of tiered system of checks whose only purpose is to help prevent mistakes and bad behaviour. In other words, organisations like the Financial sets Authority exist precisely because edges can’t be trusted on their own. And edges frequently make mistakes and misbehave, as we have seen too many times. When you have a single source of authority, strength tends to get abused or misused. The trust relationship between people and edges is awkward and precarious: we don’t really trust them but we don’t feel there is much different.
Blockchain systems, however, 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 additional to the ledger, which method there is no single point of failure and no single approval channel. If a hacker wanted to successfully tamper with the ledger on a blockchain, they would have to simultaneously hack millions of computers, which is almost impossible. A hacker would also be pretty much unable to bring a blockchain network down, as, again, they would need to be able to shut down every single computer in a network of computers distributed around the world.
The encryption course of action itself is also a meaningful factor. Blockchains like the Bitcoin one use deliberately difficult processes for their verification procedure. In the case of Bitcoin, blocks are verified by nodes performing a deliberately processor- and time-intensive series of calculations, often in the form of puzzles or complicate mathematical problems, which average that verification is neither moment nor easy to reach. Nodes that do 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 people to become nodes (because processing blocks like this requires pretty powerful computers and a lot of electricity), whilst also handling the time of action of generating – or minting – units of the money. This is referred to as mining, because it involves a important amount of effort (by a computer, in this case) to produce a new commodity. It also method that transactions are verified by the most independent way possible, more independent than a government-regulated organisation like the FSA.
This decentralised, democratic and highly obtain character of blockchains method that they can function without the need for regulation (they are self-regulating), government or other opaque intermediary. They work because people don’t trust each other, instead of in spite of of.
Let the significance of that sink in for a while and the excitement around blockchain starts to make sense.
Where things get really interesting is the applications of blockchain beyond cryptocurrencies like Bitcoin. Given that one of the inner principles of the blockchain system is the obtain, independent verification of a transaction, it’s easy to imagine other ways in which this kind of course of action can be valuable. Unsurprisingly, many such applications are already in use or development. Some of the best ones are:
- Smart contracts (Ethereum): probably the most exciting blockchain development after Bitcoin, smart contracts are blocks that contain code that must be executed in order for the contract to be fulfilled. The code can be anything, as long as a computer can execute it, but in simple terms it method that you can use blockchain technology (with its independent verification, trustless architecture and security) to create a kind of escrow system for any kind of transaction. As an example, if you’re a web designer you could create a contract that verifies if a new client’s website is launched or not, and then automatically release the funds to you once it is. No more chasing or invoicing. Smart contracts are also being used to prove ownership of an asset such as character or art. The possible for reducing fraud with this approach is enormous.
- Cloud storage (Storj): cloud computing has revolutionised the web and brought about the arrival of Big Data which has, in turn, kick started the new AI dramatical change. But most cloud-based systems are run on servers stored in single-location server farms, owned by a single entity (Amazon, Rackspace, Google etc). This presents all the same problems as the banking system, in that you data is controlled by a single, opaque organisation which represents a single point of failure. Distributing data on a blockchain removes the trust issue thoroughly and also promises to increase reliability as it is so much harder to take a blockchain network down.
- Digital identification (ShoCard): two of the biggest issues of our time are clarify theft and data protection. With great centralised sets 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 possible for abuse of our personal data is terrifying. Blockchain technology offers a possible solution to this by wrapping your meaningful data up into an encrypted block that can be verified by the blockchain network whenever you need to prove your identity. The applications of this range from the obvious substitute of passports and I.D. cards to other areas 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 long been suspected of being both unreliable and highly unprotected to tampering. Blockchain technology offers a way of verifying that a voter’s vote was successfully sent while retaining their anonymity. It promises not only to reduce fraud in elections but also to increase general voter turnout as people will be able to vote on their mobile phones.
Blockchain technology is nevertheless very much in its beginning and most of the applications are a long way from general use. already Bitcoin, the most established blockchain platform, is unprotected to huge volatility indicative of its relative newcomer position. However, the possible for blockchain to solve some of the major problems we confront today makes it an extraordinarily exciting and seductive technology to follow. I will certainly be keeping an eye out.