If you’ve experimented with 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 just 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 really a digital ledger of transactions, not unlike the ledgers we’ve been using for centuries to record sales and purchases. The event with this digital ledger is, in fact, more or less 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 one person to another involves some type of intermediary to facilitate the transaction. Let’s say Rob wants to transfer £20 to Melanie. He is able to either give her profit 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 may be the intermediary verifying the transaction: Rob’s funds are verified when he takes the money out of a money machine, or they are verified by the app when he makes the digital transfer. The financial institution decides if the transaction should go ahead. The financial institution also holds the record of most transactions made by Rob, and is solely in charge of updating it whenever Rob pays someone or receives money into his account. Put simply, the bank holds and controls the ledger, and everything flows through the bank.
That’s lots of responsibility, so it’s critical 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 dependence on trust has underpinned almost any major behaviour and facet of the monolithic finance industry, to the extent that even when it had been unearthed that banks were being irresponsible with this money throughout the financial crisis of 2008, the government (another intermediary) chose to bail them out as opposed to risk destroying the ultimate fragments of trust by letting them collapse.
Blockchains operate differently in one key respect: they are entirely decentralised. There is no central clearing house such as for instance 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 of which holds a copy of the entire ledger on the respective hard drives. These nodes are connected together using a software application called a peer-to-peer (P2P) client, which synchronises data throughout 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 into a blockchain, it’s first encrypted using state-of-the-art cryptographic technology. Once encrypted, the transaction is transformed into something called a block, that will be basically the term useful for an encrypted band of new transactions. That block is then sent (or broadcast) to the network of computer nodes, where it’s verified by the nodes and, once verified, offered through the network so that the block can be included with the finish of the ledger on everybody’s computer, under the list of most previous blocks. This is called the chain, hence the tech is known as a blockchain.
Once approved and recorded to the ledger, the transaction can be completed. This is the way cryptocurrencies like Bitcoin work.
Accountability and the removal of trust
What’re the features of this method over a banking or central clearing system? Why would Rob use Bitcoin instead of normal currency?
The solution is trust. As discussed earlier, with the banking system it is critical that Rob trusts his bank to safeguard his money and handle it properly. To ensure this happens, enormous regulatory systems exist to verify those things of the banks and ensure they are 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. Put simply, organisations like the Financial Services Authority exist precisely because banks can’t be trusted on the own. And banks frequently make mistakes and misbehave, as we’ve seen too many times. When you yourself have a single supply of authority, power tends to obtain 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 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 included with the ledger, this means there’s no single point of failure and no single approval channel. If your hacker desired to successfully tamper with the ledger on a blockchain, they would need to simultaneously hack millions of computers, that will be almost impossible. A hacker would also be more or less unable to create a blockchain network down, as, again, they would have to be able to power down each computer in a network of computers distributed around the world.
The encryption process itself can also be a key 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 number of calculations, often in the proper execution of puzzles or complex mathematical problems, which imply 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 event of both incentivising visitors 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 known as mining, because it involves a considerable amount of effort (by a computer, in this case) to generate a new commodity. It also means 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 secure nature of blockchains means that they can function without the necessity for regulation (they are self-regulating), government or other opaque intermediary. They work because people don’t trust one another, as opposed to in spite of.
Allow significance of this sink in for some time and the excitement around blockchain starts to make sense.
Where things get really interesting may be the applications of blockchain beyond cryptocurrencies like Bitcoin. Given that among the underlying principles of the blockchain system may be the secure, independent verification of a transaction, it’s easy to assume other ways where this kind of process can be valuable. Unsurprisingly, many such applications are already 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 contain code that really must be executed in order for the contract to be fulfilled. The code can be anything, as long as a computer can execute it, however in simple terms it means that you can use blockchain technology (with its independent verification, blockchain carbon credit trustless architecture and security) to produce a type of escrow system for any type of transaction. For example, if you’re a net 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 you once it is. No further chasing or invoicing. Smart contracts are also getting used to prove ownership of a tool such as for instance property or art. The possibility of reducing fraud with this approach is enormous.
Cloud storage (Storj): cloud computing has revolutionised the net and brought about the advent of Big Data that has, subsequently, kick started the new AI revolution. But most cloud-based systems are run on servers stored in single-location server farms, owned by way of a single entity (Amazon, Rackspace, Google etc). This presents all the same problems since the banking system, for the reason that you data is controlled by way of 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 since it is indeed much harder to take a blockchain network down.
Digital identification (ShoCard): two of the greatest issues of our time are identify theft and data protection. With vast centralised services such as for instance Facebook holding so much data about us, and efforts by various developed-world governments to store digital details about their citizens in a central database, the possibility of abuse of our private data is terrifying. Blockchain technology offers a potential solution to the by wrapping your key data up into an encrypted block that can be verified by the blockchain network if you have to prove your identity. The applications with this range from the obvious replacement of passports and I.D. cards to other areas such as for instance 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 to be both unreliable and highly vulnerable to tampering. Blockchain technology offers a means of verifying a voter’s vote was successfully sent while retaining their anonymity. It promises not just to reduce fraud in elections but in addition to increase general voter turnout as people will be able to vote on the mobile phones.