If you tried to immerse yourself in this mysterious thing called blockchain, you would be forgiven for stepping back in horror at the sheer opacity of technical jargon that is often used to frame it. So before we get into what a cryptocurrency is and how blockchain technology can change the world, let’s talk about what blockchain really is.
In simpler terms, a blockchain is a digital transaction log, 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, virtually identical to that of a traditional ledger, as it records debits and credits between people. This is the basic concept behind the blockchain; the difference is who owns the ledger and who verifies the transactions.
With traditional transactions, one payment from one person to another involves some form of intermediary to facilitate the transaction. Suppose Rob wants to transfer £ 20 to Melanie. You can give him cash in the form of a £ 20 note or you can use some kind of bank application to transfer the money directly to your bank account. In either case, a bank is the intermediary that verifies the transaction: Rob’s funds are checked when he withdraws money from an ATM, or are verified by the application when he makes the digital transfer. The bank decides whether the transaction should continue. The bank also keeps track of all transactions made by Rob, and is solely responsible for updating it whenever Rob pays someone or receives money in his account. In other words, the bank maintains and controls the general ledger, and everything flows through the bank.
That’s a lot of responsibility, so it’s important for Rob to feel that he can trust his bank, otherwise he wouldn’t risk his money with them. He must feel safe that the bank will not scam him, he will not lose his money, he will not be robbed and he will not disappear overnight. This need for confidence has underpinned virtually every major behavior and facet of the monolithic financial industry, to the point that even when it was discovered that banks were being irresponsible with our money during the 2008 financial crisis, the government ( another intermediary) chose to rescue them instead of risking destroying the final fragments of trust by letting them collapse.
Blockchains work differently in one key aspect: they are completely decentralized. There is no central clearing house like a bank, and there is no central ledger held by an entity. Instead, the ledger is distributed across a wide network of computers, called nodes, each of which contains a copy of the entire ledger to its respective hard drives. These nodes connect to each other using software called a peer-to-peer (P2P) client, which synchronizes data across the network of nodes and ensures that everyone has the same version of the ledger at a given time. .
When a new transaction is entered into a blockchain, it is first encrypted with state-of-the-art cryptographic technology. Once encrypted, the transaction becomes something called a block, which is basically the term used for an encrypted group of new transactions. This block is then sent (or broadcast) to the network of computer nodes, where it is verified by the nodes and, once verified, is passed through the network so that the block can be added to the end of the general ledger of everyone’s computer, below the list of all the previous blocks. This is called a chain, so the technology is known as a blockchain.
Once approved and registered in the general ledger, the transaction can be completed. This is how cryptocurrencies like Bitcoin work.
Accountability and confidence-building
What advantages does this system have over a bank or central clearing system? Why would Rob use Bitcoin instead of the normal currency?
The answer is trust. As mentioned before, with the banking system it is crucial that Rob relies on his bank to protect his money and manage it properly. To ensure that this happens, there are huge regulatory systems in place to verify the actions of banks and make sure they are fit for purpose. Governments then regulate regulators, creating a kind of step-by-step system of controls whose sole purpose is to help prevent errors and misbehavior. In other words, organizations like the Financial Services Authority exist precisely because banks cannot trust themselves. And banks often make mistakes and misbehave, as we have seen too many times. When you have a single source of authority, power tends to be abused or misused. The relationship of trust between people and banks is awkward and precarious: we don’t really trust them but we don’t think there are many alternatives.
Blockchain systems, on the other hand, do not require you to rely on them at all. All transactions (or blocks) in a blockchain are checked by network nodes before being added to the general ledger, which means that there is no single point of failure or single channel of approval. If a hacker wanted to successfully manipulate the ledger of a blockchain, he would have to hack millions of computers simultaneously, which is almost impossible. A hacker would also be virtually incapable of disabling a blockchain network, since, again, they should be able to shut down all the computers in a network of computers around the world.
The encryption process itself is also a key factor. Blockchains like Bitcoin use deliberately difficult processes for their verification procedure. In the case of Bitcoin, blocks are verified by nodes that perform a series of deliberately intensive calculations in processor and time, often in the form of puzzles or complex mathematical problems, which means that verification is neither instantaneous nor accessible. Nodes that compromise the use of block verification are rewarded with a transaction fee and a recent Bitcoins reward. This has the function of encouraging people to become nodes (because processing blocks like this requires quite powerful computers and a lot of electricity), while managing the process of generating – or minting – currency units. This is called mining, because it involves considerable effort (by a computer, in this case) to produce a new commodity. It also means that transactions are verified in the most independent way possible, more independent than a government-regulated organization like the FSA.
This decentralized, democratic, and highly secure nature of blockchain makes it possible for them to function without the need for regulation (self-regulation), government, or other opaque intermediaries. They work because people don’t trust each other, rather than in spite.
Let the importance of this sink in for a while and the excitement around blockchain starts to make sense.
Where things get really interesting are blockchain apps beyond cryptocurrencies like Bitcoin. Since one of the underlying principles of the blockchain system is the secure and independent verification of a transaction, it is easy to imagine other ways in which this type of process can be valuable. Not surprisingly, many of these applications are already in use or under development. Some of the best are:
- Smart Contracts (Ethereum): Probably the most exciting blockchain development after Bitcoin, smart contracts are blocks that contain code that must be executed for the contract to be fulfilled. The code can be anything, as long as a computer can run it, but in simple terms it means that you can use blockchain technology (with its independent verification, architecture and security without trust) to create a kind of trust system for to any type of transaction. . For example, if you are a web designer, you can create a contract that verifies whether or not a new client’s website is started, and then automatically deliver the funds to you once you do. No more chasing or billing. Smart contracts are also used to prove ownership of an asset such as a property or art. The potential for reducing fraud with this approach is enormous.
- Cloud Storage (Storj): Cloud computing has revolutionized the web and led to the arrival of Big Data, which in turn has driven the new AI revolution. But most cloud-based systems run on servers stored on single-location, farm-owned server farms (Amazon, Rackspace, Google, etc.). This presents all the same problems as the banking system, as your data is controlled by a single opaque organization that represents a single point of failure. Distributing data in a blockchain completely eliminates the trust issue and also promises to increase reliability, as it is much more difficult to remove a blockchain network.
- Digital ID (ShoCard): Two of the most important issues of our time are ID theft and data protection. With large centralized services like Facebook containing so much data about us and the efforts of various governments in the developed world to store digital information about their citizens in a central database, the potential for abuse of our personal data is frightening. Blockchain technology offers a potential solution to this by wrapping your key data in an encrypted block that the blockchain network can verify whenever you need to prove your identity. Its applications range from the obvious replacement of passports and ID cards to other areas such as the replacement of passwords. It could be huge.
- Digital Voting: Highly current as a result of research into Russia’s influence in the recent US election, digital voting has long been suspected of being unreliable and highly vulnerable to manipulation. Blockchain technology provides a way to verify that a voter’s vote has been successfully sent while maintaining anonymity. It promises not only to reduce election fraud, but also to increase voter turnout, as people will be able to vote on their mobile phones.
Blockchain technology is still in its infancy and most applications are far from general use. Even Bitcoin, the most established blockchain platform, is subject to high volatility indicative of its relatively newcomer status. However, the potential of the blockchain to solve some of the major problems we face today makes it an extraordinarily exciting and seductive technology to follow. I’m sure I’ll be careful.