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Crypto-what?
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's often used to frame it. So before we enter into just what a crytpocurrency is and how blockchain technology might change the entire world, let's discuss what blockchain actually is.opensource
In the simplest terms, a blockchain is a digital ledger of transactions, not unlike the ledgers we've been using for hundreds of years to record sales and purchases. The event with this digital ledger is, actually, more or less identical to a normal ledger in that it records debits and credits between people. That's 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 sort of intermediary to facilitate the transaction. Let's say Rob desires to transfer £20 to Melanie. He is able to either give her money in the form of a £20 note, or they can use some sort of banking app to transfer the cash 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 cash out of a cash machine, or they are verified by the app when he makes the digital transfer. The bank decides if the transaction should go ahead. The bank also holds the record of 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 a lot of responsibility, so it's critical that Rob feels they can trust his bank otherwise he wouldn't 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 importance of trust has underpinned almost any major behaviour and facet of the monolithic finance industry, to the extent that even when it had been discovered that banks were being irresponsible with your money throughout the financial crisis of 2008, the federal government (another intermediary) thought we would bail them out rather than risk destroying the final fragments of trust by letting them collapse.
Blockchains operate differently in one single key respect: they are entirely decentralised. There is no central clearing house just like 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 that holds a copy of the whole ledger on the respective hard drives. These nodes are connected together with a software application called a peer-to-peer (P2P) client, which synchronises data throughout the network of nodes and makes sure everybody has exactly the same version of the ledger at any given point in time.
Whenever a new transaction is entered into a blockchain, it's first encrypted using state-of-the-art cryptographic technology. Once encrypted, the transaction is converted to something called a block, which can be basically the term useful 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, handed down through the network so that the block can be added to the end of the ledger on everybody's computer, beneath the list of previous blocks. This really is called the chain, hence the tech is called a blockchain.
Once approved and recorded into 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 as opposed to normal currency?
The clear answer is trust. As mentioned before, with the banking system it is crucial that Rob trusts his bank to guard his money and handle it properly. To ensure this happens, enormous regulatory systems exist to verify what of the banks and ensure they are fit for purpose. Governments then regulate the regulators, creating a kind 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 the own. And banks frequently make mistakes and misbehave, as we've seen way too many times. When you have just one supply of authority, power tends to get 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 added to the ledger, this means there's no single point of failure and no single approval channel. If your hacker wanted to successfully tamper with the ledger on a blockchain, they would need to simultaneously hack an incredible number of computers, which can be almost impossible. A hacker would also be more or less unable to create a blockchain network down, as, again, they will 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 just like the Bitcoin one use deliberately difficult processes for their verification procedure. In case of Bitcoin, blocks are verified by nodes performing a deliberately processor- and time-intensive group of calculations, often in the form of puzzles or complex mathematical problems, which mean that verification is neither instant nor accessible. Nodes that do commit the resource to verification of blocks are rewarded with a transaction fee and a bounty of newly-minted Bitcoins. It has the function of both incentivising visitors to become nodes (because processing blocks like this calls for pretty powerful computers and a lot of electricity), whilst also handling the method of generating – or minting – units of the currency. This really is called mining, because 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 probably the most independent way possible, more independent when compared to a government-regulated organisation just 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 and other opaque intermediary. They work because people don't trust one another, rather than regardless of.
Allow significance of that sink in for a while and the excitement around blockchain starts to produce sense.
Smart contracts
Where things get really interesting may be the applications of blockchain beyond cryptocurrencies like Bitcoin. Given that one of the underlying principles of the blockchain system may be the secure, independent verification of a transaction, it's easy to assume other ways in which this sort of process can be valuable. Unsurprisingly, many such applications happen to be being used or development. Some of the finest ones are:
Smart contracts (Ethereum): probably the most exciting blockchain development after Bitcoin, smart contracts are blocks which contain code that must be executed to ensure that the contract to be fulfilled. The code can be anything, so long as a computer can execute it, but in simple terms it means that you can use blockchain technology (with its independent verification, trustless architecture and security) to generate a kind of escrow system for any type of transaction. For example, if you're a website designer you can create an agreement that verifies in case a new client's website is launched or not, and then automatically release the funds to you once it is. You can forget chasing or invoicing. Smart contracts are also used to prove ownership of a property such as for instance property or art. The possibility of reducing fraud with this process is enormous.
Cloud storage (Storj): cloud computing has revolutionised the web and caused the advent of Big Data which includes, consequently, kick started the brand new AI revolution. But many cloud-based systems are operate on servers stored in single-location server farms, owned with a single entity (Amazon, Rackspace, Google etc). This presents all the same problems because 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 increase reliability as it is so 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 main database, the possibility of abuse of our personal data is terrifying. Blockchain technology provides 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 with this add the obvious replacement of passports and I.D. cards to other places such as for instance 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 to be both unreliable and highly at risk of tampering. Blockchain technology provides a method of verifying that a voter's vote was successfully sent while retaining their anonymity. It promises not just to lessen fraud in elections but additionally to increase general voter turnout as people will have the ability to vote on the mobile phones.
Blockchain technology is still greatly in its infancy and a lot of the applications are a long way from general use. Even Bitcoin, probably the most established blockchain platform, is at the mercy of huge volatility indicative of its relative newcomer status. However, the possibility of blockchain to fix a few of the major problems we face today helps it be an extraordinarily exciting and seductive technology to follow. I will certainly be keeping an eye out.
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