If you’ve tried to dive into the mysterious thing called blockchain, you’ll be forgiven for retreating in horror at the sheer opaqueness of the technical jargon that is often used to frame it. So before we get into what crytpocurrency is and how blockchain technology is changing the world, let’s talk about what blockchain really is.
In the simplest terms, a blockchain is a digital ledger of transactions, unlike the ledgers we have used for hundreds of years to record sales and purchases. The function of this digital ledger is, in fact, very similar to the traditional ledger because it records debits and credits between people. That’s the core concept behind the blockchain; the difference is who holds the ledger and who verifies the transactions.
With traditional transactions, payment from one person to another involves a type of intermediary to facilitate the transaction. Let’s say Rob wants to transfer £ 20 to Melanie. He can give her money in the form of £ 20 paper, or he can use some kind of banking app to transfer the money directly to his bank account. In both cases, a bank was the intermediary verifying the transaction: Rob’s funds were verified when he took the money out of a cash machine, or it was verified in the app when he made in digital transfer. The bank will decide if the transaction should proceed. The bank also keeps a record of all transactions made by Rob, and is solely responsible for updating it each time Rob pays someone or receives money in his account. In other words, the bank holds and controls the ledger, and everything flows into the bank.
That’s a big responsibility, so it’s important that Rob feels he can trust his bank otherwise, he won’t risk his money with them. He had to trust that the bank would not cheat him, would not lose his money, would not steal, and would not disappear overnight. This need for trust underpins almost every major ethic and part of the monolithic financial industry, to the point that even knowing that banks were not responsible for our money during the 2008 financial crisis, was chosen by the government ( another mediator) to bail them out rather than risk destroying the last bits of trust by allowing them to collapse.
Blockchains function differently in one important part: they are completely decentralized. There is no central clearing house like a bank, and no central ledger maintained by an entity. Instead, the ledger is distributed over an extensive network of computers, called nodes, each of which has a copy of the entire ledger on their respective hard drives. These nodes are connected to each other through a piece of software called a peer-to-peer (P2P) client, which synchronizes the network data of the nodes and ensures that everyone has the same version of ledger at any given point in time. .
When a new transaction is entered into a blockchain, it is first encrypted using the most advanced cryptographic technology. Once encrypted, the transaction converts into something called a block, which is basically the term used for an encrypted group of new transactions. That block will be sent (or broadcast) to the network of computer nodes, where it will be verified by the nodes and, once verified, passed through the network so that the block can be added to the end of the computer’s ledger. in all, below the list of all previous blocks. This is called a chain, so the technology is called a blockchain.
If approved and recorded in 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 critical that Rob trusts his bank to protect his money and manage it properly. To ensure that this happens, there are several regulatory systems in place to verify the actions of banks and ensure that they are appropriate for the purpose. Governments then regulate regulators, creating a kind of tiered system of checks whose sole purpose is to help prevent errors and misconduct. In other words, organizations like the Financial Services Authority exist because banks are not self -reliant. And banks are always wrong and misbehaving, as we have seen many times. If you have a source of authority, power is likely to be abused or misused. The trust relationship between people and banks is rather awkward and dangerous: we don’t really trust them but we don’t feel there are many alternatives.
Blockchain systems, on the other hand, don’t have to trust you. All transactions (or blocks) in a blockchain are verified by network nodes before being added to the ledger, which means that there is no single point of failure and no path to failure. apruba. If a hacker wants to successfully tamper with the ledger of a blockchain, they have to simultaneously hack millions of computers, which is almost impossible. A hacker would also not be able to take down a blockchain network, because, again, they would have to shut down every single computer in a network of computers distributed around the world.
The encryption process itself is also a key factor. Blockchains like Bitcoin use deliberately cumbersome processes for their verification method. In the case of Bitcoin, blocks are validated by nodes that perform a deliberate processor- and time-intensive series of calculations, usually in the form of puzzles or complex mathematical problems, which means that verification is not immediate or accessible. Nodes that delegate the resource to verify blocks are rewarded with a transaction fee and a bounty of newly minted Bitcoins. It has the job of encouraging people to become nodes (because processing blocks like this require powerful computers and a lot of electricity), while also overseeing the process of creating – or mining – units of money. This is called mining, because it involves a lot of effort (on a computer, in this case) to create a new product. It also means that transactions are verified in the most independent way possible, more independently than a government-regulated organization such as the FSA.
This decentralized, democratic and more secure nature of blockchains means that they can operate without the need for regulation (they are self-regulating), government or other opaque intermediaries. They work because people don’t trust each other, rather than anything else.
Let the importance of that sink in for a moment and the excitement around the blockchain begins to be understood.
Where things can be very interesting are blockchain applications beyond cryptocurrencies like Bitcoin. Since one of the underlying principles of the blockchain system is secure, independent verification of a transaction, it is easy to imagine other ways in which this type of process can be valuable. Not surprisingly, many such applications are already in use or developed. Some of the best are:
- Smart contracts (Ethereum): perhaps the most exciting blockchain development after Bitcoin, smart contracts are blocks with code that need to be executed to fulfill the contract. Code can be anything, as long as a computer can do it, but in simple terms it means you can use blockchain technology (with independent verification, unreliable architecture and security) to create a type of escrow system for any type of transaction. As an example, if you are a web designer you can create a contract confirming whether a new client’s website is launched or not, and then automatically release the funds to you when it is ready. No more chasing or invoicing. Smart contracts are also used to prove ownership of an asset such as property or art. The potential to reduce fraud with this method is enormous.
- Cloud storage (Storj): Cloud computing is transforming the web and bringing about the advent of Big Data which, in turn, is starting a new AI revolution. But most cloud-based systems are run on servers hosted on single-location server farms, owned by one entity (Amazon, Rackspace, Google etc). It presents all the same problems as the banking system, where your data is controlled by a single, opaque organization that represents a point of failure. Sharing data on a blockchain completely eliminates the issue of trust and also promises to increase reliability because it is more difficult to get a network blockchain.
- Digital identification (ShoCard): two of the biggest issues of our time are theft identification and data protection. With extensive centralized services like 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 personal data is appalling. Blockchain technology offers a potential solution to this by wrapping your key data in an encrypted block that can be verified by the blockchain network if you need to prove your identity. Its applications range from the obvious exchange of passports and ID cards to other areas such as the exchange of passwords. It can be huge.
- Digital voting: extremely topical after an investigation into Russia’s influence in the recent U.S. elections, digital voting has long been suspected of being unreliable and highly vulnerable to tampering. Blockchain technology offers a way to verify that a voter’s vote has been successfully cast while maintaining their anonymity. It promises not only to reduce election fraud but also to increase the overall turnout of voters because people will be able to vote on their mobile phones.
Blockchain technology is still very much in its infancy and most applications are still far from general use. Even Bitcoin, the most established blockchain platform, is subject to considerable volatility which introduces its relative new status. However, the potential for the blockchain to solve some of the major problems we face today makes it an incredibly exciting and attractive technology to follow. I will definitely watch.