Intro to Blockchain Technology
By now most of us have heard of and/or know what bitcoin is, after intense speculation about its future as a replacement currency it saw a meteoric rise in its value. But far fewer people know about the technology that powers bitcoin and made it so exciting in the first place. In 2008 a person (or a group of people) by the name of Satoshi Nakamoto invented Bitcoin and the blockchain technology that would power it. The identity of Satoshi is still not known, but the fruits of his labor have already had a far reaching impact. Part of what makes blockchain so amazing is that it was able to solve the double-spending problem in a decentralized manner without needing to rely on a central server for authentication.
What is a blockchain then? Put simply it is a decentralized, distributed (through the internet), typically public digital ledger used to maintain records called blocks. They are then linked and secured utilizing cryptography, with every block containing a cryptographic hash of the previous block, allowing it to access all the records that have come before while keeping those records secure. In addition they also contain a timestamp and transaction data. By design blockchains are resistant to record modification, both malicious or otherwise. Because it functions as an open ledger distributed across a vast peer to peer network consisting of hundreds or thousands of computers it allows for the maintaining and creation of records in a verifiable and permanent manner. The network adheres to established protocols for communicating and validating new blocks, ensuring that records cannot be altered after the fact without the network majority agreeing on it.
So what is it that makes blockchain so special? There are essentially 3 core tenets of blockchain technology that makes it different, first: it is decentralized meaning there is no primary server that can be hacked, or compromised helping ensure data integrity, second: its records cannot be altered retroactively without altering all subsequent blocks (in essence this results in data that either does not ever change, and therefore is extremely reliable, or requires a decentralized majority to make retroactive changes), third: it should be transparent and visible. This means that anyone who is on the blockchain can see all past, present, and future records for as long as they remain on the blockchain further allowing for record validation.
Blockchains utilize different proofs-of-work to secure their records and allow new blocks into the chain. A popular proof is utilizing hashcash, requiring miners (someone who collects unconfirmed transaction from the network to confirm them) use their CPU power to solve hashcash puzzles to allow the block to be accepted by the network. This only occurs when the miner returns a hash that meets the network set difficulty and is done through trial and error, requiring a significant amount of processing power. In exchange for a batched and verified block from the miner they earn payment once it’s accepted into the blockchain. In the case of Bitcoin the blockchain consists of a ledger of every bitcoin transaction ever made. The network is able to adjust difficulty of the hashcash puzzles as needed to maintain a steady rate of block creation, in the case of Bitcoin they target 6 new blocks being created every hour.
Now I want to clarify what I mean by transparency being a key principle of blockchain. That isn’t to say that in the case of bitcoin you’d be able to see that I sent someone .07 bitcoin, however what would be publicly viewable is that my public address sent 0.7 bitcoin to someone else’s public address. But my actual identity is well protected thanks to some sophisticated cryptography. Therefore unless I revealed to others that a specific public address belonged to me, nobody would ever be able to specifically identify me on the ledger, but it’s transparent in the sense that anyone and everyone can see that transaction as part of the whole blockchain. To see what I mean take a look at a transaction record below, you’ll see multiple addresses but none of them are any more personally identifiable than a random string of letters.
The crypto specialist William Mougayar provides a fairly good simplification of what blockchain technology ultimately accomplishes “The traditional way of sharing documents with collaboration is to send a Microsoft Word document to another recipient and ask them to make revisions to it. The problem with that scenario is that you need to wait until receiving a return copy before you can see or make other changes because you are locked out of editing it until the other person is done with it. That’s how databases work today. Two owners can’t be messing with the same record at once. That’s how banks maintain money balances and transfers; they briefly lock access (or decrease the balance) while they make a transfer, then update the other side, then re-open access (or update again). With Google Docs (or Google Sheets), both parties have access to the same document at the same time, and the single version of that document is always visible to both of them. It is like a shared ledger, but it is a shared document. The distributed part comes into play when sharing involves a number of people.” What makes Blockchain technology so exciting is that it isn’t just limited to finance applications, though it clearly shows the most promise to disrupt that industry. But you can share almost anything through blockchain, and because it is lower cost than traditional methods thanks to not having transaction fees, you can cut out middlemen like credit card processors bringing costs down and directly leading to more money in the pockets of those actually providing the services you care about. You can buy your next concert ticket straight through your favorite band cutting out ticketmaster and the like, and supporting them directly all through blockchain. Similarly you could support your local businesses at far lower cost than traditional payment processors could while offering the same level of convenience you’re used to.
And so thanks to these three principles of blockchain decentralization, data integrity, and visibility the blockchain offers a compelling solution to many of the problems that face the modern digital age. Even in the institutional level it offers far greater protections than they are accustomed to. Imagine for a moment that the major banks adopted blockchain. They would no longer need to concern themselves with things like embezzlement or crooked accounting as financial records can’t be modified or altered unilaterally this increased transparency would provide them increased protection. It’s hard to say with any certainty where blockchain technology will take us, but it’s a very powerful foundation with plenty of flexibility making its possible applications worth exploring. The next big paradigm shift might just be powered by blockchain.
