Blockchain is a hot topic at the moment, yet for many, the technology remains an elusive concept. Just as the notion of the cloud was once difficult to grasp, understanding blockchain technology is relatively simple once you get your head around it.
Over the past few weeks we’ve had a couple of people ask us what blockchain is, so we’ve put together this short guide to help explain the basics.
What is blockchain technology?
The brainchild of a person or group of people known as Satoshi Nakamoto, blockchain allows digital information to be distributed but not copied. Originally devised for the digital currency, Bitcoin, the blockchain is a ledger of records arranged in data batches called blocks that use cryptographic validation to link themselves together. Put simply, each block references and identifies the preceding block by a hashing function, forming an unbroken chain.
Unlike the digital backbone of governments and banks, which operate using a centralized database, blockchain technology is decentralised, where the ledger is not stored in a master location or managed by any particular body. Instead, it is said to be distributed, existing on multiple computers at the same time, where a community of users can control how the record of information is amended and updated. Blockchain transactions are broadcast, and every node is creating their own updated version of events. Information held on a blockchain exists as a shared and continually reconciled database.
Why is the blockchain gaining traction?
While the Bitcoin blockchain has been running since 2008, blockchain technology has only started gaining momentum in the fintech industry since last year.
Here are some reasons why blockchain could be the next big thing for banks and other financial institutions:
The Blockchain is Transparent and Incorruptible
The blockchain network lives in a state of consensus, one that automatically checks in with itself every ten minutes. A kind of self-auditing ecosystem of a digital value, the network reconciles every transaction that happens in ten-minute intervals, where each group of these transactions is known as a “block”.
While blockchain data could technically be altered, it would take a huge amount of computing power to override the entire network. This is because a blockchain is run by an entire network of computers.
The Blockchain & Enhanced security
As the blockchain database isn’t stored in any single location, records are truly public and easily verifiable. No centralised version of the information exists, eliminating the risks that come with data being held centrally. Essentially, its network lacks centralized points of vulnerability that computer hackers can exploit such as passwords and log in details.
In the case of blockchain technology, private key cryptography provides a powerful ownership tool that fulfils authentication requirements. Possession of a private key is ownership. It also spares a person from having to share more personal information than they would need to for an exchange, leaving them exposed to hackers.
Blockchain durability and robustness
Blockchain technology is like the internet in that it has a built-in robustness. By storing blocks of information that are identical across its network, the blockchain cannot:
- Be controlled by any single entity.
- Has no single point of failure.
Since being established in 2008, the Bitcoin blockchain has operated without significant disruption. It’s a track record that bodes well for blockchain technology as it continues to be developed.
What is blockchain technology actually used for?
Blockchain technology is not just useful for creating digital currencies such as Bitcoin or developing new financial technologies, but also gives internet users the ability to create value and authenticate digital information.
According to Blockgeeks , here are just some of the following applications which blockchange technology will be used for:
Distributed ledgers enable the coding of simple contracts that will execute when specified conditions are met. Ethereum is an open source blockchain project that was built specifically to realize this possibility. Still, in its early stages, Ethereum has the potential to leverage the usefulness of blockchains on a truly world-changing scale.
The Sharing Economy:
With companies like Uber and AirBnB, the sharing economy is already a proven success. Currently, however, users who want to hail a ride-sharing service have to rely on an intermediary like Uber. By enabling peer-to-peer payments, the blockchain opens the door to direct interaction between parties — a truly decentralized sharing economy results.
Crowdfunding initiatives like Kickstarter and Gofundme are doing the advance work for the emerging peer-to-peer economy. The popularity of these sites suggests people want to have a direct say in product development. Blockchains take this interest to the next level, potentially creating crowd-sourced venture capital funds.
In 2016, one such experiment, the Ethereum-based DAO (Decentralized Autonomous Organization), raised an astonishing $200 million USD in just over two months. Participants purchased “DAO tokens” allowing them to vote on smart contract venture capital investments (voting power was proportionate to the number of DAO they were holding). A subsequent hack of project funds proved that the project was launched without proper due diligence, with disastrous consequences. Regardless, the DAO experiment suggests the blockchain has the potential to usher in “a new paradigm of economic cooperation.”
By making the results fully transparent and publicly accessible, distributed database technology could bring full transparency to elections or any other kind of poll taking. Ethereum-based smart contracts help to automate the process.
Supply Chain Auditing:
Consumers increasingly want to know that the ethical claims companies make about their products are real. Distributed ledgers provide an easy way to certify that the backstories of the things we buy are genuine. Transparency comes with blockchain-based timestamping of a date and location
Decentralizing file storage on the internet brings clear benefits. Distributing data throughout the network protects files from getting hacked or lost.
The crowdsourcing of predictions on event probability is proven to have a high degree of accuracy. Averaging opinions cancels out the unexamined biases that distort judgment. Prediction markets that pay out according to event outcomes are already active. Blockchains are a “wisdom of the crowd” technology that will no doubt find other applications in the years to come.
Protection of Intellectual Property:
Digital information can be infinitely reproduced and distributed widely thanks to the internet. This has given web users a wealth of free content. However, copyright holders have not been so lucky, losing control over their intellectual property and suffering financially as a consequence. Smart contracts can protect copyright and automate the sale of creative works online, eliminating the risk of file copying and redistribution.
Internet of Things (IoT)
The Internet of Things is essentially network-controlled management of certain types of electronic devices. For instance, the monitoring of air temperature in a storage facility. Smart contracts make the automation of remote systems management possible. A combination of software, sensors, and the network facilitates an exchange of data between objects and mechanisms. The result increases system efficiency and improves cost monitoring.
While blockchain may have been around for almost a decade, the capabilities of blockchain technology are still being explored. While it may not be a commonly known term now, blockchain will play an important role in technology in the near future.