Crypto – what?
If you’ve tried diving into this mysterious thing called blockchain, you’d be forgiven for recoiling in horror at the sheer opacity of the technical jargon that’s often used to frame it. So, before we understand what cryptocurrency is and how blockchain technology can change the world, let’s discuss what blockchain actually is.
In the simplest terms, 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 function of this digital ledger is essentially almost identical to a traditional ledger as it records debits and credits between people. That’s the basic concept behind blockchain. the difference is who keeps the ledger and who verifies the transactions.
In traditional transactions, a payment from one person to another involves some intermediary to facilitate the transaction. Suppose Rob wants to transfer £20 to Melanie. He can either give her cash in the form of a £20 note, or he can transfer the money directly to her bank account through a banking app. In both cases, the bank is the intermediary that verifies the transaction. Rob’s funds are verified when he withdraws money from the cash register, or they are verified by the app when he makes a digital transfer. The bank decides whether the transaction should be carried out. The bank also maintains a record of all transactions made by Rob and is solely responsible for updating it whenever Rob pays someone or receives money into his account. In other words, the bank keeps and controls the ledger, and everything flows through the bank.
It’s a big responsibility, so it’s important that Rob feels he can trust his bank, or he wouldn’t be risking his money with them. He must feel confident that the bank will not cheat him, lose his money, be robbed and disappear overnight. This need for trust has underpinned almost every major behavior and aspect of the monolithic financial industry, to the point that even when the banks were found to be irresponsible with our money during the 2008 financial crisis, the government (another intermediary) chose to: save them rather than risk the last shreds of trust by letting them crumble.
Blockchains work differently in one key way. they are completely decentralized. There is no central ledger like a bank, and no central ledger maintained by a single entity. Instead, the ledger is distributed across a vast network of computers called nodes, each of which stores 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 data across the network of nodes and makes sure everyone has the same version of the ledger at any point in time. .
When a new transaction is entered into the blockchain, it is first encrypted using the latest cryptographic technology. Once encrypted, a transaction is turned into something called a block, which is basically used for an encrypted group of new transactions. That block is then sent (or broadcast) to a network of computer nodes, where it is verified by the nodes and, once verified, transmitted through the network so that the block can be added to the end of everyone’s computer ledgers. below the list of all previous blocks. This is called a chain, hence the technology is called blockchain.
Once approved and registered in the registry, the transaction can be completed. This is how cryptocurrencies like Bitcoin work.
Liability and Revocation of Trust
What are the advantages of this system over a banking or central clearing system? Why would Rob use Bitcoin instead of regular currency?
The answer is trust. As mentioned before, in banking it is very important that Rob trusts his bank to protect his money and manage it properly. For this to happen, there are massive regulatory systems in place to scrutinize the actions of banks and ensure they are fit for purpose. Governments then regulate regulators, creating a sort of tiered system of checks whose sole purpose is to help prevent mistakes and misconduct. In other words, organizations like the Financial Services Authority exist precisely because banks cannot be trusted on their own. And banks often make mistakes and behave badly, which we have seen many times. When you have one source of power, power tends to be misused or abused. The relationship of trust between people and banks is awkward and unstable. we don’t really trust them, but we don’t feel like there’s much of an alternative.
Blockchain systems, on the other hand, absolutely do not need you to trust them. All transactions (or blocks) on the blockchain are verified by nodes in the network before being added to the ledger, meaning there is no single point of failure and no single channel of confirmation. If a hacker wanted to successfully breach the blockchain registry, he would have to hack millions of computers simultaneously, which is nearly impossible. A hacker would also be nearly impossible to take down a blockchain network because, again, they would need to be able to disable every computer in a network of computers distributed around the world.
The encryption process itself is also a key factor. Blockchains like Bitcoin use intentionally difficult processes for their verification procedure. In the case of Bitcoin, blocks are verified by nodes that perform a series of deliberate CPU- and time-consuming calculations, often in the form of puzzles or complex mathematical problems, meaning that verification is neither instantaneous nor accessible. Nodes that commit a resource to block verification are rewarded with a transaction fee and an abundance of newly produced Bitcoins. This has the function of both encouraging people to become nodes (since such processing units require quite powerful computers and a lot of electricity), while also managing the process of creating or minting currency units. This is called mining because it involves considerable effort (in this case by a computer) to produce a new commodity. It also means that transactions are scrutinized in the most independent way possible, more independent than a government-regulated organization like the FSA.
This decentralized, democratic and highly secure nature of blockchains means that they can operate without the need for regulation (they are self-regulating), government or other opaque intermediary. They work because people don’t trust each other, not in spite of it.
Let that significance stick around for a while and the excitement around blockchain starts to make sense.
Where things get really interesting are blockchain applications beyond cryptocurrencies like Bitcoin. Given that one of the underlying principles of a blockchain system is secure, independent transaction verification, it’s easy to imagine other ways in which these types of processes could be valuable. Not surprisingly, many such applications are already in use or in development. Some of the best are:
- Smart contracts (Ethereum). perhaps the most exciting blockchain development since Bitcoin, smart contracts are blocks that contain code that must be executed in order for a contract to be executed. The code can be anything as 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 create a kind of backup system for any kind of transaction. . As an example, if you’re a web designer, you can set up a contract that will confirm whether a new client’s website has been launched or not, and then automatically release the funds to you when it’s launched. No more chasing or invoices. Smart contracts are also used to prove ownership of an asset such as real estate or art. The potential to reduce fraud with this approach is enormous.
- Cloud storage (Storj). cloud computing revolutionized the Internet and ushered in the emergence of Big Data, which in turn ushered in a new AI revolution. But most cloud-based systems run on servers housed in single-location server farms owned by one person (Amazon, Rackspace, Google, etc.). This presents the same problems as the banking system, as your data is controlled by a single, opaque entity, which presents a single point of failure. Distributing data on the blockchain completely eliminates the trust issue and also promises to increase reliability as it is much more difficult to destroy the blockchain network.
- Digital identification (ShoCard). two of the biggest issues of our time are theft and data protection. With huge centralized services like Facebook storing so much data about us, and efforts by governments in various developed countries to store digital information about their citizens in a central database, the potential for our personal data to be misused is terrifying. 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 when you need to prove your identity. These applications range from the obvious replacement of passports and ID cards to other areas such as replacing passwords. It can be huge.
- Digital voting. highly relevant to the investigation into Russia’s influence on the recent US election, digital voting has long been suspected of being both unreliable and highly vulnerable to tampering. Blockchain technology offers a way to verify that a voter’s vote has been successfully cast while preserving their anonymity. It promises not only to reduce electoral fraud, but also to increase overall voter turnout as people will be able to vote on their mobile phones.
Blockchain technology is still very much in its infancy, and most applications are too far away for general use. Even Bitcoin, the most established blockchain platform, is subject to massive volatility, a testament to its relative newcomer status. However, blockchain’s potential to solve some of the major problems we face today makes it an extraordinarily exciting and enticing technology to follow. I will certainly be watching.