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A Brief Introduction To Blockchain – For Normal People
If you’ve tried to dive into this mysterious thing called blockchain, you’d be forgiven for recoiling in horror at the sheer opacity of the technical jargon often used to frame it. So before we get into what a cryptocurrency is and how blockchain technology can change the world, let’s talk about what blockchain actually is.
In simpler terms, a blockchain is a digital record 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, in fact, practically identical to that of a traditional ledger, as it records debits and credits between people. This is the basic concept behind blockchain; the difference is who has the ledger and who verifies the transactions.
With traditional transactions, a payment from one person to another involves some kind of intermediary to facilitate the transaction. Let’s say Rob wants to transfer £20 to Melanie. You can either give him cash in the form of a £20 note or you can use some sort of banking app to transfer the money directly into your bank account. In both cases, a bank is the intermediary that verifies the transaction: Rob’s funds are verified when he withdraws money from an ATM, or they are verified by the app when he makes the digital transfer. The bank decides whether the transaction should continue. The bank also keeps 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 maintains and controls the ledger, and everything flows through the bank.
This is a big responsibility, so it’s important that Rob feels he can trust his bank, otherwise he wouldn’t risk his money with them. You need to feel confident that the bank won’t scam you, won’t lose your money, won’t be robbed and won’t disappear overnight. This need for trust has underpinned virtually every major behavior and facet of the monolithic financial industry, to the point that even when it was discovered that banks were being irresponsible with our money during the 2008 financial crisis, the government ( another intermediary) chose to bail them out rather than risk destroying the last shreds of trust by letting them collapse.
Blockchains work differently in one key way: they are fully decentralized. There is no central clearinghouse like a bank, and there is no central ledger held by an entity. Instead, the ledger is distributed across a wide network of computers, called nodes, each of which contains a copy of the entire ledger on their respective hard drives. These nodes connect to each other using software called a peer-to-peer (P2P) client, which synchronizes data across the network of nodes and ensures that everyone has the same version of the ledger at any given time. .
When a new transaction is entered into a blockchain, it is first encrypted using state-of-the-art cryptographic technology. Once encrypted, the transaction becomes something called a block, which is basically the term used for an encrypted group of new transactions. This block is then sent (or broadcast) to the network of computing nodes, where it is verified by the nodes and, once verified, passed through the network so that the block can be added to the end of the ledger of everyone’s computer, under the list of all previous blogs. This is called a chain, hence the technology is known as blockchain.
Once approved and recorded in the ledger, the transaction can be completed. This is how cryptocurrencies like Bitcoin work.
Accountability and the elimination of trust
What advantages does this system have over a bank or central clearing system? Why would Rob use Bitcoin instead of regular currency?
The answer is trust. As mentioned before, with the banking system it is critical that Rob trust his bank to protect his money and manage it properly. To ensure this happens, huge regulatory systems exist to verify the actions of banks and ensure they are fit for purpose. Governments then regulate regulators, creating a kind of tiered system of controls whose sole purpose is to help prevent mistakes and bad behavior. In other words, organizations like the Financial Services Authority exist precisely because banks cannot be trusted on their own. And banks often get it wrong and misbehave, as we’ve seen too many times. When you have a single source of authority, power tends to be abused or misused. The relationship of trust between people and banks is uncomfortable and precarious: we really don’t trust them but we don’t think there are many alternatives.
Blockchain systems, on the other hand, don’t need you to trust at all. All transactions (or blocks) in a blockchain are verified by the network’s nodes before being added to the ledger, meaning there is no single point of failure and no single channel of approval. If a hacker wanted to successfully tamper with a blockchain’s ledger, he would have to hack millions of computers simultaneously, which is nearly impossible. A hacker would also be virtually unable to disable a blockchain network as, again, they would need to be able to shut down every computer in a globally distributed computer network.
The encryption process itself is also a key factor. Blockchains like Bitcoin use deliberately difficult processes for their verification procedure. In the case of Bitcoin, blocks are verified by nodes that perform a series of deliberately processor- and time-intensive calculations, often in the form of puzzles or complex mathematical problems, which means that verification is neither instantaneous nor accessible. Nodes that commit the resource to block verification are rewarded with a transaction fee and a reward of recent Bitcoins. This has the function of incentivizing people to become nodes (because processing blocks like this requires quite powerful computers and a lot of electricity), while managing the process of generating – or minting – units of the currency. This is known as mining, because it involves considerable effort (by a computer, in this case) to produce a new commodity. It also means that transactions are verified as independently as 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, rather than in spite of.
Let the significance of this sink in for a while and the excitement around blockchain starts to make sense.
Where things get really interesting is blockchain applications beyond cryptocurrencies like Bitcoin. Since one of the underlying principles of the blockchain system is the secure and independent verification of a transaction, it is easy to imagine other ways in which this type of process can be valuable. Not surprisingly, many of these applications are already in use or in development. Some of the best are:
- Smart Contracts (Ethereum) – Probably the most exciting blockchain development after Bitcoin, smart contracts are blocks that contain code that must be executed in order for the contract to be fulfilled. The code can be anything, as long as a computer can run it, but in simple terms it means you can use blockchain technology (with its independent verification, trustless architecture and security) to create a kind of trust system for to any type of transaction. . For example, if you’re a web designer, you can create a contract that checks whether or not a new client’s website launches, and then automatically release the funds to you once it does. No more chasing or billing. Smart contracts are also used to prove ownership of an asset such as property or art. The potential to reduce fraud with this approach is huge.
- Cloud Storage (Storj): Cloud computing has revolutionized the web and led to the advent of Big Data which in turn has fueled the new AI revolution. But most cloud-based systems run on servers stored in single-location server farms owned by a single entity (Amazon, Rackspace, Google, etc.). This presents all the same problems as the banking system, in that your data is controlled by a single opaque organization that represents a single point of failure. Distributing data on a blockchain completely eliminates the trust issue and also promises to increase reliability, as it is much more difficult to delete a blockchain network.
- Digital ID (ShoCard): Two of the biggest issues of our time are ID theft and data protection. With large centralized services like Facebook containing so much data about us and the efforts of various governments in the developed world to store digital information about their citizens in a central database, the potential for misuse of our personal data is terrifying. Blockchain technology offers a potential solution to this by wrapping your key data in an encrypted block that the blockchain network can verify whenever you need to prove your identity. Its applications range from the obvious replacement of passports and IDs to other areas such as password replacement. It could be huge.
- Digital Voting: Hot on the heels of the investigation into Russian influence in the recent US election, digital voting has long been suspected of being unreliable and highly vulnerable to manipulation. Blockchain technology provides a way to verify that a voter’s vote has been successfully submitted while maintaining anonymity. It promises to not only reduce election fraud, but also increase overall voter participation as people will be able to vote on their mobile phones.
Blockchain technology is still in its infancy and most applications are a long way from mainstream use. Even Bitcoin, the most established blockchain platform, is subject to high volatility indicative of its relative newcomer status. However, blockchain’s potential to solve some of the biggest problems we face today makes it an extraordinarily exciting and enticing technology to pursue. I’ll be sure to keep an eye out.
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