Crypto what?
If you’ve tried to dive into this mysterious thing called blockchain, you’d be forgiven for recoiling in horror at the utter opacity of the technical jargon that’s often used to frame it. So before we discuss what a cryptocurrency is and how blockchain technology could change the world, let’s discuss what blockchain actually is.
In the simplest terms, a 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, in fact, quite identical to that of a traditional ledger, in that it records debits and credits between people. That is the core concept behind blockchain; the difference is who keeps 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. He can give her cash in the form of a £20 note or he can use some kind of banking app to transfer the money directly into her bank account. In both cases, a bank is the intermediary that verifies the transaction: Rob’s funds are verified when he withdraws the money from an ATM, or they are verified by the app when he makes the digital transfer. The bank decides if the transaction should go ahead. 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 in his account. In other words, the bank maintains and controls the ledger, and everything flows through the bank.
That’s a big responsibility, so it’s important that Rob feels he can trust his bank, otherwise he wouldn’t be risking his money with them. He needs to be sure that the bank won’t let him down, he won’t lose his money, it won’t get stolen and it 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 banks were found to be irresponsible with our money during the 2008 financial crisis, the government (another middleman) rescue them rather than risk destroying the final shards of trust by letting them crumble.
Blockchains work differently in one key aspect: they are completely decentralized. There is no central clearinghouse like a bank, and there is no central ledger held by a single entity. Instead, the ledger is distributed across a vast 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 software called a peer-to-peer (P2P) client, which synchronizes data across the network of nodes and makes sure they all have 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. That block is then sent (or broadcast) to the network of computing nodes, where it is verified by the nodes, and once verified, it is transmitted over the network so that the block can be added to the end of the ledger on the computer. of all. below the list of all previous blocks. This is called the chain, which is why the technology is known as blockchain.
Once approved and posted to the ledger, the transaction can be completed. This is how cryptocurrencies like Bitcoin work.
Accountability and elimination of trust
What are the advantages of this system over a banking or central clearing system? Why would Rob use Bitcoin instead of normal currency?
The answer is trust. As mentioned above, with the banking system it is critical that Rob trust his bank to protect his money and manage it properly. To ensure this happens, there are huge regulatory systems in place to verify the actions of banks and ensure that 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 misconduct. In other words, organizations like the Financial Services Authority exist precisely because banks cannot be trusted by themselves. And banks often make mistakes and misbehave, as we’ve seen too many times. When you have only one source of authority, power tends to be abused or misused. The trust relationship between people and banks is awkward and precarious: we don’t really trust them, but we don’t feel like there are many alternatives.
Blockchain systems, on the other hand, do not require you to trust them at all. All transactions (or blocks) on a blockchain are verified by network nodes before being added to the ledger, meaning there is no single point of failure or single approval channel. If a hacker wanted to successfully manipulate the ledger on a blockchain, he would have to simultaneously hack millions of computers, which is almost impossible. A hacker would also be virtually incapable of taking down a blockchain network, since, again, he would need to be able to shut down all the computers in a network of computers distributed throughout the world.
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 deliberately time- and processor-intensive series of calculations, often in the form of puzzles or complex math problems, meaning verification is neither instantaneous nor accessible. Nodes that commit the resource for block verification are rewarded with a transaction fee and a reward of newly minted Bitcoins. This serves the purpose of incentivizing people to become nodes (because processing blocks like this requires fairly powerful computers and a lot of electricity), while also handling the process of generating, or minting, units of the currency. This is known as mining, because it involves a considerable amount of effort (by a computer, in this case) to produce a new product. It also means that transactions are verified 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 function without the need for regulation (they self-regulate), government, or another opaque intermediary. They work because people don’t trust each other, and not in spite of it.
Let the importance of that sink in for a while and the excitement around blockchain will start to make sense.
smart contracts
Where things get really interesting are blockchain applications beyond cryptocurrencies like Bitcoin. Since one of the underlying principles of the blockchain system is the independent and secure verification of a transaction, it is easy to imagine other ways in which this type of process can be valuable. Unsurprisingly, many of these apps 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 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 that you can use blockchain technology (with its independent verification, trusted architecture, and security) to create a kind of escrow system for any type of transaction. . As an example, if you’re a web designer, you can create a contract that verifies whether or not a new client’s website launches, and then automatically funds them once it launches. 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 enormous.
- Cloud Storage (Storj): Cloud computing has revolutionized the web and led to the advent of Big Data which, in turn, has started 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 the same problems as the banking system, where 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 harder to take down a blockchain network.
- Digital ID (ShoCard): Two of the biggest problems of our time are identity theft and data protection. With large centralized services like Facebook storing 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 abuse of our personal data 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 whenever you need to prove your identity. Applications for this range from the obvious substitution of passports and ID cards to other areas such as password substitution. It could be huge.
- Digital Voting: Hot on the heels of the investigation into Russia’s influence in the recent US elections, digital voting has long been suspected of being unreliable and highly vulnerable to manipulation. Blockchain technology offers a way to verify that a voter’s ballot was successfully submitted while maintaining anonymity. It promises not only to reduce election fraud, but also to increase overall voter turnout, 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 great volatility indicating 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 pursue. I will definitely be watching.
