What is blockchain? Everything you need to know about the technology
You’ve probably heard it before: blockchain is here to stay, and it’s going to revolutionize the way we track our assets. But what, exactly, is blockchain?
Many mistake the technology for bitcoin. While this was its original purpose, blockchain has evolved beyond the realm of digital currency.
In short, blockchain is a continuously updated record of transactions spread out across a vast network of computers.
The term blockchain is shorthand for a whole suite of distributed ledger technologies that can be programmed to record and track anything of value. Think of it like a database that is decentralized and distributed among a whole network of computers.
“What [blockchain] enables is the exchange and storage of assets in digital form, peer-to-peer, without the need for intermediaries like banks and governments,” explained Alex Tapscott, co-founder of the Blockchain Research Institute.
According to Anthony Di Iorio, founder of blockchain startup Decentral and co-founder of Ethereum, blockchain’s main function is to track digital assets.
“It gives you the ability to prove ownership of part of that [blockchain] ledger so that you have control of it to move that asset from one point of the ledger to another point of the ledger,” said Di Iorio.
Picture sending money without banks, handling land disputes without lawyers and voting without the threat of electoral fraud.
But we already have processes in place that track data and assets. What makes blockchain different?
Let’s talk about data
Blockchain stores information in batches, called blocks, which are connected in a continuous chronological line known as a chain.
If you wanted to change information in a block, you couldn’t directly change that block. Instead, the change would be recorded in a new block, showing that A changed to B at a specific time and date. This plays off the centuries-old method of a financial ledger, which tracks data changes over time.
For example, let’s say there’s a dispute between Bob and his sister, Mary, about who will inherit their grandmother’s rare and precious red diamond that’s been in the family for years.
Since blockchain uses the ledger method, there’s an entry in the ledger showing that their grandmother first owned the diamond in 1930. She gave the diamond to her daughter in 1960 as a wedding gift, and Mary then purchased the diamond from her mother in 2011. Each of these changes is reflected in the ledger.
The fact that Mary is the owner of the diamond can be seen in blockchain’s recorded history. But what if Bob wants the diamond and goes behind everyone’s back, hacking into the system to change the record?
Trust in the technology
Blockchain is decentralized and distributed among a huge network of computers. If you tamper with the information, everyone will be able to see what you’re doing.
With each new record, a new block is created, and each block is linked using something called cryptography. When a block is added to a chain, it is sealed by a cryptographic stamp called a hash — a random string of numbers and letters.
In order to create this stamp, a cryptographic riddle needs to be solved by a block creator, also known as a programmer or a miner. The riddle is very hard — it’s like guessing a 20-digit combination lock. A miner has to invest a lot of time and computer power to solve even one of these combinations.
When the block is done, it goes through something called proof of work. Everyone on the network — Bob, Mary and everyone else — need to verify that the stamp or hash is valid. If so, then the new block is accepted into the blockchain.
“What’s important about this technology is that no single actor on the network can change the content of that ledger without the entire network reaching consensus,” Tapscott said.
But why would someone waste time and energy to confirm this kind of information? Money.
By design, a blockchain is programmed so that when a new block is accepted, it automatically releases cryptocurrency to the miner. And every time there is an action — like a change of ownership to Bob and Mary’s grandmother’s diamond — there is a small transaction fee, which also goes to the miner.
From here on, any changes to the block, such as a change in ownership to the diamond, would create a new block, but the old hash code would always connect to the next subsequent block in the chain.
Blocks are resistant to modification because, in order to hack them, you would not only have to rewrite the code of that individual block but also every other block connected to it, which could be hundreds of thousands. Because the blockchain is distributed among millions of computers, you would also have to rewrite the history of commerce for not only one computer but all of them.
As of now, it is believed that no human is capable of such a hack.
“It takes longer than our universe, and that’s why it’s unbreakable; no hacker can live that long,” said Elena Sinelnikova, founder of CryptoChicks.
Blockchain also squeezes out the middleman. Think of a typical business — most require trusted intermediaries, such as lawyers, banks and notaries.
These agents go between two parties and build trust by verifying documents and transactions. For example, a lawyer will review documents and conclude with evidence that yes, Mary is, in fact, the owner of her grandmother’s diamond. Or, for instance, a bank might say no, that credit card transaction for a Rolex watch was not yours.
This method of business has always added a layer of security, but experts say it can be costly and time-consuming.
“It is a far more secure and far more efficient method of moving, storing and managing value than any system we’ve ever devised,” Tapscott said.
If Mary’s ownership information on the diamond was registered in a blockchain, she may not need a lawyer to verify her information against Bob, who is also claiming ownership. Instead, the information lives on the blockchain database — all Mary would have to do is show her brother.
We now know that any information or record added to a blockchain has been verified and encrypted and cannot be tampered with. We also know the blockchain is distributed across many computers and transparent for everyone to see.
Experts say this type of peer-to-peer interaction with our data is changing the way we access, interact and make transactions with one another.
“That is a paradigm shift that is going to have a big influence and impact on basically every single industry in the economy,” Tapscott said.
Early days for blockchain
The future understanding and use of blockchain may be similar to our current use and understanding of the internet — we may not know the exact details of how it works, but we all use it.
That’s how experts envision blockchain’s future over the next decade; they expect it will become so ingrained in our day-to-day activities that we’ll simply use it without realizing. The problems blockchain faces right now are also similar to the early days of the internet: before search engines like Google, it was a lot more challenging to get around the world wide web.
It wasn’t so long ago you had to use a phone line to get online — and even low-resolution images took a while to download.
“In the early 1990s, people in the newspaper industry said the internet will never pose a challenge to the newspaper business because it takes a minute to download a webpage and it takes only a second to open a newspaper,” Tapscott said.
“We are seeing the same thing here. People are saying, ‘Well, the usability is not intuitive. My grandmother can’t use it.’ Well, this is 1994 for blockchain.”
Just like the early days of the internet, Tapscott says blockchain has not yet gone through its “digital revolution.”
Blockchain does not have an easy-to-use interface — for now. Already, techies across the world are competing to create a more user-friendly interface that will bring the technology out of its early days and into the mainstream.
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