What Is Blockchain Technology?
By now, you’ve probably heard the term “blockchain technology,” perhaps in reference to a cryptocurrency such as Bitcoin or some ultra ambitious project promising to change the world as we know it. However, because you’re reading this article, you probably have been wondering “What is Blockchain technology” and have a sneaking suspicion that blockchain technology is more than just another IT buzzword, and you are absolutely correct.
To give you some perspective on just how big this is, the global size of the blockchain market is forecast to grow into the trillions of dollars and reached a high of 800 billion during the fever pitch of 2017. Apart from being a critical element of cryptocurrencies, the growing list of blockchain use cases includes everything from supply chain management to digital voting to distributed storage to identity verification and anything else you could imagine.
To understand the inner-workings of blockchain and its immense transformative potential, it’s helpful to start from the beginning and trace its roots to the present.
The Origins of Blockchain
Way back in 1991, in a research paper entitled “How to Time-Stamp a Digital Document”, Stuart Haber and W. Scott Stornetta described a system that would make it impossible for someone to either to back-date or to forward-date a time-stamped digital document, addressing the issue of how to certify when a document was created or last changed.
A year later, the researchers improved the efficiency of the system by incorporating Merkle trees into the design. What the heck is a Merkle tree you ask? Merkle trees are tree-like data structures used for efficiently summarizing and verifying the integrity of large sets of data; they are also used in hash-based cryptography.
Thanks to the use of Merkle trees, the researchers were able to collect several documents into a single block, which reduced the storage and computation requirements of the system. They also connected each block to the one before it to create a single secured chain of blocks, or a blockchain for short.
However, it took nearly two decades for the first major application of blockchain technology to see the light of the day, that is when Bitcoin broke out on the scene. The inventor of Bitcoin, an unknown person or group of people using the name Satoshi Nakamoto, used blockchain as the public ledger for all transactions on the Bitcoin network. This public ledger is essentially a public record of all things bought and sold in the Bitcoin system.
Blockchain, Under the Hood
Blockchain is often described as a distributed public electronic ledger that is openly shared among users and can record information in a verifiable and permanent way (what happens on the blockchain stays on the blockchain). To make this definition a clearer, let’s break it down.
A public ledger is a nothing more than a record-keeping system that is available for public viewing as well as for verification; this means you can now check if your friend really paid you back that gas money you lent them. Some of the first public ledgers were used to record information such as agriculture commodity prices, but virtually all public ledgers in use today are electronic, which means they are stored on computers.
In an attempt to increase the resiliency and security of the system, instead of relying on a central administrator or centralized data storage, most implementations of the blockchain are distributed across multiple sites and countries and managed in a peer-to-peer fashion. This decentralizes the network and does not allow potential attackers a single location to concentrate their efforts.
The ability of blockchain technology to record information in a verifiable and permanent way means that once data is recorded on a blockchain, it cannot be retroactively changed without making the entire chain of blocks invalid. That’s because each block contains three components: data, the hash of the block and its data, and, most importantly, the hash of the previous block.
Blockchains can store all sorts of data, such as transaction details as is the case with Bitcoin’s blockchain. The data stored inside a block is fingerprinted using a hash function, which is any function that can be used to map data of arbitrary size to data of a fixed size.
This produces a unique sequence of numbers and letters, a hash, and identifies the block and all of its contents. Any change of the data inside the block causes the hash to change. This hash number sequence can be used at a later date to refer to specific transactions to take place on the Blockchain (much like a receipt, if you will).
When a new block is added to a blockchain, it contains the hash of the previous block, so new data can only be added but never erased. If someone tried to modify an older block of data, the block’s hash would instantly change, which would make all following blocks invalid because they would no longer store a valid hash of the previous block. In other words, blockchains are write-only and tamper-resistant, making them ideal for all sorts of applications where data validity is essential.
Okay, take a deep breath… was that a bit confusing?…That is because it is. Blockchain, at its core, is a revolutionary technology that is complex in its workings and, unfortunately, it can not be explained with anything less than an equally complex explanation.
But, Why Is It So Important?
As interesting as the decentralized aspect is, it’s actually not what makes blockchain such a big deal. The real reason why blockchain is so important is that it minimizes the amount of trust required from any single network participant.
Today we all gain trust while conducting transactions/verifying information by working though various third party intermediaries. For example, online auction sites use escrow services to hold funds for one party until the other party fulfills the transaction.
Each and every day, hundreds of millions of people trust multinational financial corporations such as MasterCard or Visa, JP Morgan Chase, etc, with their money. Even more people trust their local governments with voting records, social security documents and all types of sensitive information. Not only are you not aware of the protections put into place to guard this sensitive information (if any), but, throughout history these same institutions have proven to not deserve of this trust the public provides them.
Blockchain is a system ran by cold hard code; therefore, there are no ulterior motives regarding the information stored within it or deceit that can transpire. Trust is provided through the economic game, which is built into blockchain; it incentivizes cooperation and solves the age-old double-spending issue.
Double spending was the main issue that has plagued Bitcoin’s predecessors, in which the same single digital token can be spent more than once, without the need of a trusted authority or central server. (i.e. spending the same Bitcoin twice). Finally, a system that cannot be retroactively altered or manipulated.
This is why so many experts believe that blockchain technology is the next big thing that will change the world and inevitably bring high levels of disruption across nearly all industries and sectors. The best part is we don’t even have to wait to see its’ effects, blockchain is already being implemented into various real world applications as we speak.
Blockchain in the Real World
Walmart and its Food Safety Collaboration Center in Beijing use blockchain in-factory for processing data, expiration dates, and shipping details for pork. In Estonia, people can vote from their laptops thanks to a blockchain based e-voting platform.
IBM is developing blockchain based solutions to manage clinical trials data and electronic medical records while maintaining regulatory compliance. Even large Banks are looking to use the blockchain to increase the efficiency of financial transactions; thus, reducing the cost for both the institution and its’ customers. So far, as with any new disruptive technology, the adoption of blockchain has been fairly conservative; but this will likely change very soon as more people realize its immense transformative potential.
According to Karim Lakhani, a professor of business administration at the Harvard Business School, blockchain has the same potential as TCP/IP, the suite of communications protocols behind the internet. Granted you are reading this article I think you understand how significant the internet has been.
A New Technology for A New World
Blockchain is a new technology and already it is shaking up the world in ways that were thought to be fantasy 20 years ago. We have just begun to explore potential uses for blockchain technology, but it’s already clear that its implications will be profound and wide-reaching.
For far too long humanity has been dependent on middlemen who have siphoned value out of peer-to-peer exchanges in the form of fees and inefficiency; all in the name of profit. Whether it be finance, supply chain, medical or automated systems this technology has the potential to change it all. A decade from now, the world as we know it may be a very different place—all thanks to blockchain based solutions.