There has been a lot of hype around blockchain technology, but what actually is it and what can it do?
Blockchain is classed as a distributed ledger technology – there are a number of these, but most people (myself included) have only heard of blockchain. My simplest explanation of ledger technology is that it is a data structure, instead of resting with a single provider, shared among a distributed network of computers. Like a spreadsheet that is duplicated thousands of times across a network of computers, ledger technology creates an immutable record of all data transactions across the network – hence the term “ledger”.
The result is a more open, transparent and verifiable system that will fundamentally change the way we think about exchanging value and assets, enforcing contracts and sharing data.
Bitcoin was blockchain’s proof point. It’s a crypto currency that transacts millions of dollars’ worth of cryptocurrency a day.
It’s important to distinguish between public and private blockchain networks however:
Because public networks, like bitcoin, aren’t owned by an entity, they must be governed by network consensus.
Private networks are networks that, as the name suggests, are privately owned by an enterprise or individual. This lets the owner commission users on to the network and write the rules when it comes to how the network operates and data is processed.
What’s the difference between blockchain and bitcoin?
Bitcoin is only one application of blockchain, and to focus on it is isn’t demonstrating the true potential of blockchain tech.
Blockchain is a transformational technology with the potential to extend digital transformation beyond an organisation’s walls, and into the processes it shares with suppliers, customers and partners.
For the individual, blockchain can secure and simplify the process of voting online, paying taxes, applying for a mortgage or opening a bank account. For society, it secures record keeping and sharing for and between local authorities, government agencies, banks and businesses. On a global level, blockchain is needed for international collaboration on environment, security and trade.
As an example of blockchain’s scope, there are use cases for blockchain to be used in emerging technology like Augmented Reality. The opportunities really are endless, and the best blockchain applications haven’t even been thought of yet.
Why is it called blockchain?
Because the structure of the tech is literally blocks arranged in chains. The ledger contains a continuous and complete record (the “chain”) of all transactions performed which are grouped into blocks.
Each block contains an encrypted hash of the previous block, tying the chain together. Its these hashes that make it impossible to change or remove blocks, as then the chain simply won’t tie together.
Is blockchain secure?
Data contained on the blockchain is cryptographically secured, so it is mathematically implausible to cheat and expose the data.
Each user of the network has a private and public key. Unsurprisingly, it’s a user’s public key that is shown to the network, and the corresponding private key is kept hidden by the user. The combination of both these keys creates a unique digital signature on every transaction, which can keep everyone accountable.
Think of a user name and password: the user name is what is recognisable to the network, and the password is what you keep to yourself to access the network. But people can often find ways of transacting on regular networks without necessarily being held accountable. It’s the digital signature in blockchain networks that is the added level of security – as it allows all transactions to be traceable (depending on the rules of the network).
These sort of security characteristics are quite unique to blockchain and are some of the reasons why it’s getting so much attention.
Who is Satoshi Nakamoto?
He/she is the supposed creator of Bitcoin, so in turn blockchain technology too. They have a few thousand bitcoin, and with the well-known increase in bitcoin value they are worth billions. They’ve never spent any though!
The public have never actually seen/heard from them, they pretty much went in to hiding after the establishment of the bitcoin network.
It’s a great story. I mean who knows, our CTO Stuart could be Satoshi on the sly?
How does bitcoin work?
The bitcoin network is a big competition – the aim of the game being to get the next bitcoin on the blockchain.
In a public network such as bitcoin, a block is only added to the chain if the nodes, which are members in the blockchain network, reach consensus on the next ‘valid’ block to be added to the chain. In order to determine the validity of a transaction, the nodes must solve a highly complex algorithm to verify the relevant transaction (on the bitcoin network this is known as the ‘Proof of Work’). Only once it has been verified can a transaction form part of a block and that block be added to the blockchain. The first node to solve the algorithm and validate the block is rewarded with bitcoins. Therefore, it’s referred to as “mining” – because nowadays the winners really do strike gold!
There are other mechanisms to determining the validity of a transaction in blockchain networks: such as Proof of Stake, Proof of Authority etc. They all offer different approaches to reaching consensus, and it should be the situation which determines the approach to take.
What is the simplest use case?
Probably the example of transacting money, as this is something almost everyone has had to do (for shopaholics like me, you might do it a few times a day.)
When data is put on to the blockchain, in this example a monetary value, it’s as real as having the cash. The data is secured and can’t be copied or spent more than once. Only the intended recipient can unencrypt the data, so spend the money, and a record of all transactions is kept in an immutable ledger.
In this case, there is no need for a middle man such as the bank, to check if the sender has the appropriate funds or if the recipient is who they say they are.
It’s not just for Financial Services
For now the majority of discussion around blockchain is for financial services, just because of blockchain’s history with cryptocurrencies and so the obvious connection. However, I think we’ll start to see more focus around blockchain in other industries as more opportunities for its application are discovered.
There are lots of opportunities
Blockchain’s application in public sector is undeniably exciting. If you take Estonia as an example of digital public services – we’d be able to do our tax returns, apply for a passport, and open a bank account all online with ease; and much more quickly than it’s currently done.
When speaking with the Estonian ambassador to the UK on digital identity and free movement of data, Tiina Intelmann. she argued that if we as citizens have a digital identity number which we use to open a bank account in Estonia – why not in Portugal too? We think big in the EU when it comes to free movement of persons and goods, but not data. Of course, there are security implications that come with this…but that’s where blockchain comes in!
Oh, also the Everledger use case: using blockchain to track diamond ownership is pretty cool. Maybe I have a conflict of interest here though, as I find anything to do with diamonds exciting.