Blockchain Explained. Simply.
Blockchain technology is changing the game in the digital world and it is important for you to know why. So, what is blockchain? How can you benefit from this technology in the near future? We, as the team at Telekom Innovation Laboratories working on blockchain, are here to provide you some answers.
Blockchain is not Bitcoin.
Let’s start with some basic terminology. Most people associate the word ‘blockchain’ with ‘Bitcoin’, the cryptocurrency. They are indeed related, but not the same.
Blockchain technology is a digital ledger used to store or exchange assets. Think of a ledger as a digital list of transactions, like a bookkeeping system. You can collect and store all your digital records on that ledger.
Bitcoin, a digital coin that can be used to make payments, is only one of many possible applications of the blockchain technology. Other things on a blockchain could be the a share in a company, a kilowatt hour of energy, or a digital certificate of ownership.
Internet of value.
Internet was born in 1968 and enabled people sharing information with one another online, like sending a PDF or an Excel sheet through email. However, when you share a document with a friend, she gets a copy of your version, not the original document that you have on your computer.
Currently we are evolving into an era of internet of value, meaning the ability to store, trade and manage assets using the internet as a medium. Examples of such assets could be intellectual property, identity management, money, contracts, art, votes, energy, etcetera. The possibilities to store are endless.
When trading one of these assets, it is often crucial that we know that we are dealing with the original version and not a copy of the asset. Here is an example to highlight this: Imagine going out for lunch with a friend and she pays for your meal. Afterwards you want to pay back what you owe. When doing that, you don’t send a copy of that money. Otherwise the money your friend is receiving would be worthless (and the friendship would probably end). This problem is called ‘Double spending’.
Today we use intermediaries, often referred to as ‘middlemen’, to take care of our valuable transactions. The middleman facilitates the interaction between a seller and a buyer, by settling, clearing and record keeping the transaction. In other words, they make sure whether the seller has the right to sell and that the buyer has the ability to buy. As a customer, you pay a commission for this service.
Here are some common examples of services in your everyday life where a middleman is involved:
Problems of the middleman.
Why do we still trust middlemen to take care of our valuable assets? Simply because they establish trust where there usually is none. We need the middlemen to guarantee that the person on the other side will hold his part of the deal. However, these middlemen have a dark side and can bring negative effects.
Consider a business network of banks, insurers, regulators and auditors. They all keep their private ledger in which they record every transaction that occurs between them and the participants (which could be you or your business). When those ledgers disagree, the parties might have to resort to court to settle the issue. This centralized structure is inefficient, time consuming and expensive since it forces everyone to keep their own copy of the transactions and keep them up to date. In addition, these private ledgers are often inaccessible and hidden from the public eye, and they are vulnerable since they can be possible targets for hackers.
Trust the blockchain.
Well, guess what? Blockchain will solve these problems. The only thing needed is for you to trust a digital entity instead of a human. You won’t be able to shake hands with blockchain to show your trust, but the benefits of the technology will become immediately clear.
A blockchain is a single ledger containing the transactions that occur in one network. It is shared and distributed, and all of the participants have the same version, which is a feature ensured by the blockchain technology. This means that the same records are stored on multiple computers at the same time. Whenever someone wants to add a change to the blockchain, update, or record a new transaction, a set of participants has to agree whether that transaction has indeed occurred (consensus). It also allows you to track the history of the assets on the blockchain; who owned it, what changes have been made to it over time, etc (provenance). Being immutable, you cannot go back and change or delete a transaction once it is added to the ledger. The blockchain ensures this by marking each transaction with a digital fingerprint that also integrates all the previous fingerprints on that blockchain. Because everybody is agreeing on the updates being made to the blockchain, the ledger is the single source of truth, also referred to as finality.
And it’s getting even better! A transaction on the blockchain will cost less, because blockchain technology is less expensive in terms of running and maintaining, as opposed to the costs of numerous centralized middlemen operating. Transactions on the blockchain can be completed within seconds. Furthermore, the blockchain is installed on multiple computers around the globe. This decentralization facilitates sharing data in cases where the involved parties do not necessarily trust each other. Due to the requirement of the collective agreement on the existence of a transaction, the blockchain can in principle never be hacked.
You might ask yourself why you should trust blockchain. First of all, it is immutable. Once records have been entered into the blockchain, they cannot be deleted or changed. This is because of the fact that all the transactions are chained together (hence it is called blockchain) by hashes, or digital fingerprints as explained above. To make changes to the blockchain, without the permission of the other users, you would have to attack the whole blockchain, making all previous transactions void. So, a hacker on the blockchain would be like a bank robber who is blowing up the bank building, and inevitably destroys all the money inside it. Pretty pointless, right? Additionally, making changes to the blockchain would be in any way difficult to impossible, because another key feature of blockchain is that it is decentralized. An attacker would therefore have to attack the majority of the participating computers. Again, difficult to almost impossible.
Now you could say: “Ok, I trust the ledger, but can I trust that the entries are correct?” Well, you can! Because each entry is verified by multiple, independent parties (i.e. participating computers) of the blockchain network. This is the consensus aspect of blockchain, ensuring that the entries on a blockchain are the single source of truth. In addition to that, as a participant, you can always see the transaction history and details. So you can for example go back in the chain and see who owned an asset in the past and when it was transferred. This transparency aspect adds another layer of security, as you can trace things back to their origin.
So to make things short, blockchain is an immutable ledger running on multiple computers, on which assets can be stored and exchanged and contracts can be executed. The ledger is managed by the blockchain network, which means that it needs a consensus between participants to confirm an event before it can be validated and put on the blockchain. All events that have taken place since the blockchain was initiated are stored and can be viewed by all participants at any time.
So how does it work?
A block is a collection of data that is published into a ledger entered into the blockchain over a given period.
Once a block is validated, it will be given a hash making it secure & identifiable. When it becomes part of the chain it is linked to all the previous ones.
On the blockchain, there is no weakest link making it impossible to try to tamper one block.
Tampering with one block would mean you would have to tamper all blocks, which is pretty impossible.
The chain is shared as a distributed ledger on every computer using it with one single source of truth.
The ledger is continuously updated for everyone on the network.
Now you that know some basics about what blockchain is and how it works, you might wonder where it is useful? Currently, there are three main applications:
Storing digital records - Instead of having to look for your lost birth certificate and health records you can store these on the blockchain in a digital wallet. Other documents can also be stored here, as for example ownership certificates for property or car, and even your medical records.
Exchanging digital assets - Besides storing documents, the blockchain technology also permits you to exchange digital assets, like cryptocurrencies. You can issue new assets and exchange ownership in real time, without middlemen.
Executing smart contracts - Smart contract work like normal contracts but are digital and converted into computer codes. A smart contract will only be executed if a certain set of pre-defined conditions are met. For instance it can be used for insurance payments or even crowdfunding. By issuing it via the blockchain, a smart contract is immutable, transparent and trackable.
So, what’s next?
Blockchain is slowly becoming part of our daily lives. After reading this article, you will hopefully be able to talk with your friends or colleagues about the most famous buzzword of 2018 and probably a couple of years to come. You might not want to miss out on this new technology because blockchain is, and will continue to be, a gamechanger in our time.
Time to get some crypto-kitties!