A basic dive into the essence of blockchain.
Blockchain is one of the biggest buzzwords in the technology world these days. Yet, with all of the hype that surrounds it there have been few concrete definitions of what blockchain is. As a general technology it may seem quite abstract, but it is comprised of several concrete technical components that are easier to explain individually. So I have set out to provide a simple and constructive definition of blockchain, from a conceptual standpoint rather than a highly technical one, by breaking down my overall understanding of it piece-by-piece. If it provides any insight at all then I am glad to be of service.
To start, blockchain is essentially a global database, or public ledger, that securely stores digital transactions of any value such as currency (money, stocks, bonds), tangible assets (goods, property, energy) and intangible assets (votes, identity, ideas, personal data). Blockchain applications are then built on top of this public ledger that help to facilitate the coordination, tracking and exchange of these assets.
Technology: what is blockchain made of?
A block itself is a data container that stores millions of transaction entries and a few data points such as a timestamp and a ‘hash’ (or link) that securely chains it to the previous block of transactions. Before a block of transactions is added to the chain of other blocks however, it must be validated and recorded by a community of miners (think of them as accountants). A unique characteristic of miners is that they operate on a proof-of-work consensus basis — when one verifies a block of transactions he/she then posts it to the rest of the mining community and they must unanimously agree and confirm that the block is valid before it is added.
The process miners undertake to verify and add blocks to the blockchain is based on cryptography; miners must dedicate their resources to solving state-of-the-art cryptographic puzzles. In addition to providing the backbone of the verification process, cryptographic security is embedded into the entire infrastructure of the blockchain which serves to create integrity in the information stored in the database. Through the use of public and private keys and digital signatures cryptography is what controls who can do what and what is shared with whom.
From there, through the use of distributed computing, another significant layer of security is added when the blockchain is then decentralised, or copied and sent out to be stored on all participating nodes (computers) in the blockchain network. These nodes all store an identical version that is updated in nearly real-time and there is currently around 5,400 in the bitcoin network alone. Because all of these nodes are connected, they maintain consensus with each other by continually checking that all copies are the same; if changes to a record in any node were to occur, the system would be alerted to this inconsistency. So to try to change information on the blockchain, you would have to individually hack all of the cryptographically secured computers and change an entry. This is virtually impossible to achieve with today’s technology, making the blockchain essentially tamper-proof.
Anyone can add an entry to a block if it is verified by miners, in this sense another element of the blockchain is that it is a public ledger. This is because all parties have access to add transactions and monitor and track these records.
These distributed and secure properties of the blockchain contribute to creating a historical permanent record. That is to say, a full account of a user’s transaction history that has not been altered or corrupted. Blockchain accounts are unique to each user and verified by official identification documents (such as a passport or company registration number) which is then linked to an anonymous account number and serves to circumvent fraud and prevent users creating more than one account. Each user’s incorruptible reputation is transparently stored on their unique identity. In turn, this establishes responsibility and creates checks and balances within the system on a global level.
This creates trust-based transactions that enable secure peer-to-peer exchange due to their validated, historically transparent, cryptographically secure and tamper-proof nature. Now, rather than having to rely on third party trust brokers (such as banks or notaries), trust can instead be placed into the technology itself and thus removes the need for a middleman in transactions and creates a direct interaction between ‘buyer’ and ‘seller’. This also eliminates the need to know the identity of the entity or the person you are transacting with. It allows for everyone to operate under anonymity wherein neither the buyer or the seller is identified and just the exchange is verified and saved.
Running on top of all of this are decentralised, open source platforms that are operated by the community for the community wherein a coding language is used to develop applications based on information in the database. Ethereum is a great example of a blockchain platform.
These applications are governed by rules, or protocols, of the blockchain as agreed upon and also built by the community. We have seen three protocols so far, the first protocol, or Blockchain 1.0, is responsible for the cryptocurrency bitcoin which is primarily applicable to the financial industry. Blockchain 2.0 is responsible for the rules governing smart contract applications, or programmable contracts that automatically execute when its terms and conditions are met. Blockchain 3.0 will be what extends blockchain beyond the applications of finance and contracts to a more widespread use. An example of a 3.0 protocol are sidechains, or extensions where transactions can take place ‘off chain’. Only when the parties want to settle is the final result of these transactions are they posted to the blockchain. This opens up the blockchain to be saving considerable storage space and operational capacity but more to the point it offers benefits for scale, efficiency and coordination which will extend blockchain into new areas.
Concepts: understanding the blockchain environment
Through the employment of miners, cryptography and distributed computing, information stored on the blockchain becomes permanent and incorruptible; records cannot be deleted or changed. This contributes to positioning blockchain to become the most secure collective computing system on the internet and possibly the most significant and detailed global record in history.
The blockchain is shared by all network nodes, updated by miners, monitored by everyone, and owned and controlled by no one. Through global distribution of the blockchain database, the power shifts from a few central authorities and is redistributed to society. Universally accessible, it facilitates transactions of any type and size between all parties on a global basis and this ultimately gives rise to a revolutionary new approach to the accessibility and movement of assets around the world. The distributed aspect of decentralisation also contributes greatly to security.
Transparency and Accountability
The creation of a permanent, tamper-proof and transparent history establishes traceability of goods and transactions as well as the incentive to maintain honest relations. This has the potential to create legitimacy through oversight, standard setting and answerability mechanisms for every asset that is exchanged on the blockchain.
The continuing and rapid development of open source platforms, protocols and applications extend blockchain technology into the realm of endless possibilities for widespread application. Understanding these concepts of the blockchain environment will be key to applying it in all levels of society and into sectors that stand to immensely benefit from these principles and benefits such as government, healthcare, anti-corruption, energy and the environment, to name a few.
Blockchain: the toolkit for a trust-based society
We have now broken down the totality of blockchain into its separate technological elements of mining and cryptography, a public ledger, distributed computing, historical permanent records, peer-to-peer exchange, platforms and protocols. These elements come together to create a unique blockchain environment that questions the way we currently understand trade, ownership and trust.
When taken together, the impact that these revolutionary concepts have upon our economy is profound as it empowers all levels of society to take part in frictionless, borderless and instantaneous peer-to-peer trade of anything of value. Information about these transactions can now be stored in a historically permanent public ledger. The distribution of real-time copies of this public ledger all over the world ensures that gatekeeping and power no longer resides in a central authority. Instead, we now have access to a globally shared source of truth as well as the shared ownership and responsibility of creating and maintaining it.
Blockchain is not a technological innovation in a normative sense because it is not the technology itself that is the breakthrough. Instead, the innovation is the ingenious combination of technologies and concepts that are being developed and applied by society, for society. If we all take part in creatively and collectively applying it where it is needed, blockchain has the potential to be the technological foundation required to achieve an inclusive, socially responsible and equitable society.