What is Blockchain Technology?

(An attempt to explain it to myself, more than anyone else)

Blockchain technology is a decentralized system for recording and verifying transactions. Unlike the traditional client-server model utilized by systems like the world wide web — in which we, the clients/ our computers, make requests to a centralized server for information — blockchain technology does not rely on a central authority, but rather, works via a distributed network of participants. The distributed infrastructure of blockchain technology has powerful implications for data storage, data security, and general access to data (which we will touch on later).

In order to fully understand why blockchain technology is so innovative, it’s important to first make sense of the fundamental technologies that make blockchain technology possible.

The Blockchain Itself

Often referred to as a distributed ledger or a distributed database, the blockchain itself is basically a record of all transactions made within a blockchain system. Every time a transaction is executed within a blockchain system, information about that transaction (and others executed in the last 10 minutes) is captured in a new block. Once verified, that block is then added to a chronologically ordered chain of blocks (hence, “blockchain”) detailing information about all previous transactions ever executed within that system.

In comparison to a standard ledger, which typically reflects relevant information for the present moment, a blockchain is much more comprehensive in that it maintains a history of all the information that has ever been recorded within a blockchain system.

Furthermore, each new block in a blockchain is linked to the previous block by a “hash” or long, seemingly random string of numbers and letters. This string is generated by a cryptographic hash function that can distill all the information in one block into a single, identifying hash. This feature makes it easy for the network to notice when even small changes are made to a block because they can throw off the order of all hashes. Rogue participants are deterred from tampering with blocks since successfully changing the hash of one block would require changing the hashes of all previous blocks.

Peer-to-Peer Networks

Powering decentralized blockchain systems are peer-to-peer (P2P) networks, or systems of interconnected participants working together rather than answering to a central authority. In a P2P blockchain network, an updated version of the blockchain is stored in various high-powered computers or nodes. When a transaction is broadcast to this network, the nodes verify the transaction by communicating with one another, simultaneously updating every version of their blockchain in the process. This system not only eliminates the need for a trustworthy central authority, but also makes it possible to access information on the blockchain from any participating node.

Consensus Mechanisms

A consensus mechanism is essentially a set of rules governing a blockchain network. These rules are agreed upon by all the nodes in the network and determine how blocks are added to a chain, what makes blocks valid, etc. By conforming to these rules, the nodes in a blockchain network can collectively make decisions about the accuracy and validity of information within the system without having to actually trust one another.

The Implications of Blockchain Technology

In breaking down the fundamental technologies underlying blockchain technology, we can already see the advantages that blockchain technology offers. Some of the key advantages are -

  • Immutability — The tedious and exhaustive way in which information is verified and recorded on a blockchain makes the blockchain virtually impossible to alter or hack.
  • No single point of failure — Because a version of the blockchain is accessible from every participant node within the blockchain P2P network, the failure of one, or even multiple nodes would not result in the total loss of information.
  • No need for a central authority — The consensus mechanism lends the blockchain network a protocol for executing and verifying transactions in a way that is fair and beneficial to all participants in the system.

Altogether, these technologies make up a system that is more secure, more reliable, and more democratic than traditional systems.

Consider a standard financial transaction. Traditionally, with financial transactions such as sending money to a friend, we rely on centralized institutions and services like banks or Paypal, to facilitate these transactions. While these institutions invest billions of dollars in robust security measures, their centralized databases still remain vulnerable to all kinds of external attacks. In fact, an average of 300+ financial data breaches have taken place annually since 2014 (http://breachlevelindex.com/). In the immutable, distributed system of blockchain technology, however, data breaches could become a thing of the past.

In addition to enhanced security, blockchain technology has the potential to democratize existing systems. Again, consider traditional financial systems and the barriers to entry for candidates trying to

  • Qualify for a loan
  • Open a bank account
  • Or even sign up for a credit card

In each situation, candidates must demonstrate their ability to participate in these systems by meeting certain criteria, whether it be a minimum credit score or a decent tax history. This could prove challenging for undocumented individuals, refugees, or others who may lack the official status required to enter these systems in the first place.

Alternatively, in a financial system built on the blockchain, powered by a P2P network and governed by an impartial set of rules (consensus mechanism) rather than a discriminatory central authority, it is possible that all candidates would need to participate is internet access + an anonymous blockchain address/ identity.

Greater security and democratization of financial systems are just a couple applications of blockchain technology. Looking ahead, blockchain technology is moving beyond simple cryptocurrency transactions and transforming the way we keep records and even the way that we carry out agreements. Ethereum is an example of a platform built on the blockchain where participants can execute “smart contracts” representing anything from voting rights to shares of a company. In this context, blockchain technology is more than just a secure and reliable system for verifying transactions — it is a means to creating entirely new systems of value.

Thoughts on tech and tech ethics. Also an attempt to get comfortable with sharing my writing.