Feb 9, 2016
What is Blockchain Technology?
If you’ve found this site, you’re no doubt aware of Bitcoin and other, recently-minted “cryptocurrencies.” You also almost certainly know that the technical underpinning of most of these cryptocurrencies — and Bitcoin’s greatest innovation — is something called the blockchain. This site and our forthcoming blog posts will explore how this innovation will disrupt industries far afield from finance, including the creative industries.
But first, a quick bit of background for anyone getting up to speed on the blockchain generally. Here’s what it is, in a nutshell.
Distributed Trust. All successful transactions between two or more parties require some level of assurance or trust by both parties. For many financial transactions, the assurance is provided by third parties such as banks. For other types of transactions, governmental institutions may fill that role. There are other mediators of trust as well, too numerous to name.
The blockchain eliminates the need for third-party-mediated trust. Transactions facilitated by blockchain technology are automatically verified by a multitude of computers owned by many parties. The transactions are recorded in a digital ledger that exists on all of those computers simultaneously; a ledger that grows with each additional transaction, and thus can be used to confirm not just the most recent transaction but all of those historically on the chain.
The term “blockchain” derives from the fact that transactions occurring on the system during a particular timeframe are gathered into a block of transactions then placed into the chain of such blocks.
For Bitcoin, its public blockchain is validated by a network of “miners” — computers that compete with each other to solve cryptographic puzzles and earn new Bitcoins. Other blockchain efforts may use a different system of distributed validation (that is, a different consensus mechanism). Indeed, “distributed” does not have to mean “public”; private blockchains — and even hybrid public/private blockchains — have been proposed and have been the focus of recent, intense attention from investors.
Distributed Transparency. Think of a prisoner exchange on a bridge in a B-movie: the assurances are provided by an understanding that if one side tries to back out of the deal, it will be immediately apparent. Similarly, blockchain technology theoretically resists virtually all attempts to falsify or manipulate records, because the entire transactional history is, again, distributed over thousands of computers, and prior to new transactions being made the system checks that the local version of the blockchain is the same as all of the others throughout the network.
One key aspect of distributed ledger technology is that the blocks in the chain can include other information, which allows a large number of additional applications to be built on top of the blockchain. Already, numerous companies are offering products that piggyback on the Bitcoin blockchain, while other companies and institutions are building their own independent blockchains. As just one example, NASDAQ is exploring blockchain technology to facilitate trades without the need for brokers and clearing houses. Instead, transactions would occur directly between parties, with lower costs and lower counter-party risk. But the possibilities are nearly endless.
Of course, this oversimplifies the technology, and then some. Below are some recent “explainer” articles that go into a bit more depth. For a more complete understanding, try Michael Casey and Paul Vigna’s book The Age of Cryptocurrency.
Next up: Why blockchain technology will matter to industries outside of finance.
Blockchain “explainer” articles:
In-depth reading:
