Crypto-what?
You’d be forgiven for recoiling in horror at the sheer opaqueness of the technical jargon that is frequently used to frame this mysterious thing called blockchain if you’ve tried to learn more about it. Therefore, let’s first discuss what blockchain is before moving on to what a cryptocurrency is and how blockchain technology may change the world.
A blockchain is essentially a digital version of the paper ledgers that have been used for centuries to record sales and purchases. In fact, this digital ledger performs essentially the same tasks as a traditional ledger in terms of recording debits and credits between parties. The main difference between this and blockchain is who controls the ledger and who verifies the transactions.
A payment from one person to another requires some sort of intermediary to facilitate the transaction in traditional transactions. Say Rob wants to send Melanie 20 pounds. She can accept cash in the form of a 20 pound note from him, or he can use a banking app to send the money directly to her bank account. When Rob withdraws money from a cash machine or uses an app to make a digital transfer, a bank acts as the middleman and verifies the transaction. The decision to proceed with the transaction rests with the bank. Every time Rob pays someone or receives money into his account, the bank is solely responsible for updating the record of all transactions Rob has made. In other words, the ledger is kept and controlled by the bank, and everything passes through it.
That’s a big burden, so it’s critical for Rob to believe he can trust his bank; otherwise, he wouldn’t put his money at risk with them. He needs to have faith that the bank won’t steal from him, lose his money, be robbed, or just vanish without a trace. The monolithic finance industry’s need for trust has been the driving force behind nearly every significant behavior and aspect. In fact, the government, another intermediary, decided to bail out the banks during the 2008 financial crisis rather than risk destroying the last remaining shards of trust by allowing them to fail.
Blockchains function uniquely in one important way: they are completely decentralized. There is no central ledger held by one organization, similar to a clearing house in a bank. The ledger is instead spread across a sizable network of computers, known as nodes, each of which has a copy of the entire ledger stored on its own hard drive. Peer-to-peer (P2P) clients, a piece of software that connects these nodes to one another and synchronizes data across the network of nodes to ensure that everyone has access to the same ledger at all times, are what keep these nodes in sync with one another.
Using cutting-edge cryptographic technology, each new transaction that is added to a blockchain is first encrypted. Once the transaction has been encrypted, it is changed into a block, which is simply a term for an encrypted collection of fresh transactions. The block is then broadcast (or sent) into the network of computer nodes, where it is checked by the nodes and, after being checked, passed through the network so that it can be added to the end of the ledger on each computer, below the list of all prior blocks. Since this is known as the chain, the technology is known as a blockchain.
The transaction can be finished once it has been approved and recorded in the ledger. Such is the operation of cryptocurrencies like Bitcoin.
Accountability and the removal of trust
In comparison to a banking or central clearing system, what benefits does this one offer? Why would Rob choose Bitcoin over fiat money?
As previously stated, the key to the banking system is Rob’s trust in his bank to handle and protect his money properly. Massive regulatory systems are in place to make sure this occurs by vetting the banks’ actions and ensuring they are fit for purpose. Then, governments control the regulators, establishing a sort of hierarchy of checks and balances with the sole objective of assisting in the prevention of errors and unruly behavior. In other words, institutions like the Financial Services Authority exist because banks cannot be relied upon to operate in a trustworthy manner. Additionally, banks frequently behave badly and make mistakes, as we have witnessed far too often. When there is only one source of authority, abuse or misuse of power is more likely. We don’t really trust banks, but we feel like there aren’t many other options, which creates an awkward and unstable trust relationship between people and banks.
Contrarily, blockchain-based systems don’t require any level of your trust. There is neither a single point of failure nor a single approval channel because all transactions (or blocks) in a blockchain are verified by the network’s nodes before being recorded in the ledger. A hacker would need to simultaneously infiltrate millions of computers, which is nearly impossible, in order to successfully alter the ledger on a blockchain. Furthermore, since a hacker would have to be able to take down each and every computer in a network of computers spread out across the globe, it would be very difficult for them to bring down a blockchain network.
Another important element is the encryption method itself. Blockchains like the one for Bitcoin use consciously challenging processes for their verification process. In the case of Bitcoin, blocks are verified by nodes carrying out a purposefully time- and processor-intensive series of calculations, frequently in the form of puzzles or challenging mathematical problems, so verification is neither immediate nor available. A transaction fee and a bounty of freshly created Bitcoins are awarded to nodes that commit their resources to block verification. Because processing blocks like these requires fairly powerful computers and a lot of electricity, this serves the dual purpose of enticing people to become nodes and managing the process of generating — or minting — units of the currency. It takes a lot of work (by a computer in this case) to create a new commodity, which is why this is referred to as mining. Furthermore, it indicates that transactions are examined in the most unbiased manner imaginable, one that is more unbiased than a body subject to government regulation, such as the Financial Services Authority (FSA).
Blockchains can operate without the need for regulation because they are self-regulating, without the involvement of a centralized authority or other unreliable intermediary due to their decentralized, democratic, and highly secure nature. Rather than in spite of this, they function because people don’t trust one another.
After you give that some thought, the excitement surrounding blockchain will begin to make sense.
Smart contracts
The use cases for blockchain that go beyond cryptocurrencies like Bitcoin are where things start to get really interesting. Given that one of the guiding principles of the blockchain system is the secure, independent verification of a transaction, it is simple to think of additional applications for this kind of procedure. Unsurprisingly, there are a lot of these applications either in use or being developed. Some of the best ones are:
- After Bitcoin, Ethereum’s smart contracts are arguably the most exciting blockchain innovation. Smart contracts are composed of code blocks that must be executed in order for the contract to be fulfilled. The code can be anything as long as a computer can run it, but in layman’s terms it means that you can use blockchain technology to build an escrow system for any kind of transaction thanks to its independent verification, trustless architecture, and security. A contract that checks to see if a new client’s website has been launched or not, and then automatically releases the funds to you once it has, could be created, for instance, by a web designer. Nothing to chase after or bill for. The ownership of an asset, such as real estate or works of art, can also be established through the use of smart contracts. With this strategy, there is great potential for decreasing fraud.
- Cloud storage (Storj): Cloud computing transformed the internet and ushered in the era of Big Data, which in turn sparked the current AI revolution. However, the majority of cloud-based systems are powered by computers housed in server farms with a single location and a single owner (Amazon, Rackspace, Google, etc.). Due to the fact that your data is controlled by one opaque organization, this presents all the same issues as the banking system and is therefore a single point of failure. Since it is so much more difficult to bring down a blockchain network, distributing data on a blockchain completely eliminates the trust problem and also promises to increase reliability.
- Identity theft and data protection are two of the most pressing issues facing society today with regard to digital identification (ShoCard). With massive centralized services like Facebook holding so much information about us and efforts by various developed-world governments to store digital data about their citizens in a central database, the possibility of misuse of our personal data is horrifying. By encapsulating your key information in an encrypted block that can be validated by the blockchain network whenever you need to prove your identity, blockchain technology offers a potential solution to this problem. The replacement of passports and identification cards is the most obvious application for this. cards to other areas such as replacing passwords. It could be huge.
- In light of the investigation into Russia’s interference in the most recent U.S. election, digital voting is a hot topic. election, digital voting has long been suspected of being both unreliable and highly vulnerable to tampering. With the help of blockchain technology, it is possible to confirm the validity of a vote while maintaining the anonymity of the voter. Due to the ability to vote using a mobile device, it promises to both decrease election fraud and boost overall voter turnout.
Blockchain technology is still very much in its infancy, and the majority of the applications are far from being adopted by the general public. Even Bitcoin, the oldest platform on the blockchain, is prone to extreme volatility, which is a sign of how new it is. Blockchain is an incredibly fascinating and alluring technology to follow, though, because it has the potential to address some of the most pressing issues of our time. Certainly, I’ll be keeping an eye out.