When someone has tried to dive into that mysterious thing called Blockchain, they have to be forgiven for recoiling in horror at the sheer opacity of the technical jargon often used to frame it. Before going into what a cryptocurrency is and how Blockchain technology could change the world, it is necessary to know what Blockchain really is.
In the simplest terms, a blockchain is a digital ledger of transactions, not unlike the ledgers we've been using for hundreds of years to record sales and purchases. The function of this digital ledger is, in fact, virtually identical to a traditional ledger in that it records debits and credits between people. That is the core concept behind Blockchain; the difference is who has the ledger and who verifies the transactions.
With traditional transactions, a payment from one person to another involves some type of intermediary to facilitate the transaction. Let's say Rob wants to transfer €20 to Melanie. He can give her cash in the form of a €20 bill, or he can use some kind of banking app to transfer the money directly to her bank account.
In both cases, a bank is the intermediary that verifies the transaction: Rob's funds are verified when he withdraws the money from an ATM, or they are verified by the app when he makes the digital transfer. The bank decides if the transaction should continue. The bank also maintains a record of all transactions made by Rob and is solely responsible for updating it each time Rob pays someone or receives money in his account. In other words, the bank maintains and controls the ledger, and everything flows through the bank..
It is important that Rob feels that he can trust his bank, otherwise he would not risk his money with them. He needs to be sure that the bank will not defraud him, he will not lose his money, he will not be robbed and he will not disappear overnight.
This need for trust has underpinned virtually every major behavior and facet of the monolithic financial industry, to the point that even when banks were found to be being irresponsible with our money during the 2008 financial crisis, the government (another middleman) he chose to rescue them rather than risk destroying the last shreds of trust by letting them collapse.
The Blockchain Model
Blockchains operate differently in one key respect: They are completely decentralized.. There is no central clearing house like a bank, and there is no central ledger held by one entity.
Instead, the ledger is distributed across a vast network of computers, called nodes, each of which contains a copy of the entire ledger on their respective hard drives. These nodes are connected to each other through software called a peer-to-peer (P2P) client, which syncs data across the network of nodes and makes sure they all have the same version of the ledger at any given time.
When a new transaction is entered into a blockchain, it is first encrypted using state-of-the-art cryptographic technology. Once encrypted, the transaction becomes something called block, which is basically the term used for an encrypted pool of new transactions. That block is then sent (or transmitted) to the network of computing nodes, where it is verified by the nodes, and once verified, it is transmitted over the network so that the block can be added to the end of the ledger on the computer. of all, below the list of all previous blocks.
This is called a chain, hence the technology is known as Blockchain.
Once approved and posted to the ledger, the transaction can be completed. This is how cryptocurrencies work like Bitcoin.
The loss of confidence in the banking system
What are the advantages of this system over a bank or central clearing system? Why would Rob use Bitcoin instead of normal currency?
The answer is trust. As explained earlier, with the banking system it is critical that Rob trust his bank to protect his money and handle it properly.
To ensure this happens, there are huge regulatory systems in place to check banks' actions and make sure they are fit for purpose.
Behind them, governments regulate regulators, creating a sort of tiered system of controls whose sole purpose is to help prevent mistakes and misbehavior.
In other words, organizations like the Financial Services Authority exist precisely because banks themselves cannot be trusted. And banks frequently make mistakes and behave inappropriately, due to costs, human errors, lack of control..., as has been manifested on too many occasions.
When there is only one single source of authority, power can be abused or misused. The relationship of trust between people and banks is uncomfortable and precarious: we don't really trust them, but we don't think there are many alternatives.
The foundations of trust in Blockchain
Blockchain systems do not require trust on them at all. All transactions (or blocks) on a blockchain are verified by network nodes before being added to the ledger, meaning there is no single point of failure and no single approval channel.
If a hacker wanted to successfully manipulate the ledger on a blockchain, they would have to simultaneously hack millions of computers, which is practically impossible. A hacker would also be unable to bring down a blockchain network, as, again, they would need to be able to shut down every computer in a network of computers spread across the globe.
The encryption process itself is also a key factor.
Blockchains like Bitcoin use deliberately difficult processes for their verification procedure. In the case of Bitcoin, blocks are verified by nodes that perform a series of deliberately processor-intensive and time-intensive calculations, often in the form of puzzles or complex math problems, meaning verification is neither instantaneous nor accessible. . The nodes that commit the resource to the verification of blocks are rewarded with a fee transaction fee and a reward of newly minted Bitcoins.
This has the function of incentivizing people to become nodes (because processing blocks like this requires quite powerful computers and a lot of electricity), while also handling the process of generating or minting units of the currency.
This is known as mining is., because it involves a considerable amount of effort (by a computer, in this case) to produce a new product. It also means that transactions are verified as independently as possible, rather than a government-regulated organization such as the FSA, for example, in the United States (Financial Services Agency).
This decentralized, democratic, and highly secure nature of blockchains means that they can function without the need for regulation (they self-regulate), government, or other opaque intermediary. It works because it doesn't require trust between people, they don't trust each other, but the network as a whole.
These concepts require resting, meditating and assimilating them for a while and that is when new doubts, possibilities and challenges appear around Blockchain.
Beyond Cryptocurrencies
From these concepts appear new interesting applications with Blockchain beyond cryptocurrencies. Since one of the underlying principles of the Blockchain system is the secure and independent verification of a transaction, it is easy to imagine other ways in which this type of process can be valuable.
Some of these applications, by way of example, are set out below:
Smart contracts (Ethereum)
One of the most exciting Blockchain developments after Bitcoin, smart contracts are blocks that contain code 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 simple terms it means you can use Blockchain technology (with its independent verification, trustless architecture, and security) to create a sort of escrow system for any type of transaction. .
For example, a web designer can create a contract that verifies whether or not a new client's website is released into production, and after that the client automatically makes the payment once it is. Smart contracts are also used to prove ownership of an asset, such as property or a piece of art. The potential to reduce fraud with this approach is significant.
Cloud Storage (Storj)
Cloud computing has been a revolution, sparking the growth of technologies such as Big Data which, in turn, have fueled the artificial intelligence revolution.
But most cloud-based systems run on servers stored in single-location server farms, owned by a single entity (Amazon, Rackspace, Google, etc.).
This presents the same problems as the banking system, as your data is controlled by a single opaque organization that represents a single point of risk for errors or fraud. Distributing data on a blockchain completely removes the trust issue and also increases reliability as it is much more difficult to take down a blockchain network.
Digital ID (ShoCard)
Two of the biggest current problems that have arisen from the digital revolution are identity theft and data protection.
With vast centralized services like Facebook holding so much data about us, and efforts by various governments in the developed world to store digital information about their citizens in a central database, the potential for abuse of our personal data is a major concern for businesses. persons.
Blockchain technology offers a potential solution by wrapping key data in an encrypted block that can be verified by the Blockchain network whenever someone needs to prove their identity. Its applications range from the obvious replacement of passports and ID cards to other areas such as replacement of passwords or work or university certificates. The potential is huge.
digital vote
Coming to the fore in the wake of the investigation into Russian influence in US elections, digital voting has long been suspected of being unreliable and highly vulnerable to manipulation.
Blockchain technology offers a way to verify that a person's vote was successfully cast while maintaining their anonymity. It promises not only to reduce election fraud, but also to increase overall voter turnout as people will be able to vote on their mobile phones.
Conclusion
Blockchain technology, although widespread, is still in its infancy as most applications are far from mainstream use. Even Bitcoin, the most established Blockchain platform, is subject to high volatility indicating its relative status as still a newcomer. However, the potential of Blockchain to solve some of the major problems we face today makes it an extraordinarily exciting and alluring technology to follow and clearly a safe bet.
