Heard about this blockchain thing?
Most likely you have, in bits and pieces from the internet/colleagues/your Uber driver last Saturday (when no one was in any state to be talking complicated tech). If you’re wondering what blockchain is all about – this post is for you.
Blockchain is a relatively new technology. Its first application was the digital currency Bitcoin, which was created by an unknown person with the pseudonym Satoshi Nakamoto in this whitepaper back in 2008.
There are different parts to blockchain systems that can be put together like Lego bricks. Choosing which bricks to use is like making the choices in designing a blockchain.
For example, I can choose a red brick, a yellow brick and a green brick and decide to build a system for moving money between participants (Bitcoin). Alternatively, I could choose a blue brick and an orange brick and build a system to record people’s identities (the Estonian e-residency program).
As a record of transactions, blockchain can provide a (practically) unchangeable, permanent record of activity. As a record of who owns what, the structures in blockchain can prove the provenance of assets or proof of ownership. It works without a centralised authority like a government or a bank, which can be vulnerable to corruption. This strengthens the network and makes it very difficult for one fraudulent or corrupt actor to control.
What can blockchain be used for?
Blockchain technology currently has many use cases in various stages of development. The authorisation and authentication aspects of blockchain lend themselves to improved and cheaper Know Your Customer (KYC) procedures. Blockchains can provide lower costs of reconciliation. It can improve financial inclusion for people who are left out by traditional financial services systems.
So…WTF is a blockchain anyway?
A blockchain is a peer-to-peer distributed ledger. This means it is a record of transactions (a ledger). It is like a traditional accounting ledger, but is distributed between multiple participants in real time (peer-to-peer).
The overall concept of distributed ledger technology or ‘DLT’ underpins the idea of blockchain. However, although every blockchain is a distributed ledger, not every distributed ledger is a blockchain.
WTF? What I mean is, three people can all have simultaneous access to the same information showing who owes who money, i.e. it is a ledger or record that is distributed amongst those people. A blockchain is just one system they could use to all have access to that ledger.
The term blockchain derives from the method of constructing the ledger, where transactions are grouped into ‘blocks’ and become part of the ledger, which is formed of a ‘chain’ of blocks.
Blockchain works as a peer-to-peer system in the same way as file sharing platforms like Napster or bitTorrent. This means there is no central authority that holds the ledger; it is simultaneously held by all the people within the network.
The ledger exists on all participants’ systems simultaneously. There is no need to check the data against a centralised ‘master’ record and periodically match up with the records of other parties.
It is possible to have different types of blockchains, built with different design choices (Lego bricks) depending on the use case. The methods of processing transactions, storing them and authorising them can use different technologies.
How does it work?
The key to blockchain’s usefulness is the integrity of the data within it. ‘Integrity’ means how accurate and consistent the data is, whether it is correct and complete and if it stays that way.
Blockchain technology uses advanced cryptography to build the blocks in the chain and label them, through a process called ‘hashing’. The integrity of data is supported by the hashing process because the hash is a permanent marker on each block which cannot be changed.
The participants in a blockchain network interact by adding and verifying new blocks of transactions. They agree on and spread the word about the order of blocks in the chain at any given point in time. The picture above shows different participants in the network and the connections between them. Some of the dots will create the new blocks and add them to the chain. They will then send the new updated sequence of blocks through their connections to the other people in the network. This sequence makes up the definitive record of the ledger.
Why do I care?
There are many industries today where blockchain could be employed in future, some potential areas may not yet exist. Don and Alex Tapscott’s book ‘Blockchain Revolution’ is a fantastic book on blockchain use cases; written back in 2014, it still shows the potential for blockchain technologies to change the world is huge.
Blockchain is new, but already here and in use. It is complex in structure, but ideologically simple.
It has many applications and could therefore potentially be the future of many different industries. The rapid pace of innovation and application of blockchain in different industries makes an understanding of its make-up and functions essential for everyone.
I challenge you to re imagine your industry with blockchain in it – how could distributed ledgers add something valuable to your work?
Blockchain is not the catch-all solution to the world’s problems, but it can vastly improve certain areas; for example, those where we need reconciliation and multi-party access to the same information in real time.
Find the Lego bricks in the right size and colour for your business/industry and see what you can do with blockchain.