8 July, 2019
Blockchain was first brought to public attention as the technology underpinning cryptocurrencies like bitcoin, but today it’s increasingly used for a variety of other purposes. Governments, banks, and major corporations around the world have recognized the potential of blockchain to transform industries and are exploring its utility for countless applications.
But before we get into use cases, we need to understand how the technology works.
Don and Alex Tapscott, authors of Blockchain Revolution, describe blockchain as “an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value.”
In just this brief explanation, there is a lot to unpack: the incorruptible nature of the technology, the characteristics of a digital ledger, and the method of record-keeping. But at the most basic level, the easiest way to understand blockchain is to look at each of its three parts.
a) Record: The information to be stored, processed, or shared—a transaction or contract, for example.
b) Block: A bundle of records.
c) Chain: All the blocks linked together. These are added to the chain one after another in chronological order.
Next, we need to look at how transactions work on the blockchain.
1. A record outlines the details of a transaction, including digital signatures of all involved parties.
2. The network, comprised of nodes (or computers), checks the details and the validity of the record.
3. Once the information is verified, the record is accepted by the entire network of computers and added to a block. Each block includes a unique, identifying code called a hash as well as the hash of the previous block in the chain. Including the previous block’s hash creates the immutability that is so essential to the blockchain.
4. The block is linked to the chain, with the hash codes determining the order. The verified transaction creates a new block of data for the ledger.
The information embedded in a blockchain is virtually impossible to change, since it isn’t stored in one centralized location like a traditional ledger. Instead, the records are hosted across a network of computers at the same time, accessible to anyone. This network makes constant checks to make sure the copies on all computers—or hosts—are identical.
(Individual blockchains can be governed by a single authority providing permission for access, but for this purpose, we’re focusing on permissionless blockchains without an authority.)
Blockchains can be loosely compared to shared Google Docs. For instance, a Google Doc can be accessed and revised by multiple people simultaneously, but all changes are recorded chronologically in a change log.
Similarly, a blockchain-based ledger is decentralized, accessible, and shared, with a record of all information from beginning to end. These records are public and verifiable—and most importantly, impervious to hackers.
Hash codes are created through an algorithm that generates a string of letters and numbers from any kind of digital information. The code is always the same length of characters despite the original size of the information, and changing anything in the initial input creates a completely new and unique hash.
The nature of hash codes and their behavior following information alterations is pertinent to the blockchain because of the linking of blocks—which contain not only their own hash but the one previous. If a hash is changed, it breaks the chain. It takes a lot of computing power—across an entire network of millions of nodes—to regenerate all the hashes. This contributes to the immutability and validity of the chain.
The constant checks and validation of the blockchain help to ensure there is no single point of failure. The blockchain exists in a state of consensus, where every transaction is self-audited. Human errors are done away with, and accountability is inherent to the process. Essentially, blockchain establishes trust without a central authority.
The transparency and accessibility of information on a blockchain reduces its susceptibility to manipulation. The only way to change records is to override an entire network of millions of computers—nigh impossible. This means hackers and fraudsters cannot manipulate information to their benefit. And this enhanced security is highly appealing in today’s digital world, where nearly everything is shared and stored online. Encryption is essential to protecting identities and assets.
Cost reduction is a huge benefit of blockchain, especially for companies and governments. Since transactions are highly optimized and automated, human error as well as fraud is reduced, and the speed of the entire process trumps traditional systems. Consumers also benefit from the speed, ease, and trust associated with the technology.
The transfer of funds through banks seems practically archaic now that we have seen transactions processed with blockchain in mere seconds, at any time, crossing international borders.
Smart contracts bring ease and transparency to the exchange of money, property, or shares while eliminating middlemen. Blockchain technology automatically executes these contracts once predetermined conditions are met.
Blockchain can eliminate the inefficiency of paper records as well as the cost of brokers and fraud. Item location can be monitored live, and consumers and businesses can follow the path of a product from manufacturer to retailer.
A token-based system for loyalty programs (such as for stores, restaurants, and online services) on the blockchain can eliminate fraud and incentivize customers.
Many marginalized communities face identity challenges that hinder their citizens’ access to financial independence. Creating decentralized digital IDs using blockchain can empower the approximately one billion people worldwide who do not have official identification (and at VeriToken, we’re already working on this). In addition, blockchain can help combat identity theft.
Data can be shared in a blockchain-based marketplace to improve industries, and institutions can use the technology for secure, trackable record-keeping as well.
Voter fraud can be eliminated through the use of a blockchain-based voting system. Furthermore, easy and accessible voting is very pertinent in marginalized communities, where access to voting stations may be hindered by a variety of factors.
Just like transactions, blockchain can be used for the transfer of titles to ensure a transparent, reliable record of legal ownership—for land, automobiles, houses, etc.
Today’s cloud storage systems are not impervious to hackers or infrastructure problems, which is a concern for people who want very reliable and safe ways to back up their data. The characteristics of blockchain can resolve these concerns.
Royalty distribution data could be controlled on a blockchain with digital content downloads, leasing, and sharing being tracked accurately. This can ensure that creators are fairly compensated.