A brief introduction to the blockchain – for normal people


Crypto-what?

If you’ve tried to dive into this mysterious thing called the blockchain, you’ll be forgiven for being horrified to have strayed from the opacity of the technical jargon often used to design it. So before we delve into what cryptocurrency is and how blockchain technology can change the world, let’s discuss what blockchain really is.

Simply put, the blockchain is a digital ledger, unlike the ledger we have used for hundreds of years to record sales and purchases. The function of this digital ledger is essentially almost identical to traditional accounting ledger as it records debit and credit between people. This is the basic concept of the blockchain; the difference is who keeps the ledger and who checks the transactions.

In traditional transactions, payment from one person to another involves some kind of intermediary to facilitate the transaction. Let’s say Rob wants to transfer Melanie £ 20. He can either give her cash in the form of a £ 20 bill, or use some sort of banking program to transfer the money directly to her bank account. In both cases, the bank is the intermediary that checks the transaction: Rob’s funds are checked when he takes money from the ATM, or they are checked by the program when he makes a digital transfer. The bank decides whether to conduct the transaction. The bank also keeps a record of all transactions made by Rob, and is fully responsible for updating it each time Rob pays someone or receives money into their account. In other words, the bank keeps and controls the ledger, and everything goes through the bank.

This is a big responsibility, so it is very important that Rob feels that he can trust his bank, otherwise he will not risk their money with them. He needs to be sure that the bank will not deceive him, will not lose money, will not be robbed and will not disappear overnight. This need for trust underpinned virtually all major behaviors and aspects of the monolithic financial industry, to such an extent that even when banks were found to be irresponsible with our money during the 2008 financial crisis, the government (another mediator) chose to bail them out. rather than risking destroying the last fragments of trust by allowing them to collapse.

Blockchains work differently in one key respect: they are completely decentralized. There is no central clearing house like a bank, and no central ledger kept by one organization. Instead, the registry is distributed over a wide network of computers called nodes, each of which stores a copy of the entire book on its hard drives. These nodes connect to each other through software called Peer Client (P2P), which synchronizes data over a network of nodes and ensures that everyone has the same version of the book at all times. .

When a new transaction is entered into a blockchain, it is first encrypted using the latest cryptographic technology. Once encrypted, a transaction is converted into what is called a block, which is basically a term used for an encrypted group of new transactions. This block is then sent (or broadcast) to a network of computer nodes, where it is checked by the nodes and after verification is transmitted over the network so that the block can be added to the end of the book on each computer, under a list of all previous blocks. This is called a chain, so the technology is called a blockchain.

After approval and entry in the book, the transaction can be completed. This is how cryptocurrencies like Bitcoin work.

Accountability and confidence building

What are the advantages of this system over a banking or central clearing system? Why would Rob use bitcoin instead of regular currency?

The answer is trust. As mentioned earlier, it is very important for the banking system that Rob trusts his bank to protect his money and manage it properly. For this to happen, there are huge regulatory systems in place to check the actions of banks and ensure that they are meeting their objectives. Governments then regulate regulators, creating a kind of multi-level system of inspections, the sole purpose of which is to prevent errors and misconduct. In other words, organizations like the Financial Services Authority exist precisely because banks cannot be trusted on their own. And banks are often wrong and misbehaving, as we have seen too many times. If you have a single source of authority, power is usually abused or abused. The relationship of trust between people and banks is awkward and shaky: we don’t really trust them, but we don’t feel there are many alternatives.

Blockchain systems, on the other hand, don’t require you to trust them at all. All transactions (or blocks) in the blockchain are checked by network nodes before being added to the book, which means there is no single point of failure and no single channel of approval. If a hacker wanted to successfully hack a blockchain ledger, he would have to hack millions of computers at once, which is virtually impossible. The hacker is also largely unable to disable the blockchain network, because, again, they will need to turn off every computer in the network of computers distributed around the world.

The encryption process itself is also a key factor. Blockchains, such as Bitcoin, use deliberately complex processes for their verification procedure. In the case of bitcoin, blocks are tested by nodes that perform intentionally intensive processors and time-consuming computations, often in the form of puzzles or complex mathematical problems, meaning that verification is neither instantaneous nor accessible. The nodes that allocate resources to verify the blocks are rewarded with a transaction fee and the generosity of the newly made bitcoins. It has the function of both encouraging people to become nodes (because processing such units requires quite powerful computers and a lot of electricity), as well as handling the process of generating – or minting – currency units. This is called mining because it involves significant effort (in this case using a computer) to produce a new product. It also means that transactions are verified in the most independent way, more independent than a state-regulated organization like the FSA.

This decentralized, democratic and highly secure nature of blockchains means that they can function without the need for regulation (they are self-regulating), government or other non-transparent intermediary. They work because people don’t trust each other, not the other way around.

Let the significance of this for a while realize, and the excitement around the blockchain will begin to make sense.

Reasonable contracts

Where things get really interesting is the application of blockchain outside of cryptocurrencies such as bitcoin. Given that one of the basic tenets of the blockchain system is secure independent transaction verification, it’s easy to imagine other ways in which this type of process can be valuable. Not surprisingly, many such programs are already in use or under development. Some of the best:

  • Smart Contracts (Ethereum): Probably the most exciting blockchain development after Bitcoin, smart contracts are blocks that contain code that needs to be executed for a contract to be executed. The code can be anything as long as the computer can execute it, but in simple words it means you can use blockchain technology (with its independent verification, unreliable architecture and security) to create a kind of deposit system for any type of transaction. . As an example, if you are a web designer, you can create a contract that checks whether a new client’s website is running or not, and then automatically allocate you funds as soon as it is. No more chasing or billing. Smart contracts are also used to confirm ownership of an asset such as property or art. The potential for reducing fraud with this approach is huge.
  • Cloud storage (Storj): Cloud computing revolutionized the Internet and led to big data, which in turn gave rise to a new AI revolution. But most cloud systems run on servers stored on single-site server farms owned by one person (Amazon, Rackspace, Google, etc.). This presents all the same problems as the banking system, as your data is controlled by a single opaque organization, which is the only point of failure. Dissemination of data in the blockchain completely removes the problem of trust, and also promises to increase reliability, because it is much harder to destroy the blockchain network.
  • Digital Identification (ShoCard): Two of the biggest problems of our time are identity theft and data protection. Due to extensive centralized services such as Facebook, which store so much data about us, and the efforts of various governments in developed countries to keep digital information about their citizens in a central database, the likelihood of misuse of our personal data is appalling. Blockchain technology offers a potential solution to this, wrapping your key data in an encrypted block that can be verified by the blockchain network whenever you need to verify your identity. The application of this varies from explicit replacement of passports and identity cards to other industries such as replacement of passwords. It can be huge.
  • Digital voting: very relevant in connection with the investigation of Russia’s influence in the recent US elections, digital voting has long been suspected as unreliable and very vulnerable to fraud. Blockchain technology offers a way to verify that a voter’s vote has been successfully sent while maintaining anonymity. This promises not only to reduce election fraud, but also to increase voter turnout as people will be able to vote by mobile phone.

Blockchain technology is still in its infancy, and most applications are far from common. Even bitcoin, the most established blockchain platform, is exposed to huge volatility, indicating its relative status as a newcomer. However, the potential of the blockchain to solve some of the major challenges we face today makes it an unusually exciting and enticing technology. I will certainly be watching.