Blockchain-based networks, decentralized applications (dApps), and distributed registries are becoming the backbone of much of our digital lives. A new, unchanging digital universe is forming around us, remaking the Internet, and you probably don’t even know it.
Invisible technology changing the world
Blockchain is not a buzzword like the cloud or the Internet of Things. This is not an innovation that can be seen and touched as easily as a smartphone or an Amazon package. But in a world where everyone can edit a Wikipedia article, blockchain is the answer to a question we’ve been asking since the beginning of the Internet age: how can we collectively trust what’s going on on the internet?
Every year, we spend most of our lives on the Internet. We do our banking online. We shop online. We register with the apps and services that make up our digital identity and send the information back and forth. Think of the blockchain as historical matter that records everything that happens: every digital transaction, exchange of values, goods and services, or personal data. But let’s take it in order.
What is Blockchain?
Blockchain is a decentralized distributed public ledger of transactional data, protected by cryptography. Transactions are grouped into blocks and linked in a chain to create an immutable ledger that is (almost) immune to fraud.
Now, if this definition was not very clear, we will divide it into more digestible parts.
- What is a distributed ledger?
The blockchain is built on a distributed registry. This means that the technology is built on a P2P network, and transactions between network participants are recorded in the registry.
The people on the network unanimously agree to any updates to the entries (or transactions)in the ledger. This consensus makes the records reliable. These records are also immutable, meaning they cannot be erased.
- Who developed the blockchain?
The blockchain was developed in 2008 by a person or group of people known as Satoshi Nakamoto to introduce the digital currency Bitcoin. This name is a pseudonym, and the real name of this person or group of people remains unknown.
Blockchain technology is based on the idea of decentralization, allowing users to interact without the use of intermediaries. Many believe that it arose as a reaction to corruption in the banking system that emerged in the years following the explosion of the US housing bubble in 2007. But there are also supporters of another theory, who believe that Bitcoin is nothing but the brainchild of”globalists”.
- What makes blockchain technology unique?
“Blockchain is a vast global distributed ledger or database, running on millions of devices and open to everyone, in which you can move, store and manage not only information, but also anything of value: money, documents, identity cards and even votes when voting, doing it safely and confidentially. Trust is established through mass collaboration and a well-thought-out code, rather than through powerful intermediaries such as governments and banks. “ — Don Tapscott, a leading expert in the field of innovation, and author of The Digital Economy.
The financial systems we use today are centralized systems, such as banks, credit card companies, and payment systems. These systems function as third-party intermediaries to facilitate transactions between the parties. While centralized systems have advantages such as trust, efficiency, scalability, and profitability, third-party intermediaries also get a share of the transactions.
In addition to high fees, these intermediaries also lengthen the transaction process from several hours to several days. For example, think of both the fees and the time involved in bank transfers and property exchanges.
Blockchain technology eliminates the need for these intermediaries, and creates a system of digital trust. It uses a network of computers called nodes to verify transactions and keep accurate records of their history. This results in reduced transaction time, improved data accuracy, and minimal costs. Since the blockchain creates a system of digital trust, it also allows you to anonymously exchange digital assets, which, according to CoinMarketRate, are already more than 10 thousand.
- How secure is the blockchain?
“The main advantage of blockchain technology is that it is more secure than traditional systems. But people tend to find it difficult to trust new technologies, and this paradox is really impossible to avoid”, Vitaly Buterin, co-founder of Ethereum.
Since blocks of identical information are stored on the network, this makes it impossible for them to be managed by a single group (and fall into the wrong hands). More importantly, everyone can use the blockchain and help run it.
How does blockchain technology work?
There are several different components in the blockchain that you should learn about to fully understand how the technology works: nodes, blocks, hashes, and digital signatures.
- What is a node?
As mentioned earlier, nodes are the computers that run and maintain the blockchain network. These nodes voluntarily join the blockchain as “administrators”. They are called miners. They often have an incentive to join — this is the opportunity to receive Bitcoins as a reward. Each node has a copy of the transaction registry, and they constantly check the validity of new transactions being added.
Since the transaction history is distributed across a network of nodes, it is almost impossible to maliciously manipulate it. The registry is maintained with the consent of the majority, so any user will need to control at least 51% of the nodes in the network to make changes.
- What is a block?
Transactional data is the building blocks of the blockchain. This data includes the source of the transaction, the recipient, and the amount being sent. A timestamp can also be enabled. Transactional data sets are grouped into blocks and collected by network nodes. After confirmation, the block joins the chain of already confirmed blocks. This is the blockchain.
New blocks can be added to the block chain by going through a process called Proof of Work for each new block. This is a mechanism that slows down the creation of new blocks and prevents malicious manipulation of the block chain. Anyone who wants to interfere with the blockchain will have to recalculate the Proof of Work for each block in the blockchain.
- What are hashes?
Each block in the block chain goes through a hashing algorithm. One type of hashing algorithm is SHA-256, a SHA-2 cryptographic hash function developed by the NSA.(SHA is a secure hashing algorithm).
This creates a unique identifier, a hash, for each transaction with a fixed length of characters. Think of a hash as a fingerprint that can identify a block and all its contents. However, instead of tracking all the transaction data, you just need to know the hash and previous hashes to prove the validity of the transaction.
- What are digital signatures?
Digital signatures serve as proof that a person is who they are, not a hacker. However, instead of real signatures, which can be easily forged, digital signatures use cryptography or mathematics. Digital signatures are required to send and receive data in the block chain.
A digital signature consists of a public key and a private key. They are connected by a mathematical relation and form a key pair.
Where is blockchain technology used?
Blockchain technology started as a financial instrument with Bitcoin as its main application, but has started to expand rapidly in other areas as well.
“Blockchain technology has such a wide range of transformative use cases, from recreating the Wall Street plumbing, to creating financial sovereignty in the most remote regions of the world,” said Perianna Boring, founder and president of the Chamber of Digital Commerce, the world’s largest trade association representing the blockchain and digital asset industry.
- Banks and online stores
On the financial side, banks have started working with blockchain companies like Ripple to make their global payment systems more efficient. Many online stores have also started to accept cryptocurrency as a faster and cheaper way to receive payments. Other blockchain companies are working to make cryptocurrencies more profitable. They create gateways where you can spend any coin you have, regardless of whether the store you shop at accepts it.
- Supply chain management and medical documentation companies
Another popular use case for blockchain is data storage and transfer. Industries where accuracy and trust in data are critical (medical records, land plots, and the supply chain) have begun to integrate this technology into their systems. Other companies use the blockchain to create a decentralized file storage. Think of Google Drive or Dropbox, but with the ability to lend free space on your computer to other people.
“A blockchain — based medical records system can protect patient data and improve the interaction between doctors and hospitals, as well as give patients more ownership rights over their own records,” Valery Vavilov, CEO of BitFury
- Online games, loans, and solar energy
The creation of Ethereum and the implementation of smart contracts have opened up more to the blockchain world than just transactional data. Simply put, smart contracts use computer programming to fulfill the terms of a contract. In fact, there is no limit to what smart contracts can be used for. They are now used in gambling, borrowing, solar energy, decentralized exchanges, video games, DeFi, and NFT, and the list goes on and on.
Are governments trying to regulate blockchain?
“There are regulators who are really excited about the potential of blockchain. They understand that you can build a solid financial system, and it will solve all your problems. All kinds of economic entertainment and games played in the current system of politics are becoming impossible in this system, “ — Patrick M. Bynr, CEO of Overstock
Blockchain is still at a very early stage, and it remains to be seen how it will affect all industries. Blockchain enthusiasts and free market advocates insist that it be allowed to develop freely, and any future regulations should make a clear distinction between the platform and any applications that run on it (Bitcoin is currently the most popular).
China went the farthest in adopting blockchain technology, making it a tool of total control.
The Future of blockchain technology
“Blockchain technology is not just a more efficient way to settle securities. This will fundamentally change the market structures and, perhaps, even the architecture of the Internet itself, “ — Abigail Johnson, president and CEO of the American investment company Fidelity Investments
Because distributed registries are validated by a network of computers, blockchains are more secure, faster, and cheaper to use than existing systems. From payments to supply chains, almost all industries are starting to use blockchain, and the technology is completely transforming these industries.
Blockchain is expected to transform not only the banking and finance industries, but also cybersecurity, supply chain management, forecasting, networking and the Internet of Things, insurance, private transportation and ride-sharing, and charity.
Blockchain can increase trust and transparency for these industries. It is important that these solutions are fully explored and allowed to be developed.
As blockchain becomes more popular, it will change all areas of modern life. It may take time before this happens, but when it does, we can welcome a world of secure, anonymous, and decentralized transactions.