What is Blockchain?
Last updated September 2017
When it comes to new technologies, the common trend is to see a small group of people develop an understanding of it before it ever reaches the mainstream. This is exactly what happened with the advent of the Internet, and it is happening again with the blockchain technology. There are numerous “buzz” articles about the price of Bitcoin and how blockchain technology is going to change the world, but most people still don’t understand what it is, so if you feel like you don’t get it yet, you are not alone. Research from HSBC has indicated that upwards of 59% of people don’t understand what the blockchain is.
The best way to understand blockchain is to think about the problems that it solves. You’ve probably had to deal with the hassle of trying to transfer someone money from your bank account and needing to go through an intermediary that is either not trustworthy or takes an unfair fee. Or again, in receiving business and overseas transactions the payment processor takes a cut. The main problem that blockchain technology solves is the issue of centralization. When you have to depend on a bank, financial institution, or the government to control your access to your money, you are experiencing this problem. Decentralization makes it possible for you to coordinate directly with the other party, which can save time and money for everyone involved. Transaction fees are charged by the bitcoin ‘miner’ processing your transfer, as part of the larger ‘transaction block’ it is mining. But miners, using powerful computers, make more efficient and reliable intermediaries; firstly, because their main payoff, in bitcoin, comes from being the first to solve the algorithm. Bitcoin and the blockchain were founded on game theory principles, designed so that all network participants have a vested interest in its keeping running smoothly. Changes to improve the source code are constantly being launched and debated.
Use of blockchain solves all these problems by creating a public decentralized ledger. What is that, you might think? The ledger is a record of all the transactions that have taken place, and decentralizing it makes it completely trustworthy. The fact that it is public means that each computer on the network knows what the balances of each account should be, but no one knows who each account belongs to. The network is essentially a public governance systems that makes sure that all transactions are legitimate. Security is strengthened without compromising privacy. By removing the middlemen (e.g. banks or other financial institutions) it becomes simpler to manage your money and also more trustworthy. This increased level of trust comes from the idea that a bank is hackable, but the blockchain technology that manages the ledger isn’t.
So how is it possible for the blockchain network to be unhackable when you read news stories every week that tell of a corporation or government being vulnerable to cyber-attacks? The main reason is because of the network of computers that it uses. Blockchain technology depends on a large network of computers that each have an updated version of the ledger. This way, it is theoretically impossible to hack every single computer on the network at once, and the ledger becomes impossible to tamper with. Additionally, network runs on complicated cryptography problems that are impossible to fake and require significant investment in the network.
If this still seems complicated, then it might be better to examine this with analogy. Each transaction builds on the previous transaction, much like a game of chess. So, if anyone tries to tamper with the previous moves of the game, then it becomes clear that those don’t match with the more recent moves, and the system rejects it. That is how blockchain works. By having multiple duplicates of the balances of everyone’s account, it is impossible to mess with one transaction without changing all of them.
In the end, blockchain is about producing an increased level of trust that the banks and other middlemen can’t necessarily provide. As the 2007 financial crisis showed, the financial institutions we depend upon aren’t always as secure as they appear to be. Cryptocurrencies mitigate that issue by depending on a blockchain to keep track of all the balances in a public ledger, that is governed by the network, and effectively create a decentralized public record of all transactions.
So why should you care? This is a technology that is going to change the world and make your life a lot easier, with or without your conscious. The blockchain has been called the biggest game-changing technology since the internet. You won’t need to depend on banks or any other central authority to establish trust (e.g. the VISA brand) and will be able to save lots of time and money.