A Brief Introduction To Blockchain – For Normal People
What exactly is cryptocurrency?
You’d be forgiven for recoiling in disgust at the sheer opaqueness of the technological jargon that is often used to frame this enigmatic thing called blockchain if you’ve tried to delve into it. So, before we discuss what a cryptocurrency is and how blockchain technology can change the world, let’s first define blockchain.
In its most basic form, a blockchain is a distributed ledger of transactions, similar to the ledgers we’ve used to record sales and purchases for hundreds of years. This digital ledger performs a similar role to a conventional ledger in that it tracks debits and credits between individuals. The difference is who owns the ledger and who verifies the transactions, which is the central principle behind blockchain.
In conventional transactions, a payment from one individual to another is facilitated by the use of an intermediary. Let’s presume Rob wants to give Melanie £20. He has two options: offer her cash in the form of a £20 note or use a banking app to move the funds directly to her bank account. In all cases, the transaction is checked by a bank: Rob’s funds are verified when he withdraws cash from a computer, or they are verified by the app when he makes a digital transfer. The bank decides whether or not to proceed with the transaction. The bank still keeps track of all of Rob’s transactions and is solely responsible for keeping it up to date if he pays anyone or collects money into his account. To put it another way, the bank owns and manages the ledger, and everything passes through it.
That’s a lot of responsibility, so Rob needs to trust his bank; otherwise, he wouldn’t put his money in their hands. He needs to be assured that the bank will not defraud him, that his money will not be lost, that he will not be robbed, and that the bank will not vanish overnight. This need for confidence has underpinned virtually every significant behavior and facet of the monolithic finance industry, to the point that, during the financial crisis of 2008, when it was discovered that banks were being reckless with our capital, the government (another intermediary) opted to bail them out rather than risk losing the last vestiges of trust by allowing them to fail.
Blockchains are unique in one important way: they are fully decentralized. There is no central clearing house, such as a bank, and no single agency holds the central ledger. The ledger is instead spread through a large network of computers known as nodes, each of which has a copy of the entire ledger on their hard drives. These nodes are linked by a piece of software known as a peer-to-peer (P2P) client, which synchronizes data across the network of nodes and ensures that everyone has the same version of the ledger at all times.
A new transaction is first encrypted using cutting-edge cryptographic technology before being added to a blockchain. Once encrypted, the transaction is converted to a block, which is a term for a collection of encrypted new transactions. That block is then sent (or broadcast) through the network of computer nodes, where it is checked by the nodes and then passed on through the network so that it can be added to the end of the ledger on everyone’s computer, under the list of all previous blocks. This is referred to as the chain, which is why the technology is referred to as a blockchain.
The transaction may be completed until it has been authorised and registered in the ledger. This is how Bitcoin and other cryptocurrencies function.
The removal of confidence and the imposition of accountability
What are the benefits of this scheme over one based on banking or central clearing?
Why will Rob choose Bitcoin over traditional currency?
Trust is the solution. As previously stated, Rob’s confidence in his bank to secure and properly manage his money is crucial in the banking system. To ensure that this occurs, massive regulatory mechanisms exist to check bank activities and ensure that they are fit for purpose. The regulators are then controlled by governments, resulting in a tiered system of checks and balances whose primary function is to help avoid errors and bad behavior. To put it another way, the Financial Services Authority exists precisely because banks cannot be trusted on their own. And, as we have seen many too many times, banks sometimes make errors and misbehave. When there is only one source of authority, power is more likely to be abused or misused. People’s relationships with banks are uncomfortable and precarious: we don’t really trust them, but we don’t see any other options.
Blockchain systems, on the other hand, do not need your confidence. In a blockchain, all transactions (or blocks) are validated by the network’s nodes before being added to the ledger, ensuring that there is no single point of failure and no single approval channel. To successfully tamper with a blockchain’s ledger, a hacker will have to simultaneously hack millions of machines, which is nearly impossible. A hacker would also be unable to bring down a blockchain network because, once again, they would need to be able to shut down every single device in a global network of computers.
The encryption method is also a significant factor. For their authentication procedures, blockchains like Bitcoin use intentionally complicated methods. Blocks are tested in Bitcoin by nodes performing a purposely CPU- and time-intensive series of calculations, often in the form of puzzles or complex mathematical problems, implying that verification is neither instantaneous nor available. Nodes that devote their resources to block verification are compensated with a transaction fee as well as a bounty of newly created Bitcoins. This serves to both encourage people to become nodes (because processing blocks like this requires very powerful computers and a lot of electricity) and to handle the process of producing – or minting – currency units. This is referred to as mining because it requires a significant amount of work (in this case, by a computer) to create a new product. It also ensures that transactions are checked in the most unbiased manner possible, much more unbiased than a government-regulated body like the FSA.
Since blockchains are decentralized, autonomous, and highly stable, they may operate without the need for regulation (they self-regulate), government, or other opaque intermediaries. They work because people don’t trust each other, not because they don’t trust each other.
Allow that to sink in for a moment, and the excitement surrounding blockchain will begin to make sense.
Contracts that are smart
The implementations of blockchain outside of cryptocurrencies like Bitcoin are where things get very interesting. Given that one of the blockchain system’s fundamental principles is the stable, independent verification of a transaction, it’s easy to imagine other applications for this type of method. Many such applications are either in use or in progress, which is unsurprising. The following are a few of the best:
Smart contracts (Ethereum): After Bitcoin, smart contracts are blocks of code that must be performed in order for the contract to be fulfilled. The code can be anything as long as it can be executed by a computer, but in layman’s terms, it means that blockchain technology (with its independent verification, trustless design, and security) can be used to build an escrow system for any type of transaction. If you’re a web designer, for example, you might build a contract that checks whether a new client’s website has been launched and then automatically releases the funds to you until it has. There will be no more chasing or invoicing. Smart contracts may also be used to prove ownership of an object, such as a piece of art or a piece of real estate. This technique has considerable potential for eliminating fraud.
Cloud storage (Storj): cloud computing has revolutionized the internet and ushered in the era of Big Data, which has ushered in a modern AI revolution. However, the majority of cloud-based systems are hosted on servers that are housed in single-location server farms that are operated by a single company (Amazon, Rackspace, Google etc). This has the same issues as the financial system in that your data is handled by a centralized, opaque organization that is a single point of failure. Distributing data on a blockchain eliminates the need for confidence completely, and it also promises to improve security because it is far more difficult to bring down a blockchain network.
Identity theft and data security are two of the most pressing concerns of our day, and digital identity (ShoCard) addresses both. The potential for misuse of our personal data is frightening, particularly with large centralized services like Facebook keeping so much data about us and attempts by various developed-world governments to store digital information about their people in a central database. Blockchain technology can provide a solution to this problem by encrypting your sensitive information and storing it in an encrypted block that can be checked by the blockchain network whenever you need to prove your identity. This has a wide variety of uses, from the obvious replacement of passports and identification cards to other fields such as password replacement. It has the potential to be massive.
Digital voting has long been suspected of being unreliable and highly vulnerable to tampering, especially in light of the investigation into Russian meddling in the recent US election. Blockchain technology allows voters to check that their vote was submitted successfully while maintaining their privacy. It promises to eliminate electoral fraud while also increasing voter turnout because people will be able to vote using their cell phones.
Blockchain is a Thai word that means “block”