What is crypto?
If you’ve tried diving into this mysterious thing called blockchain, you’d be forgiven for recoiling in horror at the opacity of the technical jargon often used to frame it. So, before we get into what cryptocurrency is and how blockchain technology can change the world, let’s discuss what blockchain actually is.
In its simplest terms, a blockchain is a digital ledger of transactions, unlike the ledgers we’ve used for hundreds of years to record sales and purchases. The function of this digital ledger is actually almost the same as a traditional ledger in that it records debits and credits between people. The basic concept behind Blockchain is; the difference is who maintains the ledger and who approves the transactions.
With traditional transactions, a payment from one person to another involves some kind of intermediary to facilitate the transaction. Let’s say Rob wants to transfer £20 to Melanie. He can either give her cash in the form of a £20 note or use a banking app to transfer the money directly to her bank account. In both cases, the bank is the intermediary that validates the transaction: Rob’s funds are verified when he withdraws money from the ATM, or verified by the app when he makes a digital transfer. The bank decides whether to proceed with the transaction or not. The bank also has a record of all transactions made by Rob and is solely responsible for updating it whenever Rob pays someone or receives money into his account. In other words, the bank maintains and controls the ledger and everything goes through the bank.
It’s a big responsibility, so it’s important that Rob feels he can trust his bank or he won’t be risking his money with them. He needs to make sure that the bank will not cheat him, lose his money, rob him and disappear overnight. This need for trust has underpinned almost every major behavior and aspect of the monolithic financial industry, to the extent that even during the 2008 financial crisis, when banks were exposed for their irresponsible handling of our money, the government (another intermediary) allowed them to collapse, destroying trust. saving them rather than risk destroying their last fragments.
Blockchains work differently in one key way: they are completely decentralized. There is no central clearing house like a bank, and no central ledger held by an institution. Instead, the ledger is distributed across a large network of computers called nodes, each of which stores a copy of the entire ledger on their hard drives. These nodes are connected to each other through software called peer-to-peer (P2P) clients, which synchronize data across the network of nodes and ensure that everyone has the same version of the ledger at any given time. .
When a new transaction is entered into the blockchain, it is first encrypted using state-of-the-art cryptographic technology. Once encrypted, a transaction becomes something called a block, which is basically a term used for an encrypted group of new transactions. That block is then sent (or broadcast) to a network of computer nodes, where it is verified by the nodes and, after verification, transmitted through the network so that the block is added to the end of the ledger on everyone’s computer, below the list of all previous blocks. This is called a chain, which is why the technology is called blockchain.
Once approved and recorded in the book, the transaction can be completed. This is how cryptocurrencies like Bitcoin work.
Elimination of responsibility and trust
What are the advantages of this system compared to a bank or central clearing system? Why is Rob using Bitcoin instead of normal currency?
The answer is trust. As mentioned earlier, with the banking system, it is very important for Rob to trust his bank to protect and manage his money properly. To ensure this happens, there are huge regulatory systems in place to scrutinize the actions of banks and ensure they are fit for purpose. Governments then regulate regulators, creating a sort of layered system of checks whose sole purpose is to prevent mistakes and bad behavior. In other words, organizations like the Financial Services Authority exist precisely because banks cannot be trusted on their own. And banks often make mistakes and misbehave, as we have seen many times. When you have a single source of authority, abuse or misuse of power happens. The trust relationship between people and banks is awkward and dangerous: we don’t really trust them, but we don’t feel there’s much of an alternative.
And blockchain systems don’t need you to trust them. All transactions (or blocks) on the blockchain are verified by nodes in the network before being added to the ledger, meaning there is no single point of failure and no single confirmation channel. If a hacker wanted to successfully hack into a ledger on the blockchain, he would have to hack into millions of computers simultaneously, which is nearly impossible. A hacker would also not be able to bring down the blockchain network because they would still need to be able to shut down every computer in the worldwide network of computers.
The encryption process itself is also a key factor. Blockchains like Bitcoin use intentionally difficult processes for their verification procedure. In the case of Bitcoin, blocks are verified by nodes that perform a series of deliberate processor- and time-consuming calculations, often in the form of puzzles or complex mathematical problems, meaning that verification is neither instantaneous nor accessible. Nodes that provide resources to verify blocks are rewarded with a transaction fee and a reward of newly minted bitcoins. This has the function of both incentivizing people to become nodes (since the processing of such blocks requires very powerful computers and a lot of electricity), while also managing the process of creating or minting currency units. It is called mining because it requires a significant amount of effort (in this case by a computer) to produce a new commodity. It also means that transactions are scrutinized in the most independent way possible, independent of a government-regulated organization like the FSA.
This decentralized, democratic and highly secure nature of blockchains means that they can operate without the need for regulation (self-regulation), government or other opaque intermediaries. People work because they don’t trust each other, not in spite of each other.
Let that fade away for a while and let the excitement around blockchain start to make sense.
Where things get really interesting is blockchain applications outside of cryptocurrencies like Bitcoin. Given that one of the core principles of a blockchain system is the secure, independent verification of a transaction, it’s easy to imagine other ways such a process could be valuable. Not surprisingly, many such programs are already in use or in development. Some of the best are:
- Smart Contracts (Ethereum): Probably the most interesting blockchain development since Bitcoin, smart contracts are blocks that contain the code that must be executed to fulfill the contract. The code can be anything, as long as a computer can execute it, but in simple terms, it means that you use blockchain technology (with independent verification, trustless architecture and security) to create a kind of escrow system for any transaction. you can use . For example, if you’re a web designer, you can create a contract that checks to see if a new client’s website is up and running and then automatically release the funds to you. No more tracking or billing. Smart contracts are also used to prove ownership of an asset such as property or art. The potential to reduce fraud with this approach is huge.
- Cloud storage (Storj): cloud computing revolutionized the internet and in turn gave rise to Big Data, which ushered in a new AI revolution. But most cloud-based systems run on servers housed in single-site server farms owned by a single entity (Amazon, Rackspace, Google, etc.). This presents the same problems as a banking system, as your data is managed by a single, opaque organization that represents a single point of failure. Distributing data on the blockchain completely eliminates the trust issue and also promises to increase reliability, as the blockchain network is very difficult to undo.
- Digital identification (ShoCard): two of the biggest challenges of our time are identity theft and data protection. With large centralized services like Facebook, for example, storing vast amounts of data about us, and efforts by various developed world governments to store digital data about their citizens in a central database, the potential for misuse of our personal data is terrifying. Blockchain technology collects your key information into an encrypted block, which can be verified by the blockchain network when you need to prove your identity. Its applications range from overtly changing passports and ID cards to other areas such as changing passwords. It can be big.
- Digital voting: Very relevant in the wake of the investigation into Russian influence in the recent US election, digital voting has long been considered both unreliable and highly vulnerable to fraud. Blockchain technology offers a way to verify that a voter’s vote has been successfully sent while maintaining anonymity. It promises to not only reduce election fraud, but also increase overall voter turnout as people can vote with their mobile phones.
Blockchain technology is still very much in its infancy and most applications are far from mainstream. Even Bitcoin, the most established blockchain platform, is subject to massive volatility, indicative of its relative newcomer status. However, blockchain’s potential to solve some of the major problems we face today makes it an extraordinarily interesting and attractive technology. I will definitely be on the lookout.