Not so long ago, terms like Bitcoin and cryptocurrency sounded bizarre and futuristic. Now, however, they’re much more common, recognized by many with an interest in technology and the Internet. In a short span of time, digital currencies have revolutionized how we think about financial transactions.
Arguably, however, it was blockchain — the technology underlying Bitcoin — that really changed the game. And, as it turns out, blockchain’s applications extend far beyond the financial sector. Here, we’ll take an in-depth look at the technology and its potential to transform our daily lives.
What Is Blockchain?
Blockchain is a distributed ledger technology, a database that is distributed across a network of computers (or nodes) which can be located anywhere in the world; in other words, it’s not housed on a centralized storage system. Each member of the network has an identical copy of the database, and changes made to one node are reflected within minutes across all nodes.
In the case of blockchain, this node-to-node network is used to process and validate blocks of transactions. Although these are most commonly financial transactions at this time, they can also be other types of records, such as legal assets or government documents. As its name suggests, the processed blocks are then linked to form a chain of authenticated groups of transactions.
The result is a technology that can be used to process diverse types of transactions without the need for a third-party hub. In the case of Bitcoin, for example, blockchain bypasses banks.
Building the Chain
The individual blocks of transactions that make up a blockchain are protected with cryptographic signatures. They are recorded chronologically, and anyone with access to the distributed ledger can anonymously add to the chain. However, to do so, they must first solve complex algorithmic problems designed to validate the transactions. In other words, they mathematically prove that the transactions within a block are authentic and accurate.
What motivates people to validate the transactions is an incentive-based, competitive process. It’s simple. The first person to solve the algorithmic riddle receives a reward; in the Bitcoin network, for example, the reward is (naturally) bitcoins.
Once a block of transactions is validated, it is added to the chain. Each new block has a timestamp and is linked to the previous blocks in chronological order. The result is a cryptographically protected, distributed ledger that contains a verified chain of records. The ledger is constantly updated and the history of the chain can be shown, block-by-block.
Once a block has been verified and added to the chain, it cannot be altered. This means that the ledger cannot be corrupted by malicious parties, which builds trust into the system. Furthermore, as the node-to-node network does not depend on centralized storage, no one party has privileged access to the chain. This is what makes blockchain technology so powerful.
Blockchain in Action
Traditionally, banks and other financial institutions acted as third-party processing hubs that facilitated online payments. The invention of the Bitcoin online currency in 2008 enabled a different way.
Using blockchain technology, Bitcoin allowed the direct, node-to-node processing of online transactions for the first time. This is where bitcoin mining comes in: miners use advanced software to gather up groups of bitcoin transactions into blocks. They then compete to be the first to validate them and are rewarded with bitcoins. The result is a self-regulating, cryptographically secure system for making online payments without the need for an intermediary.
While Bitcoin was the first use of blockchain, its applications don’t end there. Blocks could theoretically be other records, such as shareholding certificates, ownership documents, intellectual property, and medical and civil documents — to name just a few.
Blockchain offers a trusted system for processing all kinds of records. The technology eliminates intermediaries and cannot be tinkered with by malevolent individuals or organizations. It’s a technology that has the potential to radically change how we carry out all kinds of financial, legal, and government transactions. Bitcoin was just the beginning.