A brief introduction to Blockchain: for normal people

Crypto-what?

If you’ve tried to dive into this mysterious thing called the blockchain, you’ll be forgiven for recoiling in horror at the sheer opacity of the technical jargon that is often used to frame it. So before we get into what a cryptocurrency is and how blockchain technology could change the world, let’s take a look at what blockchain really is.

In the simplest terms, a blockchain is a digital transaction ledger, not unlike the ledgers that we have been using for hundreds of years to record sales and purchases. The function of this digital ledger is, in fact, practically identical to a traditional ledger in that it records debits and credits between people. That is the core concept behind blockchain; the difference is who has the ledger and who verifies 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 give you cash in the form of a £ 20 note or he can use some kind of banking app to transfer the money directly to your bank account. In both cases, a bank is the intermediary that verifies the transaction: Rob’s funds are verified when he withdraws the money from an ATM, or they are verified by the application when he makes the digital transfer. The bank decides whether the transaction should continue. The bank also maintains the record of all transactions made by Rob, and is solely responsible for updating it each time Rob pays someone or receives money on his account. In other words, the bank maintains and controls the ledger, and everything flows through the bank.

That’s a lot of responsibility, so it’s important for Rob to feel like he can trust his bank, otherwise he wouldn’t risk his money on them. You need to be sure that the bank won’t let you down, you won’t lose your money, it won’t be stolen, and it won’t disappear overnight. This need for trust has underpinned almost every major behavior and facet of the monolithic financial industry, to the point that even when banks were found to be being irresponsible with our money during the 2008 financial crisis, the government (another middleman) He chose to rescue them rather than risk destroying the last fragments of trust leaving them to collapse.

Blockchains operate differently in one key respect: they are completely decentralized. There is no central clearinghouse like a bank, and there is no central ledger held by an entity. Instead, the ledger is distributed across a vast network of computers, called nodes, each of which contains a copy of the entire ledger on their respective hard drives. These nodes are connected to each other through software called 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 any time.

When a new transaction is entered on a blockchain, it is first encrypted using state-of-the-art cryptographic technology. Once encrypted, the transaction becomes something called a block, which is basically the term used for an encrypted group of new transactions. That block is then sent (or broadcast) to the computer node network, where it is verified by the nodes and, once verified, is passed through the network so that the block can be added to the bottom of the ledger in the everyone’s computer, below the list of all previous blocks. This is called a chain, hence the technology is known as blockchain.

Once approved and posted to the general ledger, the transaction can be completed. This is how cryptocurrencies like Bitcoin work.

Accountability and removal of trust

What are the advantages of this system over a banking or central clearing system? Why would Rob use Bitcoin instead of the normal currency?

The answer is trust. As mentioned above, with the banking system it is critical that Rob trust his bank to protect his money and manage it properly. To ensure this happens, there are huge regulatory systems in place to check the actions of banks and make sure they are fit for purpose. Governments then regulate regulators, creating a kind of tiered system of controls whose sole purpose is to help prevent mistakes and misbehavior. In other words, organizations like the Financial Services Authority exist precisely because banks cannot be trusted by themselves. And banks often make mistakes and misbehave, as we’ve seen too many times. When you have a single source of authority, power tends to be abused or misused. The relationship of trust between people and banks is uncomfortable and precarious: we don’t really trust them, but we don’t think there are many alternatives.

Blockchain systems, on the other hand, don’t need you to trust them at all. All transactions (or blocks) on a blockchain are verified by network nodes before being added to the ledger, which means there is no single point of failure and no single channel of approval. If a hacker wanted to successfully manipulate the ledger on a blockchain, they would have to simultaneously hack into millions of computers, which is almost impossible. A hacker would also be virtually incapable of taking down a blockchain network, as, again, they would need to be able to shut down every computer in a network of computers spread across the world.

The encryption process itself is also a key factor. Blockchains like Bitcoin’s use deliberately difficult processes for their verification procedure. In the case of Bitcoin, the blocks are verified by nodes that perform a series of deliberately processor-intensive and time-consuming calculations, often in the form of puzzles or complex math problems, meaning that verification is neither instantaneous nor accessible. . Nodes that commit the resource to block verification are rewarded with a transaction fee and a reward of newly minted Bitcoins. This has the function of incentivizing people to become nodes (because processing blocks like this requires quite powerful computers and a lot of electricity), while also handling the process of generating or minting units of the currency. This is known as mining, because it involves a considerable amount of effort (by a computer, in this case) to produce a new product. It also means that transactions are verified as independently as possible, more independently than a government-regulated organization like the FSA.

This decentralized, democratic, and highly secure nature of blockchains means that they can function without the need for regulation (they self-regulate), government, or another opaque middleman. They work because people don’t trust each other, more than despite.

Let the meaning of that sink in for a while and the excitement around blockchain will start to make sense.

Smart contracts

Where things get really interesting are blockchain applications beyond cryptocurrencies like Bitcoin. Since one of the underlying principles of the blockchain system is the secure and independent verification of a transaction, it is easy to imagine other ways in which this type of process can be valuable. Unsurprisingly, many of these applications are already in use or under development. Some of the best are:

• Smart Contracts (Ethereum) – Probably the most exciting blockchain development after Bitcoin, smart contracts are blocks that contain code that must be executed in order for the contract to be fulfilled. The code can be anything, as long as a computer can run it, but in simple terms it means that you can use blockchain technology (with its independent verification, trustless architecture, and security) to create a kind of escrow system for any type of transaction. . . For example, if you are a web designer, you can create a contract that checks whether or not a new client’s website launches, and then automatically deliver the funds to you once it is launched. No more chasing 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 enormous.
• Cloud Storage (Storj): Cloud computing has revolutionized the web and sparked the advent of Big Data which, in turn, has set in motion the new artificial intelligence revolution. But most cloud-based systems run on servers stored in single-location server farms owned by a single entity (Amazon, Rackspace, Google, etc.). This presents the same problems as the banking system, as its data is controlled by a single opaque organization representing a single point of failure. Distributing data on a blockchain completely eliminates the trust issue and also promises to increase reliability, as it is much more difficult to remove a blockchain network.
• Digital Identification (ShoCard): Two of the biggest problems of our time are identity theft and data protection. With vast centralized services like Facebook containing so much data about us, and the efforts of various governments in the developed world to store digital information about them in a central database, the potential for abuse of our personal data is terrifying. Blockchain technology offers a potential solution for this by wrapping your key data in an encrypted block that can be verified by the blockchain network whenever you need to prove your identity. Applications for this range from the obvious replacement of passports and ID cards to other areas such as password replacement. It could be huge.
• Digital voting: very topical in the wake of research on Russia’s influence in recent US elections, digital voting has long been suspected of being unreliable and highly vulnerable to manipulation. Blockchain technology offers a way to verify that a voter’s vote was successfully cast while maintaining their anonymity. It promises not only to reduce election fraud, but also to increase overall voter turnout, as people will be able to vote on their mobile phones.

Blockchain technology is still in its infancy and most applications are a long way from general use. Even Bitcoin, the most established blockchain platform, is subject to high volatility indicative of its relative newcomer status. However, the potential of blockchain to solve some of the major problems we face today makes it an extraordinarily exciting and seductive technology to follow. I will certainly be attentive.