Blockchain technology is used to create, update and maintain a decentralised, trusted ledger of transactions which occur within a network. We can use this notion to define blockchain technology as a new answer to the question “how can I trust this data?”. Let’s use that idea as a starting point to understand the concept of what is blockchain technology. It is immutable, secure, and fully transparent.
What is blockchain technology?
The information kept on a blockchain is shared and maintained in a shared database. Think of it as a spreadsheet replicated across thousands of different computers, fully accessible to anyone, and without relying on a central server that can be hacked.
If you take a moment to think about how our economy is overwhelmingly dependent on the accurate storage and accessibility of information, you begin to understand the impact this technology can have on our world.
To find potential beneficiaries of this new system, look no further than established centuries-old industries such as banking, insurance, healthcare and the legal system, among many others.
Network of nodes
When you hear the term “network of nodes”, just replace nodes with computers. This network is made up of independently owned nodes that use a cryptographic protocol to validate the transactions taking place. The protocol rewards accuracy in a way that ensures the data entered into the ledger cannot be wrong or subject to changes.
A blockchain is a database that exists in multiple computers which are part of the overall network charged with maintaining the accuracy of the data inputs. That’s another way of saying that these nodes are rewarded when they validate transactions that the rest of the network recognises as accurate.
Once validated, these blocks of information become part of the blockchain.
Transparent and immutable
When the network validates a block of transactions, that block is permanently added to the blockchain, which as you recall is distributed across thousands of machines.
Once added, these records cannot be altered. As they are public and easily accessible, their immutability is a guarantor of trust in the whole network.
Users know the data can be trusted because it arises from a shared consensus, made possible by the decentralisation that ensures no single computer can override the rest of the network.
Why does it matter?
Blockchain technology makes it possible to trust the information kept on that database without relying on a central institution. Many industries are keeping an eye on the role of blockchain technology because our entire economy does, in fact, rely on centralised institutions which guarantee trust in the whole system. Blockchain effectively renders them redundant. It also forms the basis of a completely different type of economy and industry known as cryptocurrency.
What is the history of Blockchain and Bitcoin?
Bitcoin’s whitepaper emerged in January 2009, the product of Satoshi Nakamoto’s mind. While his or her identity remains a mystery, the paper outlined a “purely peer-to-peer version of electronic cash (allowing) online payments to be sent directly from one party to another without going through a financial institution”.
While the paper can be quite technical, its disruptive potential lies in a simple proposition: to replace trusted institutions with a trustless system. Instead of a central bank backing a currency, Satoshi proposed a decentralised system which records all transactions in that currency which can’t be altered and is validated by the nodes that run its network. Blockchain technology underlines Bitcoin.
Mining and proof of stake
Even though cryptocurrencies are digital constructs, their concepts are often expressed in gold terminology, such as mining. Mining, or proof-of-work, is the process used by computers to validate transactions in a blockchain by solving increasingly complex mathematical problems which consume a lot of resources.
This method ensures the essence of the blockchain, but it also uses up a lot of electricity and computational power, leading many companies to set up data centres exclusively dedicated to mining.
That’s why a lot of projects are currently assessing moving to the more cost-effective but still secure proof-of-stake system. With this new method, an algorithm determines the creator of a new block of transactions by its stake (measured in wealth or number of tokens from that network), doing away with unnecessary energy and power consumption without sacrificing the integrity of the system.
If proof-of-stake proves successful then the inefficiencies of proof-of-work disappear and blockchain technology will be set for mass adoption.
What’s next?
Truly disruptive technology is never a finished product. Like other exciting areas of human progress such as the internet, Artificial Intelligence or Internet of Things, blockchain has problems that need to be worked out.
These problems are of a technical nature and, once surpassed, will ensure blockchain can deliver the efficiencies that so many, from established companies to respected experts, recognise in its potential.
The blockchain revolution has been in the making for a decade. In the first ten years, it managed to generate a $420 billion market. What will it have achieved by 2028?
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Disclaimer: The views and opinions expressed by the author should not be considered as financial advice. We do not give advice on financial products.