If you have followed the recent surge in the price of Bitcoin, even closely, you may have come across the term “blockchain” -the record-keeping technology of cryptocurrencies. Since 2009, this technology has received growing interest in the general public discourse.
As an open-source technology, blockchain offers an alternative to traditional intermediary-based financial transactions. The intermediary is replaced by a collective, decentralised verification ecosystem, offering a high degree of traceability, speed, and security. This new form of digital record-keeping could revolutionise our society in ways we had not previously thought of.
What does blockchain mean?
Let me give you an analogy of how blockchain works: suppose I (a “node”) have a record of a financial transaction on my computer (a “ledger”). Ten government accountants (call them “miners”) have the same file on theirs as well (so it’s “distributed”).
When I make a financial transaction, my computer emails each accountant and informs them. These accountants then rushed to be the first to check whether my transaction was legible. The first one to validate the transaction sends the logic for verification to the other accountants. Once the other accountants agree with the verification logic, it is updated on my computer and the computers of other accountants. The accountant who validates a transaction will receive a small compensation for their efforts. This process is known as blockchain technology.
Blockchain is a decentralised, distributed public digital ledger consisting of records called blocks – linked to one another using cryptography. Each block contains a cryptographic hash of the previous block, a timestamp, and transaction data. Anyone with internet access can view the information within; it is open to everyone. Everyone has collective ownership of the record, but nobody (really) owns it, controls it, and manipulates it.
It is maintained by thousands of computers located worldwide in a distributed network. Anyone can add their computers to this network. In return, you receive payment for the service you provide. All the information in the record is permanent – and cannot be changed. All the computers on the network keep a transaction record to ensure this. To hack the system, you must compromise every computer on the network. New information can only be added to the system when all the computers signal their approval, which they do once they are satisfied with the proof of logic.
How does the blockchain work?
Suppose I go to a candy store and buy chocolates. I pay the shopkeeper a sum of money in return for the transaction. It is a direct transaction where the two parties exchange values. Now, I have some money in my digital wallet.
To spend that money, I must go through a middleman – in this case, a bank, PayPal, or a credit card company. For decades, computer scientists have been finding ways to digitally replicate direct, frictionless cash transactions.
As early as 1982, cryptographer David Chaum proposed a blockchain-like protocol with “computer systems established, maintained, and trusted by mutually suspicious groups.” However, the first blockchain was conceptualised by an anonymous entity (a person or a group of people) known as Satoshi Nakamoto in 2008. Nakamoto wrote:
A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution. Digital signatures provide part of the solution, but the main benefits are lost if a trusted third party is still required to prevent double-spending. We propose a solution to the double-spending problem using a peer-to-peer network.
The network timestamps transactions by hashing them into an ongoing chain of hash-based proof-of-work, forming a record that cannot be changed without redoing the proof-of-work. The longest chain not only serves as proof of the sequence of events witnessed but proof that it came from the largest pool of CPU power.
As long as most CPU power is controlled by nodes not cooperating to attack the network, they’ll generate the longest chain and outpace attackers. The network itself requires minimal structure. Messages are broadcast on a best-effort basis, and nodes can leave and re-join the network at will, accepting the longest proof-of-work chain as proof of what happened while they were gone.
(Nakamoto 2008)
Instead of a bank or financial intermediary processing and maintaining the transaction and record, Nakamoto proposed that the same work be performed by thousands of computers distributed across the Bitcoin network through an open-source collaboration.
The payment information – including the wallet address, the amount, and the time – is added to the collective database, known as the blockchain. Money requires trust. Over many centuries, this trust was legitimised by sovereigns, treasuries, and banks in the name of God. The emergence of democratic institutions worldwide transferred this legitimacy to the government.
It works transparently through mathematical and cryptographic proofs that have removed the need for that trust. It has enabled people to spend their digital cash directly without needing a middleman. The first blockchain was a database that stored every Bitcoin transaction.
What is the purpose of blockchain?
Blockchain is an open-source, distributed database that utilises state-of-the-art cryptography to facilitate collaboration and transparency in all transactions.
Don Tapscott, co-author of the Blockchain Revolution: How the Technology Behind Bitcoin is Changing Money, Business and the World, thinks the “blockchain is the biggest innovation in computer science – the idea of a distributed database where trust is established through mass collaboration and clever code rather than through a powerful institution that does the authentication and the settlement.”
How can blockchain work in financial systems?
Blockchain technology will soon revolutionise the financial system. As more and more countries and financial institutions have realised that banning a decentralised digital currency is incomprehensible, they are moving towards regulations, thereby reaping the benefits of this technology.
How does blockchain help data decentralisation?
Traditionally, data was stored within a relational, centralised database – an advanced Excel spreadsheet. These databases have been vulnerable to hacks, manipulations, and data theft.
With blockchain technology, there will be no centralisation, no data manipulation, and reduced data redundancy to a new level. You can send digital money to anyone, anywhere, without waiting days for the receiver to receive the payment.
How does blockchain help digital payments?
In February 2021, Mastercard announced that it would enable its merchants to accept cryptocurrency payments later that year. The company also holds a patent application describing a blockchain-based database capable of instantaneously processing payments.
The financial services industry is up for disruption. Several banking institutions have adopted this technology for quick transactions, database maintenance, and financial transparency.
How does blockchain work in digital health?
The rise of digital health – the use of information and communication technologies in medicine – has also significantly boosted blockchain technology. Blockchain will facilitate the treatment of health problems by significantly enhancing the accuracy and accessibility of historical patient data.
By creating an accessible, permanent blockchain record that is owned by you, you can instantly store information about your ailments, allergies, and lifestyle choices. It will enable doctors to diagnose and treat their patients better.
What role does blockchain have in data security?
Another reason healthcare providers are turning to blockchain technology is its enhanced security. A recent report published by Risk Based Security revealed that the healthcare industry faced 484 hacks in 2020, accounting for 12% of all breaches last year.
Patients, doctors, and healthcare providers will securely access the information with blockchain technology. Factom, a health-focused company, helps store digital records that can be accessed only by hospitals and healthcare administrators.
How is blockchain used in real estate firms?
The property market is a complex and often messy business. It would take months of paperwork for one to buy a house. This tends to happen due to a lack of trust between different entities. With blockchain smart contracts, this laborious task of property transfer has become more straightforward and transparent.
In the United Kingdom, a company called ClickToPurchase has used this technology. According to Gartner, blockchain technology has already passed the peak of the hype cycle. It has also entered a period of disillusionment that enables the usage of blockchain technology in our everyday lives. The social impact of blockchain technology has already begun to emerge. It may be time for a society based on a revamped social contract, one that emphasises collaborative ownership. However, it is still a long way from blockchain technology becoming an integral part of everyday life.
Cover Photo by Terry on Unsplash
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