What is Blockchain? This question comes up first when people hear about this new technology. The founder, Satoshi Nakamoto, is not even a real person but a pseudonym or maybe a group of people. This raises even more questions and makes it also a bit mysterious. Blockchain allows digital information to be distributed but not copied, over the internet. In this case, it uses Bitcoin, a form of digital money, to be transferred over the online web. In this article, I’ll try to explain what Blockchain is and what unique properties it has.
A Blockchain uses blocks of data which are called a chain. These blocks are part of a distributed network of computers. The data is secured by cryptographic principles and are related to each other. When data is added to a block, a timestamp occurs and the record cannot be changed anymore.
This doesn’t sound very spectacular but still, this technology has some disrupting possibilities. First, it has no central owner and is thereby a democratic system. Second, it has transparency and the information added to the ledger can be seen by anyone who is interested in it.
In the next chapters I'll go into more detail about the following subjects:
- Explanation and idea behind Blockchain
- Examples of industries it can affect
- Technical explanation
Explanation and the idea behind Blockchain
A Blockchain carries no transaction cost. The Blockchain passes information from A to B in a fully automated and secure way. When a computer(called a node) wants to start using the network, it has to create a block first. This block will be distributed over the network and verified by the other nodes on the network. These nodes can be thousands even millions, it totally depends on the size of the total network. When a block is accepted by the network, it will be added to the chain. At this moment the total chain is updated with this new block of data. All the nodes over the network will immediately store this new chain on their hard disk. This is very crucial because this makes falsifying the chain almost impossible. The reason why is because now you have thousands or even millions of copies with this unique chain stored locally. This decentralized storage of data protects the safety of the chain and the total network. Bitcoin, the first Blockchain ever created, uses it to store digital transactions on the network but it can be used in many ways.
For example a railway company. You can buy tickets on an app or website. After this transaction, the credit card company takes a fee for its service. Blockchain comes with the idea to remove the third party out of this transaction process. In this case, the credit card company will be removed. The railway operator does not just save money on transaction fees but it can outsource it’s ticketing process entirely to the Blockchain. So how does this work? In this scenario, a ‘ticket Blockchain’ exists. When a passenger buys a ticket, a block(or ticket) will be created and added to the ‘ticket Blockchain’. After the creation of this block, the Blockchain will validate if the transaction is valid. If valid, the ticket will be added to the chain and the passenger has bought a ticket. Also, this ticket will be stored on the chain and can be tracked at any time if needed.
To summarize, the use of this Blockchain is totally free! When there is a transaction needed between two parties, the Blockchain can be used to save transaction fees.
The financial industry
Another sector Blockchain will have big impact on is the financial world. This technology will have the most impact on this type of industry. This is a very traditional industry and the sentiment by consumers is more or less like “we have to deal with them and we just need them”. Bitcoin, the first Blockchain created, is disrupting this kind of industry. All services currently offered by banks like bank accounts, loans and mortgages can be replaced by a Blockchain. If all the people in the world would start using a Blockchain today instead of banks, the entire financial industry would go bankrupt. Lucky for the banks today, the bitcoin Blockchain isn’t ready for this kind of volume. That doesn’t mean it won’t come. Currently, software developers all over the world are collaborating and trying to makes this work. The latest innovation is called “The Lightning Network” which will create a new virtual layer above the current Blockchain. How this exactly works is a totally different story which I won’t cover in this blog. So how will this technology have an impact on the bankers today? In the near future bankers will become mere advisers, not gatekeepers of money. Stockbrokers will no longer be able to earn commissions and the buy/sell spread will disappear.
A technical explanation of blockchain
So how does this all work technically? Picture an excel spreadsheet, that is shared across thousands of computers on a network. They have all the same exact copy stored locally. When one of the participants wants to update this sheet, the entire network uses an algorithm to validate this update. You can say this algorithm is a puzzle(the same for every participant) and very hard to calculate. To solve this puzzle comes with a lot of processing power and electricity. When the puzzle is solved a new block on the chain is created. The participant who solved this gets a reward payed in Bitcoin(can be any token). This process of solving a cryptographic puzzle is called mining and is very crucial within validation process. After the validation is done a copy of this excel sheet is stored on every computer within the network. So information being stored on a Blockchain is shared decentral. This is totally the opposite of how data is stored on the internet nowadays. Data is currently stored at central parties all over the internet(Google, Facebook or Youtube).
I think decentralization of data will be the next step in the evolution of the online web. Currently people aren’t happy with the way Facebook or Google handles our private data. With Blockchain technology implemented the right way(!) users all over the world be back in control over their own data.