Blockchain explained: A guide to one of the modern world’s greatest innovations
What is blockchain technology and where did it come from?
The story of blockchain and Bitcoin are one and the same. It begins with a group of individuals, called cypherpunks, who predicted that the current centralized system for dealing with private information would lead to an internet that was unprotected, wherein individuals’ information was potentially used in malicious or undesirable ways, or left open to be used in those ways, by corporations or government entities.
The banking system provided a major backdrop to the cypherpunks’ concerns. A bank is most often a private or government corporation that is trusted by a country or global population to store all financial and relevant personal information and manage all financial transactions.
The relationship between a collective population and the bank is therefore one based on trust: trust that the bank won’t steal money, mishandle transactions, or misuse the data and information that is entrusted to them. Beyond the risk that a bank will act intentionally to exploit this trust, there are also inherent risks that arise from a technical system that requires a central entity to manage, process, and safeguard all of the data that is stored with them.
If you’re reading this in the West, you might not completely relate to the problem blockchain was and is trying to solve, but the quote below from Vitalik Buterin (the creator of Ethereum) helps to frame it from the perspective of those populations in countries where trust in their national banking system is perhaps weaker than it is in the US and other Western countries:
"When I speak about it in the West, people say they trust Google, Facebook, or their banks. But the rest of the world doesn’t trust organizations and corporations that much — I mean Africa, India, the Eastern Europe, or Russia. It’s not about the places where people are really rich. Blockchain’s opportunities are the highest in the countries that haven’t reached that level yet."
Out of the brewing of collective concern pioneered by the cypherpunks, the notorious Satoshi Nakamoto was born.
Nakamoto was responsible for the original bitcoin whitepaper: Bitcoin: A Peer-to-Peer Electronic Cash System. In this paper, he/she/they outlined a plan for a brand new digital currency built on a digital distributed ledger, called blockchain.
Nakamoto’s new blockchain concept was devised from three existing core technologies: cryptography, peer-to-peer networks, and a software protocol to bring everything together.
The first key feature, cryptography, provides participants with a digital identity which is secured with a complex and unique cryptographic code. With this identity, users receive both a private key and a public key. A private key is comparable to a house key. The security of this key is essential because if it fell into the wrong hands, bad actors could potentially steal from the user. The public key, on the other hand, is used to send and receive information. It could be compared to an email address; it will appear on all transactions documented on the blockchain and readable by anyone. These two keys together create a ‘digital signature,’ allowing users to interact with the blockchain’s network.
Blockchain’s peer-to-peer network is its second defining feature. As opposed to a basic digital ledger in which information is stored on a single computer, information on a blockchain is distributed throughout a network of computers, called nodes.
There are two basic categories for nodes: Full nodes and partial nodes. Full nodes participating in network will be required to download the full blockchain and a piece of software which interacts with the network. With the full database stored in multiple locations, the blockchain is less likely to be lost or corrupted. These users also act as a redistribution point for any and all transactions made on the blockchain. Partial nodes only require a piece of the blockchain. Partial nodes allow users to participate and validate pieces of the blockchain without having to download and maintain every piece of information stored on the blockchain.
The third, and arguably most important feature is the protocol itself. This is where mining comes into play.
Blockchains are created as a chronological order of transactions, cryptographically secured from one block to the next, and distributed amongst nodes through a process called mining. This process is responsible for maintaining the blockchain, processing transactions, and discovering new blocks.
Though there are two types of nodes, either can mine the blockchain. When a transaction is made, a miner will validate the activity by including it in a block. Often, the transactor will include a fee in order to incentivize the miner to add the transaction to a block ahead of others. In addition to validating transactions, miners are also responsible for discovering new blocks.
Miners are incentivized to discover new blocks in the blockchain through rewards. Upon the discovery of a new block, the miner or pool of miners unlocks a predetermined amount of cryptocurrency. The amount unlocked depends on the blockchain being mined. This ingenious process is called "Proof of Work" and it was devised to ensure self-interested parties would remain motivated to maintain the network.
The many different types of blockchains
Just as there are many different types of cryptocurrencies, all servicing different purposes, since Nakamoto’s first blockchain, there have arisen many different types of blockchains, all of which operate in different ways.
There are two basic categories in which different blockchains fall, public blockchains and private or federated blockchains. Public blockchains (made famous by Bitcoin) are owned by everyone, decentralized, trust free, open, and anonymous.
The first and most popular public blockchain, bitcoin was launched in 2008. Bitcoin is primarily a means to exchange coins. Bitcoin operates on a peer-to-peer network using a Proof of Work protocol. Miners compete for the prize, a set amount of bitcoin, awarded when a new block is discovered. In addition to the reward, miners are also incentivized through transaction fees paid by users of the network.
While Bitcoin was the first blockchain, it is not without its own innovations. Currently, developers are working on off-chain solutions which will allow the network to scale, deal with more transactions, and even build smart contracts.
Ethereum is another public blockchain. Created in 2013 by Vitalik Buterin, Ethereum opens up a new realm of possibilities in the blockchain world and is arguably responsible for accelerating blockchain adoption throughout many of the world’s major industries.
Ethereum, like Bitcoin, currently operates under a Proof of Work protocol to create new ether, the platform’s currency, but recent news suggests a switch to Proof of Stake may be on the horizon.
Ethereum’s true potential is highlighted by its capacity to build smart contracts on top of the blockchain. Smart contracts gave developers the opportunity to create entirely new cryptocurrencies, decentralized applications, and even decentralized autonomous organizations, a feature that no other blockchain offered at the time. (To learn more about Ethereum, click here)
Private and federated blockchains are privately owned, centralized, require permission to alter, and accessible only by trusted, predetermined parties. These platforms are created especially for enterprise and industry use.
It is important to note that some of these platforms have been criticized, with many suggesting that they are not blockchains at all, instead, blockchain-inspired platforms.
Two key developments within this space are R3’s Corda and the Ripple Consensus Network.
R3, a distributed database company and growing consortium of firms interested in the research and development of distributed ledger technology, built Corda, a platform fine tuned to operate within the financial world. Because of its complexity, it is not limited to finance – it has also caught the eyes of the energy industry, healthcare, and even governments. Corda has no underlying cryptocurrency and no miners involved in maintaining the network. Instead, nodes are assigned and controlled by predetermined individuals or companies in order to process transactions.
What industries are using blockchain technology?
Blockchain technology is completely transforming the way businesses are run and how transactions are made. From finance to charity, no stone is being left unturned.
The financial sector is easily the most susceptible to disruption through blockchain technology, and major institutions from around the world are beginning to jump on board. The benefits of a distributed digital ledger are clear.
Faster transactions, greater transparency, and higher security cut costs within the industry and save time for consumers. Using blockchain technology, it is estimated that the banking industry could save upwards of $20 billion in middleman costs alone.
In addition to finance, the $1 trillion pharmaceutical industry is also on the chopping block. Not only could the industry save millions in the industry’s supply chain management, it could also prevent losses and ensure the quality of a specific product, ultimately saving lives. Global shipping giant DHL is at the forefront of this movement, with Scott Allison, President, Life Sciences & Healthcare, DHL Customer Solutions & Innovation, noting:
"We have established one of the world’s most substantial blockchain-based track-and-trace serialization systems, spanning 6 geographies and populated with +7 billion unique pharmaceutical serial numbers."
Though blockchain technology is reshaping capitalism, it is not limited to enterprise. Humanitarian efforts are also being transformed. The United Nations has been a significant advocate of the technology, creating several initiatives including a program to provide refugees who have lost everything with identity and the formation of a blockchain coalition to fight climate change.
What are blockchain’s drawbacks?
Despite its disruptive properties, blockchain technology does have a few challenges to overcome before taking over the world. ‘
Blockchain technology uses a lot of electricity, and as more and more industries flock to the tech, its carbon footprint will only grow. This is one of the driving factors in moving away from the previously mentioned Proof of Work concept, with many suggesting that a shift to Proof of Stake could be a possible solution to this dilemma.
In addition to the tech’s increasing energy usage, the lack of a clear regulatory framework also threatens to rain on the blockchain party. The decentralized nature of blockchain technology and the fact that there are no defined, industry-wide security standards make it difficult to convince the world’s leading industries to adopt this technology, which is why many are choosing the path of private, ‘blockchain-inspired’ platforms.
Vitalik Buterin notes: "The main advantage of blockchain technology is supposed to be that it's more secure, but new technologies are generally hard for people to trust, and this paradox can't really be avoided."
The future of blockchain technology
While blockchain technology is actively turning just about every industry on its head, one of the more exciting applications of the technology is the prospect of a new, decentralized internet.
There were a number of factors that led to the internet as we now know it. From better connections to enhanced communication channels, these developments ushered in a new era of content curation and social communication, in addition to modern web services such as online banking or streaming video that we know and love. The problem, however, was this transformation created a lapse in data collection oversight, allowing corporations to grow and prosper from the use of personal information.
This is the very same series of events the cypherpunks of the pre-bitcoin internet predicted. Julian Assange explains in the book, Cypherpunks: Freedom and the Future of the Internet: "The internet, our greatest tool of emancipation, has been transformed into the most dangerous facilitator of totalitarianism we have ever seen. The internet is a threat to human civilization."
But the solution may be just around the corner.
Many suggest that blockchain technology will be the foundation of an entirely new internet, one in which users are in control of their own data. From file storage to social media, the re-decentralization of the internet has already begun.
The blockchain revolution is catching fire, and though it still faces numerous challenges, it shows no signs of slowing.