The financial crash of 2008 inspired the first cryptocurrency: Bitcoin, developed by the Satochi Nakamoto group. In simple terms, Bitcoin works as an open source, public distributed ledger, meaning the data, in this instance a digital currency, is decentralised. Bitcoin was developed to offer an alternative currency to the centralised, government controlled currencies. But how does Bitcoin work in a safe, transparent and immutable way? By running transactions through a system called Blockchain.
Why Block chain?
Trust, and security are central to much of civilisation, especially in finance but also in property ownership, supply chain, contracts & identity records, healthcare, government-citizen interaction and even democratic election processes. Since the Sumerians first inscribed a clay tablet with cuneiform (and probably before), trusted records of reference have been our best resort for proving what is and what is not, in a quantifiable way to resolve any potential disputes of opinion. Back with the Sumerians, keeping those clay records safe was probably the job of a king and his army or some similar organisation; similarly banks emerged to store and keep a record of what monetary assets, like gold, that a person legitimately owned and this evolved into the issuing of paper money (effectively IOUs) instead of a person carrying around the actual gold value.
With Blockchain, all of that changes.
With a complex network of electronic records holding many, many duplicate records for comparison and validation of a single fact – like whether or not you have the ability to pay for something – the shared knowledge of whether something is true or not becomes the trust factor. If someone attempts to change or hack the network, they must effectively change every single duplicate value record in order to make a change – the power of blockchain is in consensus of the many. The more the merrier.
Encryption on top of Blockchain provides additional security to prevent any hacking, leading to a completely efficient and trusted method of recording our most precious aspects of life.
What is Blockchain?
A blockchain is a ledger of digital information in which the said information is aggregated into data “blocks”. These blocks are made up of binary code that can represent anything from a value, to an image or even a simple sentence. The blocks are then “chained” together through encryption so that every block connects to the next. As such, a blockchain is built as an increasingly long and ordered string of digital information that has been verified and validated by the previous blocks in the chain. It’s a bit like a highly encrypted and verified shared Google document, one in which each entry in the sheet depends on a logical relationship to all its predecessors. In short, Blockchain technology offers a way to securely and efficiently create a tamper-proof log of sensitive activity, anything from international money transfers to shareholder records.
How does it work?
As a distributed database, blockchain storage is not limited to a single server. Rather, the totality of the information in the blockchain is simultaneously stored and updated by nodes, which are defined as any computer connected to the blockchain that processes the information exchanged. A double encryption system ensures the owner and recipient of any bit of transferred information that is recognised through use of the adequate private keys.
The digital information submitted to the blockchain is processed through a cryptographic hash function. This means that all the digital information inputted is transformed into a single fixed length output that is unique for every input. This means that even if two different inputs only have one byte of different data, another separate output will be created. The different nodes that interact with the blockchain by way of an algorithm challenge then verify these fixed length outputs independently. Whichever computer cracks the code first and verifies that the encrypted information can be validated then updates the other nodes working on the problem. These then confirm the validation on their end. Once a majority of nodes have verified the information, the block is consolidated, added to the blockchain and immediately updated across the board. The result is different batches of data can be consolidated through the cryptographic hash function into a single fixed length output that can be traced back to previous blocks in the chain. This process is called a Merkle Tree.
Secure and transparent
With every new block being validated independently by different nodes through algorithms and verified against earlier blocks, security is tight and the risk of fraud minimal. If a malicious user wanted to change even a single byte of information in a block, the validation system would spot the change as the fixed length output would come out differently, making it almost impossible to falsify information.
Furthermore, as the information is immediately uploaded to all nodes once validated, a blockchain is a very transparent system. As the chain grows longer with each block, the information held in each remains available to the blockchain users with the right access key. A blockchain will keep on growing as a result, with previous blocks being an intricate part of the chain that cannot be amended. This makes it easy to implement procedures such as audits or digital paper trails in an automated way.
One word of warning: while blockchain technology has proven to be impervious so far, this does not automatically mean full-data protection. To avoid data being manipulated, blockchain does need an application layer where data security questions are dealt with; you are still dependent therefore on how well this layer is designed and for what purposes you would want to use blockchain.
No intermediaries and the concept of smart contracts
As a blockchain is a decentralised system, there are no intermediaries required to relay information from point A to point B. In the case of Bitcoin for example, this means that money transfers no longer need the banking system to finalise a transfer as in a normal banking network and a state-mandated currency. In fact, the only delay between instruction and release is the time needed for the network of nodes to solve the algorithm and validate the block, which will be about 10 minutes. Said simply, there is no need to trust that intermediaries will do their job, as the process followed by a blockchain is software-based. Nodes work together toward transferring, documenting and safeguarding digital information as perfect strangers, with no strings attached.
Through this intermediary-free, peer-to-peer interaction backed by software, it is possible to implement computer protocols known as ‘smart contracts’. These smart contracts are governed by the same cryptographic rules to ensure clauses of a contract are implemented and enforced in a timely and automated manner.
The Blockchain system, though first popularised by Bitcoin, has many other real-world applications. Information can be shared much more securely over the Internet than in the traditional way (Excel files, EDI, etc.). This is due to blockchain cryptography, which requires anyone who wants to access the data to have the correct token.
Already large transport companies, like Maersk, have started using blockchain solutions to simplify their shipping procedures. But there are many other fields that could benefit from adopting Blockchain based data-management solutions.
- Governments could solve many problems relating to the silo approach different department still adhere to. For example, automatically linking and validating citizen data using blockchain technology could simplify different civic services simplified through a unified, decentralised database. Using a Blockchain, it would be possible to better control government expenditures in real-time and combat corruption as the myriad of intermediaries involved in budgeting would be rendered obsolete.
- Healthcare could benefit by regulating access to sensitive data using keys to let different industry bodies, from pharmaceutical companies to hospitals and insurance companies, manage patient information. Say a patient’s blood results showed a deficiency, uploading that data could automatically alert an insurance or medical service provider and start up a procedure to get the adequate treatment to the patient.
- Blockchains and smart contracts could help ensure compliance protocols are adhered to and the legality of any form of information or goods transfer is done in accordance with the governing legislation, again in a centralised and impartial way.
As the world’s computing power continues to increase, and thus the calculating capabilities of nodes evolve, more and more data will be stored in a decentralised public ledger of sorts, increasingly ensuring immutability of data, transparency and impartiality along the way.