Blockchain Technology- what is it?
Blockchain technology uses peer-to-peer technology to send payments or data from one entity to another without the involvement of a financial institution or other central entity.
The concept and technology was originally created by Satoshi Nakamoto who was creating a digital form of cash. Unlike cash however it could be used as a highly transparent, and trusted form of currency.
“A blockchain is a distributed computing architecture where every network node executes and records the same transactions, which are grouped into blocks.
Only one block can be added at a time, and every block contains a mathematical proof that verifies that it follows in sequence from the previous block. In this way, the blockchain’s “distributed database” is kept in consensus across the whole network. Individual user interactions with the ledger (transactions) are secured by strong cryptography. Nodes that maintain and verify the network are incentivized by mathematically enforced economic incentives coded into the protocol.” Source: Ethdocs.org
Blockchain technology can be thought of as a network, similar to the internet. More importantly, it is recognised as a dectentralised network.
Much like the internet there is no central authority controlling it. Instead there are multiple parties set up as ‘nodes’ and ‘miners’ play a big part in the network.
When a transaction occurs it is broadcast to the network. Nodes then execute and record the same transaction across this decentralised network. The transactions are grouped into blocks and only one block can be generated at a time.
When someone mines a block they also earn a transaction fee- which serves as an incentive to continue to add transactions into the block.
Each block also contains a reference to the block that came immediately before it. It also contains a unique answer to a difficult mathematical puzzle. New blocks cannot be submitted to the network without the correct answer. The miners as well as bulking the transactions into the blocks also compete to find the answer to solve the current block.
Each block contains what is refered to as ‘proof of work’- a mathematical calculation that verifies the sequence and the validity of the previous blocks before it. As every node in the network is verifying the transaction the system becomes a shared ledger. Meaning that any transaction at any time can be validated by not just one central authority but by many.
Blockchain problems- double spending
“Double-spending is an error in a digital cash scheme in which the same single digital token is spent twice or more. This is possible because a digital token consists of a digital file that can be duplicated or falsified.
As with counterfeit money, such double-spending is Inflation by creating, during the duplication or falsification of the digital file, a new amount of currency which does not disappear when the original digital file’s currency amount is paid to a rightful receiver. The duplication or falsification of the digital file may itself be perpetrated by a rightful receiver, in order to get paid one or more illegitimate amounts alongside a single legitimate amount. This devalues the currency relative to other monetary units, and diminishes user trust as well as the circulation and retention of the currency.” Source- Wikipedia.org
Bitcoin nodes trust the longest blockchain and build their blocks on it. So if someone wants to override the longest block chain, they must re-generate the fraudulent transaction faster than any a majority of other nodes combined, such that theirs becomes the longest.
In an ordinary currency scenario, a third party (centralised) is usually the source to authorise each transaction, such as a bank or escrow service. In the blockchain world, there is no central source to authorise transactions. Instead the network in entirety uses proof of work and cryptography to validate transactions.
Therefore eliminating double spending is critical to the success of blockchain technology. By fraud someone could try and spend the same coin twice. There are a few ways this can be achieved. Although these risks do exist currently, they are of low reward to the fraud, are hard to achieve, are rare. The risk can be further reduced with best blockchain transaction processes.
Next generation technology
As described by Bitcoin founder Satoshi, Bitcoin is purely peer-to-peer version of electronic cash that allows online payments to be sent directly from one party to another without going through a financial institution.
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.
Since then though blockchain technology has evolved extensively. Uses for it are much more than just as an online form of currency. Other users started to use the bitcoin network for other purposes than just transfer bitcoin currency. Several other crypto currencies “alt coins” have since been born. These were traditionally improving on the original bitcoin blockchain technology- however using the same principles. Some however, created their very own networks.
Ethereum lets you easily create and deploy smart contracts and digital tokens
With the introduction of Ethereum, which is another blockchain technology, users can actually do more than transfer currency.
Ethereum serves as a platform for creating decentralised blockchain applications. Similar to Bitcoin, it is an open source project and it runs on a decentralised network such that no one controls or owns it. However it allows you to create your very own smart contracts and digital tokens.
“Ethereum is a decentralized platform that runs smart contracts: applications that run exactly as programmed without any possibility of downtime, censorship, fraud or third party interference.
These apps run on a custom built blockchain, an enormously powerful shared global infrastructure that can move value around and represent the ownership of property. This enables developers to create markets, store registries of debts or promises, move funds in accordance with instructions given long in the past (like a will or a futures contract) and many other things that have not been invented yet, all without a middle man or counterparty risk.” Source: Etherium.org.
As described above, a little bit more than just currency right?
That’s why there is a bit of a buzz in the air. Blockchain technology really is just in it’s infancy and users are finding smart uses of this technology.
The ideas being generated currently offer great possibilities. Some are being implemented as you read this, some are just ideas. But hopefully this article is enough to get you on the bandwagon.
“In theory, financial interactions or exchanges of any complexity could be carried out automatically and reliably using code running on Ethereum. Beyond financial applications, any environments where trust, security, and permanence are important – for instance, asset-registries, voting, governance, and the internet of things – could be massively impacted by the Ethereum platform.” – Ethdocs.org
Useful links and references
- What is a cryptocurrency