The Blockchain. This is a term you probably heard a lot recently. Whether you’re watching your local news, the world news or surfing the Internet, blockchain is a huge topic these days. What is this blockchain technology that is causing all the hype? You may have done some digging around on your own or maybe somebody gave me some information, and most likely this information led you to Bitcoin. While it’s true that Bitcoin is built upon the blockchain technology that everybody is talking about, it is the technology behind the blockchain that is truly amazing. Blockchain technology, while intricately technical is actually pretty simple to understand once you take all of the technical jargon out of it.
To put it in its simplest terms, the blockchain is a chain that has no end. The blocks, which make up the chain contain data. The data is the verification that transactions are valid. So, as transactions get validated, they get added to a block. Once the block fills up, it gets sealed and added to the chain, where it remains permanently, for all eternity and once it is added, the data it contains cannot be removed, changed, modified, or altered in any way.
Of course, that may be the simplest explanation, but it leaves too many questions. How are the transactions validated? Who validates them? Why should you trust those responsible for the validation? What is the incentive to do the validations? And the list obviously goes on, as the questions always have in terms of digital currency systems, such as Bitcoin.
And while Bitcoin is referenced here, since it was the first product to utilize a blockchain, it is worth noting that currencies are not the only products that a blockchain can support. In fact, there are several other areas in which blockchain technology is even more efficient and beneficial than it is with currencies. That will all come in just a bit. First, to truly understand this amazing technology, you have to understand the history behind it, as well.
- 1 The Blockchain is Born
- 2 How the Blockchain Handles Currency Transactions and Trust
- 3 Blockchain Grows Up Fast, Really Fast
- 4 Satoshi’s Final Act of Genius
- 5 The True Potential of Blockchain Technology is Unleashed
- 6 Blockchain: Broken Down Into Its Two Main Parts
- 7 Public-key Encryption
- 8 Distributed Ledgers: The Most Scrutinized Balance Sheet in The World
- 9 Supported, Controlled, and Verified by The Network
- 10 Combine the Parts and You Get a Whole New Ballgame
- 11 The benefit of Blockchain Technology
The Blockchain is Born
According to the creator of the blockchain, work began on it in 2007. Satoshi Nakamoto is a name you will undoubtedly hear while delving into the realm of the blockchain. The name is a pseudonym. The true identity of Satoshi Nakamoto is unknown. In fact, Satoshi Nakamoto may not even be a man or a woman. It could be a group of people. Nobody really knows. (Although, judging by the demeanor, prose’ and other characteristics of the online communications, it appears Satoshi Nakamoto is indeed a man.)
No matter the true identity of its founder, the blockchain technology’s creator was a genius. It was shortly after the housing crisis when in October of 2008, Satoshi Nakamoto released an academic “White paper”, titled, “Bitcoin: A Peer-to-Peer Electronic Cash System”, to a small cryptographic community’s webspace. The work was pure brilliance and it wasn’t long before the die-hard cryptographers of the world were all on board with Satoshi’s idea. While Bitcoin itself was the main focus of the hype, no one can ignore the fact that Bitcoin is only possible because of the technology which supports it.
The blockchain delivered the answers to those questions which had stumped cryptographers for years. It provided a way for trustless transactions to take place. Not trustless, as in there is no trust. Rather, trustless as in there is no trust needed at all. In addition, the blockchain provides a completely hack-proof system, in fact, the only computer-related system that is hack-proof.
How the Blockchain Handles Currency Transactions and Trust
In the case of digital currencies, such as Bitcoin, there was always a set of questions, that had no real answers, that made the concept fantasy. The biggest of these problems was “How can you trust someone you do not know?” and “How do you prevent someone from sending the same digital currency to two different people?”
Think of how we do it now. Whether you are using Paypal, your personal bank account, or even Western Union, to send or receive money, you must visit the website or location of a business in order to facilitate the transaction. if you wanted to send $5 to a friend, you would use that third party to help make it happen. In doing so, you will pay a fee. if you are using your bank account, there will be some sort of delay of usually a day or two. In recent months, most banks now offer a quick payment method to send to other people who have accounts with the same bank, however, these types of money transfers are only convenient if both parties bank with the same bank and both have the type of account that allows this sort of thing.
For any scenario, you must first apply to get an account, or maybe even simply sign-up. Then you must agree to the terms and conditions set forth by the bank or money service before you can transact. once you are all set up, you deposit your money into the account, where you are now subject to the rules of the company or bank in question. have you ever needed a large amount of money in the middle of the night? If you have, or even if you haven’t, could you just go to the bank and request the cash at 3 am? Of course not! If you have PayPal, you know that PayPal can choose, for any reason, at any time, to place a hold on money that you are trying to send or receive for up to 21 days. Banks can also do this.
With the blockchain and the blockchain technology, it became possible for Bitcoin to be transferred directly from one individual to another, with no middle man. This means that even at 3 am, you can send as much Bitcoin to whoever you choose, and they receive it almost instantly. No one controls your money, no one holds it, no one has anything to do with it except you. Without the blockchain, none of that could be possible.
Blockchain Grows Up Fast, Really Fast
By the time the Blockchain was only 11 months old, Bitcoin hit a market capitalization of 1 Million dollars (USD). Just 3 short months later, and the value of Bitcoin was the same as the US Dollar. Since the day it reached the value equivalency of a dollar, it has never been lower than a dollar in value.
As the financial world began to take notice, most financial analysts agreed that Bitcoin was “silly internet money” and was just a fad that would fizzle out. While they ended up being totally wrong about Bitcoin, they also totally ignored the blockchain technology. However, not everyone ignored it. Quietly, there were several people who did take notice. The CIA, for instance, was very interested in blockchain technology and invited Gavin Andresen, the lead developer for Bitcoin to a special meeting to discuss things. This was around the same time that Satoshi disappeared, never to be heard from again. He had told Gavin that he would be stepping back and letting others take the reigns, but he did not tell anyone, Gavin included anything more. He simply vanished without a trace.
Satoshi’s Final Act of Genius
Before he left, he showed one more piece of genius. He left the ownership of the bitcoin.org domain and website to a variety of co-owners, not all within the bitcoin technological space. He did this to ensure that no one group could have complete control of Bitcoin or the blockchain. Just as no one owns the email technology, no one can own Bitcoin or the technology that gives us the blockchain. While there is a team of core developers, there are a lot of contributors, and nothing that gets developed can get forced on anyone. The entire bitcoin community, meaning every single person who has bitcoin, must agree to implement any updates or changes. Of course, in most cases, this is done as long as everyone agrees that it is for the best. A truly ingenious system.
The True Potential of Blockchain Technology is Unleashed
In December of 2013, the true power of blockchain technology is shown to the world in the form of a Whitepaper, released by Vitalik Buterin, called, “The Ethereum Project”. The level of functionality that Ethereum offered to the blockchain did not go unnoticed by businesses all over the world. The Ethereum project was funded in a crowd sale. The Ethereum project gave the world the blockchain in a way that anyone could use, whether it be a huge corporation, a bank, or the average Joe. By introducing smart contracts to the world, blockchain technology became more than an idea only being implemented by cryptographers, it became the business model for several large companies.
Blockchain: Broken Down Into Its Two Main Parts
To understand the blockchain, you need to understand only two things:
- Asymmetrical Cryptography
- Distributed Ledger
While it sounds like a mouthful and seems even more confusing than the blockchain technology itself, think of it as a passphrase. If I told you the password to enter was “Open-Sesame”, and you provided that phrase to gain access, then you would NOT be using Asymmetrical cryptography. Think of it as a question and answer. The questions asked will not be the same words as the answer given. It takes the question to get the answer, and while both are different, they agree with each other. So, if I said, “What is my birthday?”, you would need to know the correct answer to that question in order to gain access. That is Asymmetrical cryptography. That is what blockchain technology uses for security. They are not called questions and answers and are far from that easy to decipher.
When you have a Bitcoin wallet, you have two very important pieces of information: your private key (The question) and your public key (the answer). Both are a jumble of letters and numbers. The way to use them is the thing that makes them great, and so effective.
Suppose I told you that the answer to the question was “235”. By knowing the answer, you can easily transact with me. You simply send Bitcoin, or other value to me by sending it to “235”. The trick is that I never told you the question. Only I know the question and never share the question with anyone at all. By doing so, anyone who knows the answer can send me things, but only I can access them to spend myself. By providing you with the answer, and not the question, ensures security. If you were given the question, most of the time, the answer can be found. Whereas, I can set my question to “What color is the sky?”, make the answer “Pink” and by not sharing the question, and only the answer, make it impossible for anyone to ever guess the question.
Also known as Public-key Encryption, the idea of passing the public key openly, without caring who got their hands on it started in the 1970s and was used mainly for military purposes. It was not until the advent of the internet that it gained mainstream traction. Since the internet’s inception, it has grown to be the standard in how we communicate. You are already using this same method, whether you realize it or not. Every time you send an email, text message, or even answer your phone, there is a public key cryptography system right there, working behind the scenes to keep your information safe.
That is what your private key does. It allows you to claim ownership of all value that the answer stores. Without knowing the private key (the question), the public key (the answer) is worthless to you. By working in this fashion, also allows for the entire network to see each and every transaction that is performed, at any time. That makes it possible for the transactions to be verified while keeping the value safe for the rightful owner. And since the private key and public key are seriously long and scrambled strings of characters, it allows for a bit of anonymity for everyone, at the same time. So, now that you have a better understanding of asymmetrical cryptography, let’s look at distributed ledgers.
Distributed Ledgers: The Most Scrutinized Balance Sheet in The World
Bing defines distributed ledger as follows:
“Distributed ledger technology is an immutable decentralized shared ledger of all transactions across a peer-to-peer network that uses the proof-of-work chain to validate the data via a consensus algorithm allowing for resiliency and integrity of the ledger.”
Again, it sounds more confusing than it truly is. Let’s break down, and get rid of some of the technical words and reword it in a way that is much more user friendly:
Immutable– unable to be changed.
Decentralized- not owned nor controlled by any one person, business or entity.
Shared ledger– everyone who is a part of the network has a complete copy of the entire ledger.
Peer-to-peer network- network made up of all the individual computers that belong to the people who have the ledger.
Proof of work– all must agree that a transaction is valid and that one account should be debited and one credited for it to happen.
Consensus algorithm– complicated math problem that needs to be solved.
Resiliency and integrity– strength, longevity, and trust.
So, to reword it now:
A Distributed ledger is a permanent, infallible record of all transactions that occur and is available in real-time to everyone who has an interest and unless all of those that have an interest agree completely, no transaction shall be recorded. This ensures that every transaction is recorded correctly, no one can steal or undermine the network, and that the records will be kept forever.
Supported, Controlled, and Verified by The Network
All parts of the blockchain are open to everyone who is part of the network. In order to be part of the network, you simply have to have an interest or hold, of valued assets that are tied to the blockchain. In the case of Bitcoin, that means that you just need to have some Bitcoins. Everyone who owns Bitcoin is who is in control. The transactions are verified by Bitcoin Miners or people who use their computer hardware to help figure out the mathematical formulas that need to be solved in order for a block full of transactions to be verified, or confirmed, and added to the blockchain.
The incentive for these miners to dedicate their computing equipment to their very resource-hungry task is the chance to get some Bitcoin for their effort. With the Bitcoin blockchain, it is built into the system that every time a block has confirmed a reward, so many Bitcoin is given to the miners whose computations were the first to verify the block and add it to the blockchain.
The original amount was 50 Bitcoins, which has since been halved twice, making it 12.5 Bitcoins for the block reward at the time of this writing. It will continue to be split in half approximately every four years until the year 2041 when the last Bitcoin will be minted/mined. After that, there will be no more Bitcoin made. So, it is a limited supply. Whether you look now or in that fateful year, yet to come, one thing will be certain: at any time, everyone can see every single transaction ever made on the blockchain.
Again, a perfect example of how blockchain technology is able to solve every aspect of its purpose without the need for any third-party integrations at all.
Combine the Parts and You Get a Whole New Ballgame
So, a distributed ledger that uses asymmetrical cryptography is simply known as a blockchain. Now that you have a better understanding of what a blockchain is and how it works, can you think of other areas, besides currency where this technology can prove to be invaluable? The currency will always be the first to come to mind, as it should be. Whether you realize it or not, every single major bank in the United States and Europe is already using Blockchain technology today. Those quick transfer services were mentioned earlier. They are fairly new and blockchain technology makes it possible. Notice how you can get a refund directly to your debit card instantly, and it’s available immediately? Again, thank the blockchain. Those are just a couple of examples that are in use today.
The list of ways that the blockchain can help improve business is literally endless and ever-growing. For example, The US Government is already pursuing ways to implement the blockchain into its daily business activities. IBM is becoming a leader in innovations based on the blockchain. Logistics, communication, and even how your electricity is delivered to your home from the power station are all within the capability of the blockchain.
The benefit of Blockchain Technology
In the spirit of keeping this guide user-friendly and completely non-technical in nature, this question is answered in terms relevant to the average, everyday person. The simplest answer is that the blockchain provides a way to conduct business that is currently 200 times more efficient than traditional methods have ever been. The blockchain removes much of the “human error” element from business, as well as cement contracts in place with no room to maneuver legally by finding “Loopholes”. The blockchain is a way to make things happen instantly, that used to take days or even weeks to complete. Things can be checked, verified, rechecked, and then checked again at any time, by either party and it will always be up-to-date information.
The blockchain essentially removes the need to have a trusted third party involved in all aspects of life. Whether it be the sale or transfer of valuable goods, information processing, order validating, payment processing, or even scheduling, the blockchain removes the hassle, the headache, and most importantly, the time and costs associated with traditional methods. It will help to lower costs, while at the same time, providing better service that is more dependable, reliable, and trustworthy than anything that has ever come before it.