What is Blockchain Technology?
Beginnings: A Computer Science Revolution
This story begins in 2008, when a cryptography message board member named “Satoshi Nakamoto” published a whitepaper entitled Bitcoin: A Peer-to-Peer Electronic Cash System. This page effectively proposed the idea of Bitcoin – a digital currency that existed on a peer-to-peer decentralized network – and led to the rise of all cryptocurrency as we know it. It had been possible to make payments using online systems and electronic cash for years by this point using services like PayPal, but Bitcoin provided the ability to be cryptographically secure across a distributed ledger. This meant that Bitcoin was private, anonymous, and immutable. It created a completely private, strongly-protected way for individuals to make transactions – and eliminated the need for third-parties.
What allows Bitcoin to be secure, private, and anonymous is the underlying software technology. A distributed ledger is a record (such as a history of transactions, or a log of values and what accounts they are connected to) spread across many different nodes or sites instead of all stored in a single central location. This technology creates many different copies of the same record which can then be easily verified, which makes the system both stable and immutable. It better resists hackers and other malicious users, making it a great way to protect and power “Nakamoto”’s digital currency.
The protocol is referred to as the blockchain. In the blockchain, each new transaction or interaction is added to the ledger, then verified in blocks. Each block is proven cryptographically, then verified on the ledger, which means that every user of the network can see its entire transaction history. It is a collection of blocks of transactions – a “blockchain” – and it solved several major issues with other digital currency systems.
What Does The Blockchain Solve?
Issue One: Consensus
For a decentralized digital currency to succeed, each piece of the system needed to cooperate. Systems work together via a number of sophisticated mechanisms that coordinated and distribute tasks, as well as ensure consistency in output.
Issue Two: Duplicates
When you send a file to another computer, you are making a copy. Obviously, this becomes a serious problem with money, which becomes valueless when duplicated. The blockchain solves for this by presenting a publicly distributed record of transactions, as well as the same information about how Bitcoin has moved between users. This means that anyone can see and verify the history of a digital currency – and thus prove that the currency is authentic.
As a further anti-fraud technique, “Satoshi Nakamoto” introduced technology known as Proof of Work into the blockchain. Because no third party oversees transactions, proof of work serves as a solution by necessitating that individuals who initiate each transaction contribute resources to the network. This eliminates the risk of a transaction with no centralized authority overseeing it, making Bitcoin and other digital currencies safe and free from fraud.
The Distributed Ledger
Because the ledger is secure and stored across many devices, the network resists attack and transaction histories cannot be changed by any one user.
As a result, individuals can ensure that the people that they are transacting with possess necessary funds, payments cannot be invalid, and they cannot spend money they do not actually have.
How is Blockchain Used in the Real World?
Blockchain has transformed financial services and how people think about money. Cryptocurrencies like Bitcoin, Ethereum, Litecoin, and Ripple have changed how we store wealth, our banking, payments, and especially international transactions. Bitcoin is the best known digital currency, but many other alternative currencies (altcoins) have been created to focus on other aspects of blockchain technology.
Blockchain technology has proven capable of providing solutions to many of the challenges we face in day to day life. Smart contracts, for example, can be used to prove, immutably, the owners, signers, and timestamps surrounding patents, intellectual property, and trademarks. Medical records and other sensitive documents can be made easier to securely share between providers. Logistics and shipping companies can keep better track of their goods and assets than ever before, making it easy to provide customers with accurate, up to date information.
The blockchain has the power to make the world more efficient and less wasteful – and has led to over $100 billion in investments, as well as huge amounts of research from some of the largest companies in the world.