By now nearly everyone has heard about bitcoin and blockchain but, to most, it is a technology about which we only have a cursory understanding. It is when you delve into the technology and its implications on everything from financial transactions to organization of land titles and other government documents that you realize the massive potential that blockchain has to do good. It has the ability to create smart contracts (self-executing contracts written into code) and, more importantly, the ability to drastically increase the level of trust integrated into many areas.
So what exactly is the blockchain? Blockchain is essentially a new layer (some call it the trust layer) to the internet. It will be as transformative for the internet as what the world wide web originally was. It will allow people to take control of their identities and will cut at least one level of middleman, allowing for greater transparency and security of information.
I define blockchain as an incorruptible peer to peer public database which can be used to permanently record transactions in a manner which makes them fully available for public view while maintaining an extremely high level of private security around the originator and recipient of the transaction. The system is maintained through robust incentive programs for anyone interested in being part of the permanent public record keeping process.
How does it work? The major difference with blockchain technology is that it is decentralized. Most of the world’s databases are now centrally stored. For example, think of Facebook’s database or your bank’s database with all their customer information stored in one place. While we ‘trust’ these entities to keep our information safe, we continue to witness dozens of major cases of identity theft where hackers access and steal massive databases of information including passwords, credit card information, and personal information (DOB, address, etc.). By decentralizing these databases, a hacker would have considerably more work to do to steal infinitely less valuable information. Blockchain mechanisms use hundreds, thousands and even millions of ‘public nodes’ (any type of computer or server that is interested in downloading the software and using their processing power to join the system) to maintain each database. These nodes are incentivized by coins or tokens (which denote value) to be part of this ‘trust layer’ through mechanisms called ‘proof or work’, ‘proof of stake’ or other tech options.
Where did blockchain technology come from? Someone with the nom de plume of Satoshi Nakamoto released a white paper to several prominent coders describing the technology back on Oct 31st, 2008 and the first code (Bitcoin was the first blockchain to be released) was released on January 9th, 2009. The blockchain name comes from how the technology works. Blocks (digital information) are stored in a public database (chain) and connected through something called hashing, which is a way to simultaneously encrypt the information, time stamp it and link the blocks together. With this method, while the information is secured within the block, the chain of blocks are public so we see that ‘identity 1’ has sold ‘object or service A’ (which is stored within a block) to ‘identity 2’ at a specific moment in time. ‘Identity 2’ now has control over that ‘block’ to do with as they please. This method ensures that the same item can not be sold more than once and the same tokens or coins can not be used more than once either. Note that transactions of assets are only one example of what blockchains can be used for.
I specifically wrote identity 1 rather than ‘John’ or ‘Mary’ because blockchain allows for ownership without identity. If I have funds, I can transfer funds through this trust layer which assures that my funds exist and will transfer them when I receive my asset all without ever having to reveal my true identity.
Is blockchain secure? While some might think that since the blockchain maintains all information shared across multiple public nodes with access for all to see it will be less private, the exact opposite is the case. Although the information is stored everywhere, and time-stamped, the system itself is virtually impossible to corrupt, and the data is actually secured in blocks with access only given to you if you have the digital key (your private access code).
This level of privacy has many governments globally concerned because people, on the wrong side of legitimate business interests, are using technology like blockchain to finance terror and other nefarious activities as they are afforded privacy to do so. True enough, however I recently read that 80-90% of U.S. and Canadian bills have minute traces of cocaine on them. This proves that fiat currencies are no less vulnerable to nefarious people than blockchain are, and with blockchain, while you can’t identify the owner, you can always follow the money. It is digital and permanent.
In a future post, I’ll offer some examples of uses for blockchain, especially as they relate to the developing world. Let me know if this helped you understand the basics of blockchain.
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