“Blockchain! Blockchain! Blockchain!” While waiting in line for my morning caffeine fix the other day, I heard a pair of 20-somethings behind me discussing getting rich by investing in Bitcoin and blockchain technology. Seeing as how blockchain has become the Marcia Brady of both the financial and technology worlds, this conversation was hardly unique.
While terms like “blockchain,” “cryptocurrency,” and “Bitcoin” are being thrown around a lot in the news, on blogs and in coffee shops, few sources take the time to explain what they are exactly. Instead, the media, like my fellow caffeine lovers, focus largely on the hype surrounding those who have made money off of investing in Bitcoin.
However, blockchain technology’s real place to shine is in terms of online transactions and security, something that is near and dear to the CompuVision team. So, what exactly is blockchain? How does it keep transactions safe? What does it have to do with Bitcoin? And does it mean we’re finally getting hoverboards? (Spoiler Alert: If you work here we have them in our everyday lives, but in general society… probably not)
In this entry, we’ll go through a rundown of blockchain basics and get to the real reason it could prove to be important to us all.
What is Blockchain Technology?
As the name suggests, it’s a chain of blocks and each of these blocks contains information. When new information is added, such as when a financial transaction takes place, a new block is created and connected to the chain along with a unique code called a “hash” but more on that in a minute.
A chain is decentralized, meaning it’s not owned by a central institution like a company or bank. Instead, the chain can be joined by anyone in the public and their personal computers are used to hold and verify the information blocks. The beauty of this is that it allows transactions to take place safely between two people anywhere in the world without the aid of an intermediary. You can send funds and purchase goods anonymously without using your bank or a credit card.
How is Information Kept Safe in the Blockchain?
If all that information, running through all those computers doesn’t sound like much protection for financial transactions, let’s look at the three ways blockchain guards against tampering with information:
Hash: As we mentioned before, each block has a hash attached to it and this can be described as the “block’s fingerprint” because it is unique. Each block also contains the hash of the block that comes before it. When information in a block is changed, its hash also changes and sets off a change in the hash contained in every other block in the chain after it.
If a block is tampered with and the hash doesn’t match up to the “previous hash” contained in the next block, the entire chain after the tampered block will become invalid. In order to fool the system, a computer would have to calculate the hash and previous hash contained in all the blocks before the verification takes place. This would take a kind of super-charged supercomputer and, even then, would still likely not be possible.
Proof of Work: If you’re thinking that “surely computers can work fast enough to change the codes before the verification is needed,” blockchain has a guard against that too! Proof of work is a mechanism that slows down the creation of new blocks, making it nearly impossible for new hash to be calculated fast enough.
Consensus: The last line of defence that blockchain has is that it is distributed over so many computers on the network. In order to get by this, a tampered block needs to be validated by at least 51% of these computers. This is called consensus and, as you might have guessed, it would be extremely difficult, if not impossible to do.
Bitcoin and Practical Applications of Blockchain
Ok, so now that we have a handle on what blockchain is and how it protects information within its chain, what applications does this have? You really can’t have this conversation without discussing Bitcoin which is a kind of international currency that allows you to send money to anyone in the world.
While blockchain technology was originally described back in 1991 by a team of researchers who needed a way to keep important documents from being tampered with, it wasn’t until 2009 when Bitcoin creator Satoshi Nakamoto used blockchain to run his cryptocurrency that the technology gained widespread recognition. Blockchain was the technology that allowed the concept of Bitcoin to come to life: the ability to send money throughout the world without the middleman of a bank or financial institution.
Though cryptocurrencies like Bitcoin are the primary focus of the practical applications of blockchain, they are far from the only ones. Because of the security measures in place and its peer-to-peer network, blockchain could also be used to create decentralized artificial intelligence, act as a virtual notary, protect online identities, collect taxes and store sensitive medical documents. In fact, there’s so many potential uses for blockchain that they deserve their own separate write-up, but more on that soon.
As blockchain progresses, we may find its role in cryptocurrencies to be the very least of what it can do for us. While making millions off of Bitcoin may be the more glamorous side of this technology, it is the little ways it will make things easier, faster and safer that will leave a lasting impact. At CompuVision, we have our eye on this exciting technology and can’t wait to bring you even better services with it.