If you’ve experimented with dive into this mysterious thing called blockchain, you’d be forgiven for recoiling in horror at the sheer opaqueness of the technical jargon that is often used to frame it. So before we enter into exactly what a crytpocurrency is and how blockchain technology might change the entire world, let’s discuss what blockchain actually is.

In the simplest terms, a blockchain is just a digital ledger of transactions, not unlike the ledgers we have been using for more than 100 years to record sales and purchases. The event of the digital ledger is, in fact, virtually identical to a normal ledger in that it records debits and credits between people. That’s the core concept behind blockchain; the difference is who holds the ledger and who verifies the transactions.

With traditional transactions, a payment from one person to another involves some type of intermediary to facilitate the transaction. Let’s say Rob desires to transfer £20 to Melanie. He is able to either give her profit the form of a £20 note, or they can use some type of banking app to transfer the money right to her bank account. In both cases, a bank may be the intermediary verifying the transaction: Rob’s funds are verified when he takes the money out of a cash machine, or they are verified by the app when he makes the digital transfer. The financial institution decides if the transaction should go ahead. low energy blockchain The financial institution also holds the record of all transactions made by Rob, and is solely responsible for updating it whenever Rob pays someone or receives money into his account. Quite simply, the bank holds and controls the ledger, and everything flows through the bank.

That’s a lot of responsibility, so it’s critical that Rob feels they can trust his bank otherwise he would not risk his money with them. He needs to feel certain that the bank won’t defraud him, won’t lose his money, won’t be robbed, and won’t disappear overnight. This importance of trust has underpinned almost every major behaviour and facet of the monolithic finance industry, to the extent that even when it had been found that banks were being irresponsible with our money throughout the financial crisis of 2008, the us government (another intermediary) thought we would bail them out rather than risk destroying the final fragments of trust by letting them collapse.

Blockchains operate differently in one key respect: they are entirely decentralised. There’s no central clearing house such as for instance a bank, and there is no central ledger held by one entity. Instead, the ledger is distributed across a vast network of computers, called nodes, each that holds a copy of the whole ledger on the respective hard drives. These nodes are connected together using a software application called a peer-to-peer (P2P) client, which synchronises data across the network of nodes and makes certain that everybody has exactly the same version of the ledger at any given point in time.

Whenever a new transaction is entered in to a blockchain, it’s first encrypted using state-of-the-art cryptographic technology. Once encrypted, the transaction is changed into something called a block, which can be basically the term used for an encrypted number of new transactions. That block is then sent (or broadcast) into the network of computer nodes, where it’s verified by the nodes and, once verified, passed on through the network so the block can be included with the finish of the ledger on everybody’s computer, underneath the list of all previous blocks. That is called the chain, hence the tech is known as a blockchain.

Once approved and recorded into the ledger, the transaction can be completed. This is one way cryptocurrencies like Bitcoin work.

Accountability and removing trust
What are the features of this technique over a banking or central clearing system? Why would Rob use Bitcoin in place of normal currency?

The solution is trust. As discussed earlier, with the banking system it is important that Rob trusts his bank to guard his money and handle it properly. To make certain this happens, enormous regulatory systems exist to verify the actions of the banks and ensure they are fit for purpose. Governments then regulate the regulators, creating a kind of tiered system of checks whose sole purpose is to simply help prevent mistakes and bad behaviour. Quite simply, organisations like the Financial Services Authority exist precisely because banks can’t be trusted on the own. And banks frequently make mistakes and misbehave, as we have seen a lot of times. When you yourself have a single supply of authority, power tends to have abused or misused. The trust relationship between people and banks is awkward and precarious: we don’t really trust them but we don’t feel there is much alternative.

Blockchain systems, on one other hand, don’t need one to trust them at all. All transactions (or blocks) in a blockchain are verified by the nodes in the network before being included with the ledger, meaning there is no single point of failure and no single approval channel. If a hacker desired to successfully tamper with the ledger on a blockchain, they would have to simultaneously hack countless computers, which can be almost impossible. A hacker would also be virtually unable to create a blockchain network down, as, again, they will have to manage to shut down each computer in a network of computers distributed round the world.

The encryption process itself can be an integral factor. Blockchains like the Bitcoin one use deliberately difficult processes due to their verification procedure. In case of Bitcoin, blocks are verified by nodes performing a deliberately processor- and time-intensive series of calculations, often in the form of puzzles or complex mathematical problems, which show that verification is neither instant nor accessible. Nodes that commit the resource to verification of blocks are rewarded with a transaction fee and a bounty of newly-minted Bitcoins. It’s the event of both incentivising individuals to become nodes (because processing blocks like this involves pretty powerful computers and a lot of electricity), whilst also handling the method of generating – or minting – units of the currency. That is known as mining, as it involves a large amount of effort (by a computer, in this case) to produce a new commodity. It entails that transactions are verified by the absolute most independent way possible, more independent than a government-regulated organisation like the FSA.

This decentralised, democratic and highly secure nature of blockchains means they can function without the necessity for regulation (they are self-regulating), government and other opaque intermediary. They work because people don’t trust one another, rather than in spite of.

Let the significance of the sink in for a time and the excitement around blockchain starts to produce sense.

Smart contracts
Where things get really interesting may be the applications of blockchain beyond cryptocurrencies like Bitcoin. Considering the fact that among the underlying principles of the blockchain system may be the secure, independent verification of a transaction, it’s easy to imagine other ways by which this type of process can be valuable. Unsurprisingly, many such applications happen to be in use or development. Some of the greatest ones are:

Smart contracts (Ethereum): one of the most exciting blockchain development after Bitcoin, smart contracts are blocks that contain code that must be executed in order for the contract to be fulfilled. The code can be anything, as long as a computer can execute it, however in simple terms this means that you can use blockchain technology (with its independent verification, trustless architecture and security) to generate some sort of escrow system for almost any transaction. For instance, if you’re a website designer you could create a contract that verifies if a new client’s website is launched or not, and then automatically release the funds for you once it is. No further chasing or invoicing. Smart contracts will also be being used to prove ownership of a resource such as for instance property or art. The possibility of reducing fraud with this process is enormous.

Cloud storage (Storj): cloud computing has revolutionised the internet and brought about the advent of Big Data which has, in turn, kick started the new AI revolution. But most cloud-based systems are run on servers stored in single-location server farms, owned by way of a single entity (Amazon, Rackspace, Google etc). This presents the same problems because the banking system, because you data is controlled by way of a single, opaque organisation which represents a single point of failure. Distributing data on a blockchain removes the trust issue entirely and also promises to improve reliability as it is really much harder to have a blockchain network down.

Digital identification (ShoCard): two of the greatest issues of our time are identify theft and data protection. With vast centralised services such as for instance Facebook holding so much data about us, and efforts by various developed-world governments to store digital details about their citizens in a main database, the possibility of abuse of our private data is terrifying. Blockchain technology offers a potential solution to this by wrapping your key data up into an encrypted block that can be verified by the blockchain network whenever you have to prove your identity. The applications of the range from the obvious replacement of passports and I.D. cards to other places such as for instance replacing passwords. Maybe it’s huge.

Digital voting: highly topical in the wake of the investigation into Russia’s influence on the recent U.S. election, digital voting has been suspected to be both unreliable and highly susceptible to tampering. Blockchain technology offers a way of verifying that the voter’s vote was successfully sent while retaining their anonymity. It promises not merely to cut back fraud in elections but also to improve general voter turnout as people will have the ability to vote on the mobile phones.