What is Blockchain?
Blockchain is a technology that aims to solve problems surrounding centralization. It is a decentralized system for keeping records on a public ledger by everyone on the network, without the need for a central authority. The decentralized nature of updating and maintaining the public ledger makes it nearly impossible to falsify. With everyone on the network verifying each transaction, there is an extremely low probability that fake or fraudulent transactions will end up recorded on the ledger.
Imagine a group of people working together to maintain a shared ledger of transaction records. Each page of transactions starts with a summary of the page that came before it. If anything on the previous page has changed, all of the users would also need to change the summary of the current page. In this way, the pages of transactions are linked.
Pages of transactions are called blocks. Each block is linked to the blocks that came before it, creating a chain of blocks. The chain of blocks is what is known as a blockchain. A blockchain can be broken down into five distinct elements.
The first element needed to create a blockchain is a peer-to-peer network. A peer-to-peer network is essentially a network of computers (known as nodes) that have equal access and permissions on the network. Anyone can use the internet to connect to the network. The system allows users to communicate and share information remotely.
The second element needed to create a blockchain is cryptography. Cryptography uses math and computer programming to secure communications. Cryptography allows users on the network to verify communication and messages with each other on the system in a secure way.
The third element needed to create a blockchain is a consensus algorithm. A consensus algorithm is an agreement about the rules of how transactions will be recorded and verified in the production of new blocks.
A variety of consensus algorithms exist. Bitcoin uses a consensus algorithm known as Proof-of-Work. Proof-of-Work requires users to earn the right to create a new block by solving a complex math problem. Solving these complex math problems requires a lot of computational power and energy.
Other consensus algorithms exist that do not require as much processing power or electricity. Blockchain platforms such as Ethereum, Cardano, and EOS use a less energy-intensive consensus algorithm called Proof-of-Stake (PoS). In a Proof-of-Stake consensus algorithm, the creator of the next block is randomly selected, based proportionately to the size of the stake they make in the platform’s cryptocurrency. Most of the blockchains that use the PoS are platforms that are designed to develop decentralized apps (known as dApps) rather than cryptocurrencies.
The fourth element needed to create a blockchain is a clearly defined system of punishment and reward. To create a system where everyone plays by the rules, the potential rewards for following the rules must exceed the potential rewards for trying to manipulate or circumvent the system.
The reward to users on the network that help update and maintain the blockchain comes in the form of cryptocurrency tokens or coins, this process is known as mining. New coins are added into circulation when they are rewarded to the miners that produce new blocks.
Rogue actors or malicious players who try to manipulate the public ledger will end up losing the resources they spent on computational power and energy needed to become block producers. Therefore, a blockchain can prevent fraudulent transactions because the reward for producing the next block (according to rules set out in the community) is greater than the rewards for trying to cheat the system.
The fifth and final element needed to maintain a blockchain is market adoption. Without enough users on the network, the benefits of decentralization cannot be fully realized. If no one is using the system, then the value of rewarded tokens and coins will be low, eliminating the element of punishment and reward. By comparison, if a blockchain has made it to the level of mass adoption, then the value of a blockchain’s coin is likely to increase. Up until recently, only a few blockchains have over 1,000 users, and therefore only a few of them have experienced the maximum benefits of decentralization.
Another key concept that is needed to understand blockchain is the difference between private and public blockchains. A private blockchain limits the number of users that can participate in the network. In the future, companies will build private blockchains to help internal processes or to make certain aspects of their organization more efficient.
A public blockchain does not limit who can participate in the network. Anyone can join. Public blockchains do not have borders, do not require a centralized party to function, and can be very hard to censor. Public blockchains do not have a single point of failure. The records on a public ledger are immutable, meaning they are not easily tampered with. The key difference between the two blockchains is that the benefits of public blockchains are the result of decentralization.
In the future blockchain technology has the potential to revolutionize many industries. People will not need a bank to withdraw or receive funds. A complete record of account balances will be easily accessible. No person, third party or financial intermediaries are needed to vouch for either party in the transaction. The lack of a financial intermediary or middleman dramatically reduces or eliminates the fees associated with many banking transactions.
Blockchain technology can be used to write and execute contracts. For example, a contract for leasing an apartment could use a smart contract to define the terms of an agreement like the price per month in exchange for an access code or key to the apartment. A landlord would not need to worry about being paid every month, and tenants would not need to trust that the landlord will let them in the building. Smart contracts can facilitate both sides of the transaction, verifying that the actions taken by both parties are legitimate all while leaving behind an immutable record.
Voting in democratic elections could also be revolutionized using blockchain technology. A user on the system could submit their voter ID, a private passcode as well as who they are voting for into a public record. They could be checked and verified by thousands of other people on the network. The blockchain could verify who is eligible to vote, verifying that voters are who say they are and record the voter’s choice without publicly identifying who they voted for.
An electronic vote-counting system could be used to verify that only legitimate votes are counted and that no votes are changed or removed. This could bring a higher degree of democracy in countries where the election process is likely to be controlled or manipulated by people in power and would add an extra layer of security for elections in fully developed democracies.
Companies can use blockchain to verify internal processes. For example, a blockchain could ensure that supply lines are all working by verifying that each step in the production process is linked correctly and working as intended.
Using a blockchain, medical records can allow a doctor to view and share a patient’s medical history, spot dangerous drug interactions, and to make sure that prescriptions are written and filled automatically.
Blockchain can allow hospitals to safely and securely store patient information such as medical records that can be shared with doctors and specialists from anywhere in the world. In addition to added security, blockchain technology could also help improve the accuracy and speed of making diagnoses and administering treatment.
Artists and content creators can use blockchain to ensure that they are paid for their work. Using blockchain, artists can be compensated directly from fans without needing a third-party like a record label. Giving artists a much higher percentage of the revenue generated for their work from their fans.
Blockchain can help industries that currently rely on paper-based record keeping. This includes industries such as real estate, government, and personal identification. This can significantly reduce operating costs, help negate negative impacts on the environment, and make the records more secure. An electronic peer-to-peer documentation platform could also increase the speed of services provided.
These are just a few examples of how blockchain can potentially revolutionize the internet and possibly change the world. The only limitation of what blockchain will be used for in the future are the imaginations of future developers.