When many people hear the term “blockchain” it either causes them to make a “Huh?” face, so today we’ll take a deeper look into what blockchain technology is and what it does. Essentially, blockchain is the digital ledger by which cryptocurrency transactions (like Ethereum and Bitcoin) are made. Although blockchains have all kinds of potential beyond those who invest in cryptocurrencies, their first use was to enable the functioning of the digital currency called Bitcoin. Stuart Haber and W. Scott Stornetta published their paper titled “How to Time-Stamp a Digital Document” in 1991, which was a big moment in the history of the formation of blockchain. Then in 1996, Ross Anderson wrote his paper called “The Eternity Service”, in which he speaks of the idea of a decentralized information-storage system in which all updates are permanently recorded. And most famously, in 2008, Satoshi Nakomoto wrote his paper “Bitcoin: A Peer-to-Peer Electronic Cash System”, in which he delineates the mechanisms of a blockchain system, without actually using the word “blockchain”.
Behind the blockchain, there’s a node-network that validates someone’s request to buy or sell cryptocurrency. Once the transaction is complete, a new block is added to the chain to permanently record the sale. This is how blockchains empower the movement and security of cryptocurrencies. This kind of money exists nowhere in space and cannot be redeemed for gold or anything else, but rather is stored electronically using encryption techniques. Let’s explore some of the other ways blockchains could makes our lives better in years to come.
Blockchains in Action
Take, for example, the oil industry. Here, you may have several suppliers working with multiple distributors, plus various partners, each with a stake in the transaction, and at the end of the line you have the customers. Everyone in the supply chain has to keep updated and accurate records of every step in the process, and also must be able to efficiently match these records with every other participant’s records. In a huge, multi-national supply chain like this, it could be a complicated and costly business to accomplish all this, and even so potential errors could cause all kinds of problems. As is happens, blockchains can do these things quickly, efficiently, and cheaply.
To illustrate how substantial the savings for companies can be, consider that “Some 5 billion persons and 20 trillion dollars have been shut out of the economy due to disputed assets”, in the words of Hernando de Soto. And think how difficult a task it would be to deal with a snowed-in trainload of oil, in terms of keeping every member of the supply chain updated and informed about the shipment. Blockchains can do this with elegant simplicity, and in order to understand how, let’s look at them a bit more closely.
A Closer Look
Businesses need quick, accurate information to function smoothly. Blockchains could be their best friends in this regard, since they provide a transparent, unchangeable ledger that tracks any asset, from a car to the copyrights for a song. In the case of a wide-reaching business in the oil industry, a blockchain could record all orders, payments, accounts and much more in a tamper-proof format. And each block on the chain can tell you who sold the item, for how much money, when they made the sale and various other information. A new level of potential reveals itself when we learn about smart contracts. These articles allow something like a loan or a bond to be represented on the blockchain with all its relevant details. This quickens and secures bond transfers.
Blockchains reduce the risk of cyberattacks with their transparency and immutability. And by removing the need for keeping duplicate records, they insulate against fraud. Not all blockchains are the same. Some blockchains, like Bitcoin, are public, meaning that no one oversees the network. These networks need a lot of computing power and can be vulnerable security-wise. A private blockchain is controlled by a single organization that manages the shared ledger, which can tend to improve the elements of trust and security. It can also be arranged that many organizations together maintain a blockchain. Any blockchain can be made in such a way that permission is required to access it, so that someone controls who can gain access and what transactions may be done.
Ongoing research is being done all the time about ways blockchains may be implemented to improve efficiency and security in other aspects of our lives. There is also much to learn about the way they’re already being used in industry, from those who invest in cryptocurrencies to those who use cryptocurrencies like Bitcoin and Ethereum to pay for products or services. The continual utilization of blockchains in our society entrenches them more and more as time goes by, which means we may be hearing a lot more of this term in the future.