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What Is Blockchain Technology?

How Does Blockchain Work?

Blockchain technology looks set to disrupt a number of industries and organisational systems, starting with currencies and financial services, and is said to be the next big revolution after the internet itself. A lot of people seem to be excited about it, an even bigger number are totally confused by it, and everyone wants to know how to cash in on it. So what is blockchain technology and how does it work?

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Is it 'a blockchain'? Is it 'The Blockchain'? Are there lots of 'blockchains' around?

Just like Hypertext Transfer Protocol (HTTP) powered HTML pages back in 1990s and gave us the World Wide Web, blockchain is a technology that could power a new generation of information systems. The best known application of blockchain technology has been for the development of Bitcoin, the most recognizable cryptocurrency around nowadays. In fact, the blockchain that powered Bitcoin was the first one and now people are figuring out applications for blockchain tech that go way beyond cryptocurrencies and digital money.

Blockchain Technology In A Nutshell

Blockchain technology can be best described as a distributed ledger system. It is self-governing and not controlled by a central entity and this is key to its basic concept.

Top-Down Command Structures

We human beings like to organise ourselves into top-down, pyramidal structures, whether it is government, business or financial systems. We elect officials to form a government, uphold the law, police anti-social elements within us and protect us from other tribes of humans. We also have businesses with CEOs and other bigwigs who run huge corporations. We work for them, buy stuff from them, and sometimes as shareholders, get to regulate them too.

Now we hope that our government will do a good job and we will have egalitarian societies, impartial justice, stable economies and currencies we can put our faith in. Unfortunately there is only a small part of our planet which enjoys systems that come close. There are lots of places in the world today that have corrupt governance, powerless judicial systems, weak economies and unstable currencies. There are also a lot of businesses which manufacture useless crap or use processes that damage the environment, and then propagate media that helps us buy this crap.

Blockchain technology offers certain features that might help us solve some of these problems and wean us away fom some of these top-down command structures.

Lets See How Blockchain Technology Works

Take a bank, for instance. You put your money in a bank, they note it down somewhere in a ledger and you trust them to keep your money safe and this ledger free from tampering hands. So 'Jack has $50'. One day you pay Jill some money. So now:

1. Jack gave Jill $10.

2. Jack now has $40.

3. Jill now has $10.

All these details go into The Ledger.

Someone could break into the bank and mess with The Ledger, you think. In real-life, however, records like these are backed up and kept safe by several layers of security and we trust that the people with the keys will not go willingly and fool around with them. That would mean the collapse of the banking industry.

Blockchain Technology And Distributed Computing

Now imagine a scenario where there is no bank. We give all our account holders a copy of the ledger and connect them via a 'peer-to-peer network'. Now Jack has a copy of the ledger, Jill has a copy, so does Snow White, her aunt, all the seven dwarves and anyone else who wants to join our 'network'. If Jack or any of the members make a new transaction, all other ledgers get updated over the peer-to-peer computer network.

We also encode each copy of the ledger with several layers of encryption. Anyone who wants to tamper with this 'virtual bank' will have to break into each member's computer, find their ledger and then deploy a considerable amount of computing power to decode it. Does not sound so hard - your Russian nephew could do this with his Nintendo while eating his breakfast cereal. The tricky bit comes later, when all the other ledgers in the network disagree with the change and override the corrupt ledger automatically. That is how the blockchain keeps its integrity over individual nodes in the system.

Imagine a network with thousands and millions of nodes or 'ledgers'. Blockchains are designed so that it would take someone with an insane amount of computing power to mess with the entire network - a state-level organisation or a James Bond super-villian.

Distributed Ledger Technology - An Incorruptible Store of Records

In a blockchain individual records are combined into blocks. These blocks are then added to the 'blockchain' at specific intervals. This blockchain is stored and updated simutaneously in several different computers. Mess with any one part and the entire network will know. That is what keeps the blockchain safe from corruption and gives all its members a level playing field.

We just used an example of a bank. You could store transactions between individuals or any sort of immutable data in a blockchain, like your birth date, for example. What if each transaction was a vote - in favor of an elected official in a governing body, or against a business with an environmentally-detrimental practise? The blockchain, in its distributed nature, would theoretically be safe from corruption or manipulation by a central authority.

Building Your Own Blockchain Application

At this point you will say wow, I want one! How do I build my own blockchain, my own currency, my own distributed ledger system that stores records that eventually benefit me? I'll just set up a blockchain and stick my own control mechanism in it! Well, you could set up a blockchain, release to the public and then control certain aspects of it. You would have to convince everyone that these control mechanisms are for their benefit. And that is when it starts sounding like any other mega corporation.

The whole idea of a blockchain is to be decentralized. The moment you stick a control mechanism in it that defeats the purpose of a blockchain - a) Why would your users want to be part of a P2P network that is controlled by someone else? and b) You would probably be better off storing your data in a central database than in 206,432 different computers scattered around the globe.

Types Of Blockchain Applications

There are several fascinating applications for blockchain technology beyond currencies and financial services. Think peer-to-peer ecommerce or financial transactions, where you cut out the middle man. Or a blockchain-based search engine, in which search rankings are determined by network members instead of a search engine algorithm. Or contracts between individuals or property records - the blockchain would reduce scope for disputes and keep an incorruptible record that you can retrieve without resorting to a bureaucratic government agency.

Blockchain could work towards good governance, too. Take taxable income, for instance. Corrupt individuals in developing nations, and corrupt corporates in developed ones, often use creative accounting (or the lack of any whatsoever) to escape taxation. Blockchain-based cryptocurrencies could help keep track of taxable income. Similarly, expenditure of public funds could also be made available to everyone.

Another great application is online identity management. Instead of having several different forms of government-issued identification - passport, voter ID, driving license, bla bla - you could just have one ID in the auto-government blockchain and solve a lot of bureaucratic nightmares. Then we venture into the business sector. Instead of trying to assemble a profile of an individual via their LinkedIn or Facebook accounts (all managed by centrally-owned mega-corporates, by the way), online profiles would be stored on a mutually beneficial blockchain, not controlled by a central authority. This would help individuals do business with each other, build trust across geographical regions, employ each other or find work with reputable companies.

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