“What the internet did for communications, blockchain will do for trusted transactions.”
Technologists, researchers, and governments alike are frenzying about blockchain technology and how it is disrupting a wide range of industries from finance to healthcare to even retail. According to Google, searches on blockchain technology and associated topics have tripled since September 2014. This article is an attempt to provide a short explanation on what blockchain technology is, when it started and why, and its pros and cons.
What is Blockchain Technology?
Blockchain refers to an open-shared ledger that can record the history of transactions in a permanent and verifiable manner- and cannot be altered. For use as an open ledger, a blockchain is characteristically managed by a peer-to-peer network jointly sticking to a protocol that validates new blocks, which are linked and secured cryptographically. Blockchain was developed by an anonymous person – Satoshi Nakamoto in 2008, and in 2009 it was implemented as a core component of the cryptocurrencybitcoin. The underlying technology behindcryptocurrencies is blockchain, and it serves as the public ledger for all transactions taking place on the network.
Blockchain technology helps to curb the double-spending problem without the need for a trusted administrator and is the inspiration for many other applications. The simplest way to understand how blockchain avoids double spending is to know that as a large distributed ledger, it is replicated many times throughout the network so as it can be accessible to everyone. When a transaction occurs, it is updated in all replicated ledgers so that they are visible to everyone.
Why do we need blockchain technology?
Transactions such as orders, payments, and account tracking take place every minute and in each case, every participant has his own ledger and therefore, his own version of the truth. Having numerous ledgers is a formula for fraud, errors, and inefficiencies. The purpose of blockchain technology is to ensure end-to-end visibility of a transaction to reduce these vulnerabilities. Blockchain creates a single data store of all these transactions. The benefits of blockchain technology are:
- It provides a single-shared ledger that all parties can refer to at any point in time.
- It helps to detect human errors early in the chain since all parties need to arrive at a consensus.
- It provides security by enabling treachery by any of the parties to be identified immediately by comparing the ledger copy of one party to the others.
- It provides safety to manufacturers by ensuring that the quality of their products is not compromised.
- It eliminates intermediaries which enables manufacturers to reduce overall operational costs and facilitates direct connection of manufacturers to their customers.
- Blockchain allows for transparent audits which improves regulatory compliance.
The above benefits clearly present a case for the use of blockchain in business. The value of blockchain for solving business problems concerning transactions among multiple parties cannot be over-emphasised.
How does blockchain technology work?
The real blockchain magic comes when these digital ledger entries need to be distributed across a network. When a new transaction is initiated or when an existing one is edited, a block is created containing the transaction details that are broadcast to all nodes within the network. These nodes and layers in the infrastructure network serve the objective of creating a consensus on the state of the transaction at any given moment; they all have duplicates of the existing authenticated ledgers distributed between them.
Every block is time-stamped and refers to the previous block in the chain establishing a sequence of events. Once the transaction is authenticated, the block containing that transactional information is linked to the previous one, which is, in turn, linked to the previous block, creating a chain that is referred to as a blockchain. Replication of the entire chain of blocks then takes place across the whole network, and secured cryptographically making it not only difficult but practically impossible to hack. Practically impossible since it would take substantial computational power to even try hacking.
Regarding safety, both immutability of the data stored on blockchains and transparency of the system are involved. Immutability in information technology refers to the fact that the stored data cannot be altered. Once data is encrypted on a blockchain, it virtually becomes immutable. As mentioned earlier, it doesn’t mean that the data cannot be altered – but just that it would require extreme collaboration and computational power to change making it practically impossible.
Blockchain technology can, in fact, be configured to work in several ways using different mechanisms to achieve a consensus on a transaction and, to particularly, define the parties involved in the chain and eliminate all other participants. The largest example of blockchaintechnology use is in cryptocurrency – Bitcoin and Ethereum- which employ anonymous public ledgers in which anyone can take part in. There are more private uses of blockchain technology where several organisations are piloting the deployment of private blockchains to control transactional activities.
The problem with blockchain technology
The biggest issue with blockchain technology currently is that it is difficult to apply, largely because, there are several projects all with their own teams and principles. This is typical of all open source systems. Putting all of these functionalities to a practicable application is challenging. In addition that, transactions in a blockchain can be sent and received anonymously, and whereas this preserves the privacy of the user, it might allow illegal activities to the network as users’ identities cannot be tracked. Furthermore, blockchain technology is still developing and new tools are still being developed to improve its security. Similarly, its potential is still largely unknown.
Overall, blockchain technology can essentially change how value is exchanged in the world and may be that is why everyone is frenzy about it. The technology has the potential to disrupt several industries from energy distribution to advertising. Its power mainly lies in its being decentralized and the ability to eliminate trusted intermediaries. Blockchain technology holds immense promise and is something to look out for now and in the future.
By Sammuel Lewis