What is Blockchain Technology?

Last updated on May 27th, 2018,

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What is Blockchain Technology?

Given all the hype and controversy, it can be hard to figure out what blockchain actually is and what it can accomplish.  At its core, blockchain is a way of recording transactions on a digital ledger. Every computer connected to a blockchain maintains a copy of this digital ledger, insuring that everything recorded on the ledger is transparent. Each time you conduct a transaction over a blockchain network, it is added to a block along with other similar transactions. To make sure that only valid transactions are added to a block, a complex process known as mining is performed by computers connected to the blockchain network. Since anyone can participate in a blockchain network by maintaining a copy of the ledger and mining transactions, they are ideally suited for creating decentralized, fully distributed peer-to-peer networks. Two of the most popular blockchains at the moment are the cryptocurrencies Bitcoin and Ethereum. The first, Bitcoin, functions a worldwide payments system, while the second, Ethereum, acts as a distributed computing platform and operating system for Decentralized Applications (dApps).

 

Blockchain Explained by Experts

 

“Bitcoin is a remarkable cryptographic achievement and the ability to create something that is not duplicable in the digital world has enormous value.”

— Eric Schmidt, CEO of Google

 

“I’m reasonably confident … that the blockchain will change a great deal of financial practice and exchange.”

— Larry Summers, Former US Treasury Secretary

 

The blockchain cannot be described just as a revolution. It is a tsunami-like phenomenon, slowly advancing and gradually enveloping everything along its way by the force of its progression.”

— William Mougayar, General Partner, Virtual Capital Partners

 

“I think the fact that within the Bitcoin universe an algorithm replaces the functions of [government]… is actually pretty cool. I am a big fan of Bitcoin.”

— Al Gore, 45th Vice President of the United States

 

“With e-currency based on cryptographic proof, without the need to trust a third party middleman, money can be secure and transactions effortless.”

— Satoshi Nakamoto, inventor of Bitcoin

 

“Bitcoin is just one example of something that uses a blockchain. Cryptocurrencies are just one example of decentralized technologies. And now that the Internet is big enough and diverse enough, I think we will see different flavors of decentralized technologies and blockchains. I think decentralized networks will be the next huge wave in technology. The blockchain allows our smart devices to speak to each other better and faster.”

Melanie Swan, author of Blockchain: Blueprint for a New Economy

 

Blockchain History

 

The first blockchain was described in 2008 in a well-known whitepaper by an anonymous person (or group of people) using the name Satoshi Nakomoto.  The following year, Nakomoto implemented this blockchain to act as the core ledger for transactions on the Bitcoin network. For its first year of existence, Bitcoin functioned primarily as a hobby for hackers and cryptocurrency enthusiasts. It wasn’t until May of 2010 that Bitcoin was first used in a transaction, when a user in Florida named “laszlo” purchased two pizzas for 10,000 Bitcoins (valued at over $80,000,000 at current Bitcoin exchange rates!). In 2013, Bitcoin began seeing more widespread acceptance as a form of payment, as organizations like the Internet Archive began accepting donations in Bitcoin, and companies like OkCupid and Foodler began accepting it as payment. Since then, the acceptance and use of Bitcoin has only grown, with companies like Expedia accepting it as a form of payment, platforms like CoinBase providing an easy way to access Bitcoins, and financial firms like Goldman Sachs starting desks specifically dedicated to trading Bitcoin and other cryptocurrencies.

 

In July 2015, a second major blockchain, Ethereum, was released to the world. This distributed platform, developed by Vitalik Buterin, provided a way for developers around the world to easily create and deploy Decentralized Applications, or “dApps”, using the new Solidity programming language. Users of the dApps would pay for the distributed computing platform using the new cryptocurrency, Ether. From the launch of Ethereum until now, interest in blockchain has only grown, as more and more companies are using Ethereum to create decentralized services. The blockchain has allowed many of these companies to raise funding through an Initial Cryptocurrency Offering, or “ICO”, in which new cryptocurrencies that have value on unique platforms are offered to the general public in exchange for funds that are provided in Bitcoin or Ethereum. In 2017, over $5 billion in funding was raised in these ICOs, as more and more entrepreneurs see the value in developing decentralized applications that are beyond any single entity’s control. As privacy issues surrounding companies such as Facebook continue to worry consumers, we expect to see even more activity in the exciting blockchain space. Since its first conception by the mysterious Satoshi Nakomoto in 2008, blockchain has experienced steady growth and progress, but we are still only scratching the surface of this exciting new technology. In 10 years, who knows what a fully blockchain enabled future will look like?

 

Blockchain Disrupting the World

 

Blockchain technology represents the next revolutionary step in the services and manufacturing economy of the future. They allow automated distributed applications to settle multi-party transactions without the need of a centralized agency, making the entire digital economy more frictionless. Already, applications of blockchain have moved beyond simple currency based payments, and now includes smart contracts, financial instruments, and distributed databases and record keeping. The digital currencies enabled by blockchain have enabled financial services that are secure, frictionless, and nearly free, such as distributed applications for lending pools and escrow services. These platforms and the digital currencies that drive them together constitute a new “Internet of Money.” At the same time, assets such as luxury goods and jewelry are now managed and tracked on the blockchain, enabling new digital marketplaces where people can barter and exchange – creating a new “Internet of Value”. Finally, as more computing power is harnessed by smaller and smaller devices at the edge of a traditional computer network, there is a pressing need for tracking records and transactions in the “Internet of Things”. Blockchain’s distributed ledger technology is a natural fit for these requirements.

 

Judging by the large number of merchants already accepting digital currencies such as Bitcoin and Litecoin, blockchain has already established itself in the “Internet of Money”. With more and more projects linking tangible physical assets and legally recognized Smart Contracts to the blockchain, it is fast becoming the key driver of the “Internet of Value”. And as more and more edge computing devices come alive, the blockchain will be a natural complement to the “Internet of Things.” As these 3 new technologies trends converge, blockchain will play an indispensable part in a decentralized digital future. It will be the backbone of the Internet of the future.

 

Current Uses of Blockchain

 

Payments Processing

 

By far the most popular use of Blockchain, cryptocurrencies such as Bitcoin provide a decentralized payments platform that is beyond the control of any single entity like the government.

 

Decentralized Applications

 

Decentralized Applications, or dApps, are computer programs created to run on the Ethereum blockchain. They are often more scalable and efficient than traditional centralized applications, and prevent a single organization from controlling a user’s data.

 

Crowdfunding, Trading and Investing

 

Initial Cryptocurrency Offerings, or ICOs, are a new form of crowdfunding in which contributors provide funding to a new company in the form of popular cryptocurrencies such as Bitcoin or Ethereum, and receive the company’s new cryptocurrency in return. Some of these new cryptocurrencies pay future dividends, making them function as investment securities. Others act as coupons or vouchers for the company’s future products and services.

 

Future Uses of Blockchain

 

Internet of Things

 

Internet of Things systems can leverage the blockchain to enable device-to-device and consumer-to-device transactions, as well as for device coordination. In addition, Internet of Things devices are a natural fit for Decentralized Applications.

 

Supply Chain Management

 

Blockchain platforms can be used to keep a registry of products and track their progress through various points in a supply chain. They can also be used to validate product certifications by recording the manufacturing details on a blockchain. This information can be used to prove the authenticity of products and eliminate the need for physical certificates.

 

Energy

 

Solar charing stations and microgrids can use blockchain to enable users to make micropayments without the need for an intermediary or a payment gateway.

 

Identity and Recordkeeping

 

Blockchain technology can be used for maintaining records such as legal documents, marriage certificates, birth certificates, land registries, automobile records and copyright protections.  Storing the records on the blockchain insures that they cannot be tampered with, and once recorded on a public ledger they become public for anyone to see. Decentralized applications can be created to verify the record’s existence.

 

Heatlthcare

 

Blockchain can be used to store healthcare data in a secure, scalable manner.

 

Advantages of Blockchain

 

  • Decentralization: The Blockchain is not controlled by a central authority, giving control to a large group of trustless peers.
  • Scalable: Since it is maintained by a network of peers, blockchain is highly scalable, scaling up as more miners are incentivized join the network.
  • Secure: The public ledger used on a Blockchain network makes all records on it secure, auditable and undisputable. Transactions on a Blockchain network are secured by strong cryptographic algorithms.
  • Robust: Due to it’s decentralized peer-to-peer network, a Blockchain network does not have a single point of failure.
  • Autonomous: Blockchains can enable transactions to be performed autonomously, without trusted Third Parties.

 

Disadvantages of Blockchain

 

  • Vulnerabilities: Hackers can exploit vulnerabilities in poorly coded Smart Contracts, which is why using security checking libraries such as safeMath is very important.
  • Awareness: As an emerging technology, knowledge of the benefits of Blockchain is still not widespread.
  • Regulation: Existing government and industry players may be threatened by Blockchain, and may seek to regulate or limit its growth.
  • Consistency: The nodes on a Blockchain network can be eventually consistent, in that all nodes will see the same ledger at some point. This leads to slower transaction times as new blocks need to be mined, at a rate of roughly 17 seconds for Ethereum. This lag in consistency is tolerated as a tradeoff to maintain the high availability of Blockchain networks like Ethereum.

 

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