What Is Blockchain?
Daniel B. Simmons
If you’ve been watching the news lately, particularly as it relates to finance, you’ve no doubt seen or heard the term “blockchain” thrown around once or twice. You may have heard some prescient analysts predict that it’ll bring about a financial revolution, or even change the face of computing as we know it. Whether or not you agree with these claims, the fact remains that blockchain represents a new and revolutionary way to approach the exchange of information. In this article, we’ll take high-level look at the theory and the applications of blockchain and try to figure out why so many are excited about its potential.
Any discussion about blockchain must begin with the first known application of the protocol: bitcoin. Bitcoin, although originally the purview of coders and tech enthusiasts, has now solidly entered popular nomenclature. Bitcoin is a cryptocurrency, a digital or virtual form of currency. Bitcoin is made up of a balance of ones and zeros in digital “wallets” that has been deemed to have enormous value online. By itself, this is nothing special: people have been buying, selling, and trading digital assets for many decades now. It is the decentralized network on which bitcoin transactions are handled that makes it unique, a network that uses the blockchain as its very backbone.
To illustrate the blockchain protocol in action, let’s walk through a typical bitcoin transaction. First off, it must be understood that the bitcoin network, and blockchain-based networks in general, are completely decentralized, meaning that no bank, government, or entity controls the account information for the users on the network; instead, everyone controls the information via a continuously updated public ledger. This ledger holds a recorded history of all the transactions processed on the network to date. These transactions are entered into the ledger in “blocks,” or groups of transactions that have been gathered together and processed by “miners.” Bitcoin miners are users on the network who have agreed to use their computing power to process and verify transactions. These miners are in turn rewarded with bitcoin for each block they help process. Once a block of transactions is verified, it is “chained” to the previous block and propagated to all users on the network. Consensus is the name of the game here and only users whose local version of the ledger agrees with the majority can send and receive bitcoin.
And there you have it in a nutshell. A blockchain consists of three main components: distributed data (in the form of a ledger, record, or database), a secure means of verifying and updating said data, and a mechanism for chaining the current state of the data to previous blocks. Decentralization means that there is no single point of failure or attack by which the network can be compromised. As we’ve witnessed many times in the recent past, a single bank, website, or financial institution can be compromised, leaving all their users’ funds and assets in jeopardy. Stealing from a blockchain-based network like bitcoin involves not only compromising most nodes on the network, but also going back and altering previous blocks on the blockchain to make your fabricated version of the ledger consistent. Both tasks are prohibitively difficult and only get harder as the network grows.
In a world where banks get hacked, financial companies implode, and governments topple, having a monetary system that can survive that doesn’t seem like a bad idea. However, cryptocurrency is but one of the many applications envisioned for blockchain. Blockchain has been applied from everything to crowdfunding to eBay-like auction sites. There are also initiatives like Ethereum that seek to decentralize the very act of computation itself. Instead of hosting an app or website on a centralized server, Ethereum boasts the ability to run any program conceivable on the Ethereum network itself. The Ethereum network is fueled by “ether,” a cryptocurrency much like bitcoin in which application developers pay to have their code executed on the network.
The decentralization, privacy, and security that blockchain offers have many people excited for its potential to take control of our economy away from the government and puts it back into the hands of the people. Others are convinced that without the backing of governments and authorities, the technology and applications that blockchain fuels can topple at a moment’s notice. Regardless of the debate surrounding blockchain, the market has spoken. As of this writing, bitcoin has soared to a record value exceeding $6000 per coin, overtaking every publicly traded stock save Warren Buffett’s Berkshire Hathaway. Both bitcoin and Ethereum have a combined market capitalization of over $130 billion, and show no signs of slowing down, not to mention the myriad of other currencies like Ripple and Litecoin that are seeing steady gains as well. No matter what your philosophical leanings, it seems like blockchain is destined to be an important part of the future.