WHAT IS BLOCKCHAIN

by | Apr 3, 2018 | Blockchain

The news is filled with stories about blockchain, Bitcoin, Ethereum and cryptocurrency. We’re told they’re here to stay. We’re told they’re going to change everything. That this is the New Internet. All of this sounds great, but: what is blockchain? Why is it such a revolutionary thing? What should we do about it? And most of all: how will it impact us?

The first answer we get is: if you know what Bitcoin (the first cryptocurrency) is, then you already know what blockchain is or at least you how it can be used, since Bitcoin was the first successful implementation of blockchain.

In fact, blockchain isn’t at all new, it was created in 1996, brought to us by the world of cryptography. It was only in 2008 that bitcoin was created by Satoshi Nakamoto. But in the last two or three years, bitcoin became hugely popular, its value grew and it became a currency for services and goods, which in return made blockchain so much more relevant.

Cryptocurrencies are an integral part of blockchain, since they are used for sustaining and rewarding components of the block. But blockchain is so much more than that and the opportunities abound. Let’s explore them.

Basic characteristics

Distributed data

Blockchain should be seen as an amazingly spread out database. Every component (nodes) has access to the same information as well as to the totality of transactions carried out. For instance, the ethereum network currently has more than 30 thousand nodes. Information is so spread out, it’s impossible that any of it will ever get lost.

Security

Everyone is allowed to access all information with a public key, but you can’t generate a transaction on blockchain without a private key, since it’s completely encrypted. Besides the person who generated the transaction, and who also owns the private key, no one else can participate in the transaction. We can find out how many bitcoins a “user” has, we can see their public key, but we don’t know who they are. We can even trace the money, without knowing the identity of those involved. In Ethereum we can see each and every transaction.

Inalterability

Registries in blockchain can’t be modified. We can only add a transaction but we can never modify an already existent transaction. Each transaction block generates a unique coding called hash (kind of like a verification code) which is calculated according to the block. Say we have block 0 (zero) or genesis block.

Now let’s say a successive transaction block is generated: it’s composed of transactions that are added to the block 0 hash. Therefore, the transaction 1 hash block depends entirely on block 0, meaning its linked. This happens with every block. Each and every n block depends on the n-1 block in order to be validated, and so on, all the way to block 0. This is how the blockchain is created.

Imagine a pile of heavy blocks. Each time a block is added on top, those underneath are less likely or even impossible to modify or move. The result is a robust and unalterable chain.

Consensus

Every time a transaction is made, it must be verified in order to make sure it’s valid and legal. Each block of transactions is generated by a miner, a kind of problem solving machine (we’ll cover this aspect more extensively in another article). Since there are many miners, there’s a set of pre-established consensus rules which make sure that the new block is valid and that it’s taken as a base for the following blocks. As a result, each confirmed block will further confirm the previous blocks.

Traceability

Since a transaction can’t be modified and every transaction is registered in every node of the block, we can trace any transaction from the beginning until today. This means we can know the entire history of a good or record.

What can we use it for?

The most attractive thing about Bitcoin is that it cuts the middleman. There’s no need for a central authority giving confidence to the process of transactions between one or more protagonists. The design of the blockchain is enough to provide this confidence. Besides monetary transactions, we can also generate contracts o small programs regulated by the rules we just described. This brings forth new possibilities for exchanges and agreements.

Let’s talk more about transactions. Smart Contracts generate a monetary transaction or goods exchange. Contracts establish rules or agreements (just like paper contracts) between participants concerning an asset. The transaction is complete when the contract is fulfilled, which registers on the block. Fulfillment is made according to rules which are programmed inside the blockchain. Once they’re executed, they can’t be modified. Besides, the contract can’t be changed either once it exists inside the blockchain. Even if the contract needs to be changed, the results given by the previous contract are never erased.

Let’s say we have two participants, Peter and Anne. Anne has a car with license plate number A54–3697. The car is in her name and she’s the sole owner of the car, so the record on the block will indicate that the car belongs to Anne. A new smart contract is created, establishing that, if Peter has enough funds (condition), he can buy Anne’s car. When the contract is executed, and if the condition is verified, the car can be owned by Pedro, since a new record is generated, representing the transaction. Since no one can modify a block or its history, we’re guaranteed that the car is indeed Anne’s car, and we can even know the entire history of that car, since it first appeared on the block until today.

Now, if we wanted to generate a change in the contract, for instance, having a third party (a salesperson) receive a commission on the sale of the car, this wouldn’t modify the previous transactions. Either we assume the salesperson will only charge for posterior sales, or we create a special contract that generates said commission on current payments, with the risk that they could remain incomplete, since Peter or Anne could possibly not have enough funds.

This means that, nowadays, we can exchange virtual money but we can also execute contracts that may or may not involve payments. We can generate decisions which cannot be disposed of once they’re taken, which brings us a level of transparency unheard of before.

Governments, banks or insurance firms could greatly benefit from this technology. And this is just the tip of the iceberg. Cutting the middleman also translates as a cost reduction for the final user.

If we allow for a utopian vision, we can imagine a not so distant future where concepts such as blockchain and IOT (Internet of Things) are linked by smart contracts, bringing an endless amount of services to the community. This new era is barely starting and evolving steadily. We must be ready for it and for the work and business opportunities it will bring. But let’s not get carried away, blockchain won’t replace current systems, it will just help us strengthen and improve some parts of them.

At inmind we’re working hard to create and develop solutions in order to offer the best consulting regarding blockchain technologies and how to use them.

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