The word blockchain is popping up everywhere these days, but what exactly does it mean?
Blockchain technologies have potential to revolutionize not only money, but also to change the way we vote, eat, provide healthcare and conduct many other important aspects of daily life.
Satoshi Nakamoto, the pseudonym for an unknown person or team, created Bitcoin as an alternative to government-regulated currencies in the wake of the 2007 financial crisis. Satoshi saw a distinct need for a new currency — one that was controlled by the people instead of governments. The first real-world application of blockchain was created alongside Bitcoin to distribute control of the currency to the people. By doing this, blockchain has ignited a social revolution fueled by cryptocurrency.
Blockchain: What Actually Matters
Blockchain is an umbrella term for a variety of technologies.
- The first important concept to understand is the idea of a distributed ledger. A ledger is a database of transactions and “distributed” means that it’s not stored in one place. There are multiple identical copies stored in “nodes” all across the world. Each time 1 node updates, it must communicate with all the other nodes to update their copies as well.
- The 2nd important concept, and what makes distributed ledgers more interesting, is the idea of distributed or “decentralized” control. Decentralized control means that updates to the system or database must be approved by a majority of the nodes in a democratic voting process. In order to update the ledger, the nodes must reach a consensus.
- Cryptography is added on top for anonymity throughout the entire process. It also provides a heavy layer of voter security. A malicious actor cannot corrupt the system without controlling 51% of the nodes. This also allows for democracy to scale across borders, languages and governing bodies.
Decentralized Finance (DeFi)
For some people, decentralized currencies are a lifeboat, and this presents a global opportunity.
In Venezuela, a country affected by hyperinflation, Bitcoin is used to complete everyday transactions. For many Venezuelans, they can hardly convert their paychecks from bolívar to Bitcoin fast enough before it loses its value.
This presents an interesting opportunity for investors across the world. Loans with unregulated interest rates can now be made directly in emerging markets and regions dealing with economic crises.
A new industry is quickly forming around this concept called decentralized finance (DeFi). It provides novel opportunities for people across the world and the socioeconomic spectrum.
Why is it Called Blockchain?
The term “blockchain” comes from the shape of the data stored on each node computer. In computer science, this is called a “data structure.”
Each blockchain “block” contains:
- Some relevant data to be added to the database (for example, all the bitcoin transactions that occurred within the last 10 minutes).
- The ID of the block before it in the chain.
This way, the blocks are “chained” together. This is the structure of Bitcoin’s ledger and the reason we use the term “blockchain” to represent the majority of decentralized applications today.
What is Bitcoin Mining?
To add a new block to the chain, it must be cryptographically secured to the end of the current chain. This requires work (in the form of CPU power and electricity) known as mining in the cryptocurrency community.
Miners are people who dedicate significant computational power (often entire networks of dedicated mining computers) to authenticate and build the blockchain.
Miners are incentivized by Satoshi’s “proof-of-work” algorithm. This algorithm evaluates the total computing power on the mining network and generates a computational puzzle that should take about 10 minutes to solve. This puzzle is sent to all the miners who compete to solve it first. The winner securely adds the new block to the existing chain and updates the network of nodes.
The winning miner is awarded 12.5 newly minted Bitcoin for his proof of work.
The Double Spending Problem
Each time you send money on Venmo, you place your trust in the authenticity of the Venmo transaction ledger (record of transactions). Venmo’s ledger is encrypted, but it’s centralized and therefore vulnerable to malice and/or negligence.
Electronic cash has an extra incentive to be centralized: to avoid the double-spending problem. Before the blockchain era, banks needed to verify that people did not “copy and paste” their digital currencies and spend them twice.
A blockchain prevents double-spending and payment reversal.
A blockchain is secure as long as the majority of computing power on the network is not fraudulent.
If a malicious user wants to edit a past transaction, that individual will immediately break the rest of the chain. Since the accepted version of the chain is determined by a general consensus, the malicious user’s proposed new chain would immediately be discarded by the non-malicious majority of users.
In order to control Bitcoin’s blockchain, an attacker must control 51% of the mining power and decide each new block that gets added to the chain. With this power, a malicious attacker could double spend at will but not reverse the history of the blockchain without redoing over a decade of proof-of-work.
A “51% attack” on Bitcoin’s blockchain would require a globally orchestrated effort with a hefty bankroll. A “hard fork” could reverse damage done in an attack.
What is a Blockchain Fork?
You may have heard of Bitcoin Cash, which is a completely separate cryptocurrency from Bitcoin. It wasn’t always that way.
When disagreements arise in a decentralized community, parties may agree to part ways and “fork” the chain. This is how Bitcoin Cash was created — as a fork from the Bitcoin blockchain, forever traveling forward independently.
Another reason for a fork is to revert malicious damage done by an attack. The best example of this is Ethereum and Ethereum Classic. In the past, Ethereum suffered an attack and millions of U.S. dollars’ worth of cryptocurrency were stolen. The Ethereum community decided to fork its chain. The old chain with the stolen cryptocurrency became known as Ethereum Classic. The new chain, with the cryptocurrency returned to their rightful owners, became Ethereum.
When a cryptocurrency is forked, all held assets on the old chain are duplicated on the new chain. In the Ethereum example, let’s say you had 10 Ethereum before the fork. After the fork, you now have 10 Ethereum Classic and 10 Ethereum. Some people prefer to remain on the old fork so your new Ethereum Classic still has value, albeit a bit less.
Forks are controversial because they often get centralized groups of developers, despite the main goal of cryptocurrencies being decentralization. This being said, forks are avoided if at all possible.
Blockchain is More than Bitcoin
A number of new decentralized applications, or DApps for short, pop up each day.
A blockchain is useful when for applications that meet 3 specific conditions:
- There is a shared database with multiple authors.
- The users do not trust each other.
- The users do not trust a central authority.
IBM’s Food Trust Initiative with Walmart utilizes blockchain technology to provide consumers with the entire supply chain history of its specific food products.
Additionally, healthcare data is securely stored and tracked across time and shared securely between healthcare networks. It can also track the supply chain for medications and vaccines and provide end users with a comprehensive view of where their products were sourced from and where they have been.
The Future of Blockchain
Bitcoin might be the most popular cryptocurrency today, but it lacks many of the features such as smart contracts that other products like Ethereum have. With smart contracts, computers can automate agreements at scale with nearly limitless potential. Ethereum comes with its own programming language to write smart contracts called Solidity.
Want to get technical? Read Satoshi’s original whitepaper.
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