The Blockchain — Demystified
Distributed ledger technology, or the blockchain, is a very disruptive technology that most are unfamiliar with, yet like with the advent of internet 20 years ago it stands to be a very transformative and powerful tool for any business, especially the early adopters. The blockchain offers businesses a secure way of confirming and sending records without fear of changes or edits being made. This means records are kept secure, voting systems become immune to tampering, transparency exists in all transactions and smart contracts become a reality. All this while being completely scalable and customizable to the needs of the client.
What is a blockchain?
More than a buzzword at its core, the blockchain is a list of records that are cryptographically linked, which is its power. The records recorded in the blockchain are unchangeable because each block is linked together, meaning that in order to alter the records of one block, say holding one financial transaction, the person trying to falsify the data has to not only reverse engineer the cryptographical hash for that block, but this needs to be done for every block down the chain. In short, you need more time than the age of the universe and more computing power than will ever exist to falsify the data. The records added to the blockchain are added sequentially, so these blocks are linked cryptographically and this says nothing about whether the transactions are linked or related. For records management, this is ideal. All data, from financial records to medical records, to food safety management can be kept in a secure manner that is immune to tampering. Messages can be exchanged securely in this manner — remember the contents of the block can be encrypted, no one will know what you said except the intended recipient.
Third party institutions are a crutch that does not need to exist and a pain to work with. For instance a bank; it would be easier for company A to pay company B directly without the bank acting as a middleman. What if you do not trust the bank? After all, every time you use their systems you implicitly trust their security. And yet look at what happened to Equifax and the personal records of over 140 million Americans. When a business uses the blockchain you do not need to trust anyone and there is no third party holding all the records. Another security feature of the blockchain is the fact that every user has a ledger of every transaction. There is no need to trust anyone because every user has a complete copy of the ledger. No one can cheat the system and facts can be verified by anyone.
Called a consensus mechanism, a copy of the blockchain — a series of records linked together — is kept by everyone, at all times. If one person has a different blockchain than everyone else, then by consensus of the majority, that one chain is determined to be erroneous and is deleted. When a new record is added, every copy of the blockchain kept by every user simultaneously and automatically records and update the blockchain with the new block. Even if one person did reverse engineer millions of hashes it would not matter unless thousands or millions of people did the exact same thing. With the blockchain, you know your records are transparent and secure.
What about transparency?
How do you know when someone commits voter fraud? It can be very difficult to tell. If a voting system is secured with blockchain technology then everyone will have a complete list of who voted and what their ballot said. This is the transparency, there are no means of covering up or hiding your actions. Yes, data can be encrypted but you could not hide your ballot or claim that you did something other than what your ballot says — everyone has a ledger of every vote and everyone can verify who voted for what. Governments who are concerned with corruption can use a blockchain and everyone can see every transaction and verify where all the monies go. Do you distrust charities and their claims that all proceeds benefit the advertised cause? If this charity used a blockchain then there would be complete transparency in where and how they spend their donations. Such transparency also allows for the adoption of smart contracts. Simply record the terms of your contract in the blockchain and upon fulfillment the agreed upon transaction happens. For insurance companies, this is great because there is no need to deal with multiple claims on the same suit. Does your contract stipulate you receive vesting shares in the company if certain terms are met? Do not dispute those terms and instead record them in the blockchain and if they are met it is recorded and automatically fulfilled.
PoS vs PoW
Not all blockchains are powered by the same technology, but they do achieve the same result. Bitcoin, the digital cryptocurrency, was the first implementation of the blockchain technology. Bitcoin is the most well known of all the cryptocoins but it is not powered by the most efficient engine. Bitcoin derives its value from the energy needed to “mine” it. In short, you have a complex math equation that looks for a special 256 digit number that yields an answer that begins with 30 consecutive zeroes. This is hard to do and as we speak millions of computers across the globe are solving complex equations that look for a specific result — the lucky few who find this hash, as it is called, are rewarded with Bitcoins. These tokens represent digital value but in other systems can also be redeemed for goods and services.
This process, known as Proof-of-Work (PoS) is wasteful as the vast majority of the energy used to power these computers is wasted. Proof-of-Stake (PoS) is a lightweight alternative that does derive value from “mining” but derives value from consensus alone. This technology, best exemplified by Nxt and Ardor, is more scalable and more efficient and better suited for business solutions.
Are blockchains scalable and customizable?
Yes, no two blockchains are the same. A distributed ledger for financial records does not need a voting feature and a blockchain for medical records does not need asset exchange features like Bitcoin. Every business can customize the permissions and functionality of their blockchain and distribute it directly to their clients and partners. They all have the same security and the same transparency but not the same functionality, that is up to the individual needs of the company.
Originally published at jameswondera.blogspot.com.