Terry Big banks and some governments are implementing blockchain as a distributed ledger to change the way information is stored and transactions occur. Their goals are laudable – high speed, low cost, security, fewer errors and the removal of the possibility of central point attacks and failures. These models do not necessarily have cryptocurrencies built in for payments.
However, the most important and influential blockchains are built on top of Satoshi Nakamoto’s Bitcoin model. Here’s how they work.
Bitcoin or other cryptocurrencies aren’t stored in a file somewhere; they’re stored as transactions in a ledger or table called a blockchain, which uses the resources of a large peer-to-peer network to verify and approve each transaction.
The blockchain is distributed: it runs on computers provided by volunteers worldwide; hackers cannot compromise the system by hacking into some centralized database.
The blockchain is public: anyone can view the information on the blockchain at any time because it exists on the web, not in a centralized institution that is responsible for auditing and keeping records, as in traditional systems.
Finally, the blockchain is encrypted: it uses a high-strength public-key, private-key encryption algorithm (rather than two keys like those used for safes) to maintain the security of the virtual world. You don’t need to worry about Target Goods, Home Depot (the U.S. home furnishing chain), or the vulnerable firewalls in the U.S. federal government system, nor need to worry about the impact on the system of possible theft by Morgan Stanley.
In the Bitcoin network, every ten minutes, just like the rhythm of a heartbeat in the network, transactions that occur in the Bitcoin network during this cycle will be confirmed, cleared, and stored on a block structure that is connected at the beginning and end, thus forming a chain. Each block has to confirm the facts of the previous block. This architecture is capable of stamping the value exchange activity with a permanent timestamp, so that no one can tamper with this ledger.
If you wanted to steal a bitcoin, you would have to rewrite the entire history of that bitcoin on the blockchain of everyone, which is essentially impossible. The blockchain is thus a distributed ledger that represents a consensus on the network – the ins and outs of every historical transaction are clearly recorded. As opposed to a worldwide Internet of information, the blockchain is a worldwide ledger of value. It is a distributed ledger that anyone can download and run on their own computer.
Some scholars believe that the invention of double-entry bookkeeping has allowed capitalism and nation-states to flourish. With custom programming, this new digital ledger for economic transactions can be used to record almost anything of value and importance to humans: birth and death certificates, marriage certificates, deeds and certificates of ownership, educational degrees, financial accounts, medical procedures, insurance reimbursements, voting, food traceability, and anything else that can be written and expressed in code.
This new platform can be used for real-time reconciliation (confirmation of facts) of most digital records. In fact, in the near future, billions of smart devices in the real world will be able to sense, respond, communicate and share vital information – from protecting our environment to managing our health information – they can do almost anything. An Internet of Things for connecting everything needs to rely on a ledger that can record everything (the ledger of everything). Business, trade and the economy need a digital clearing technology.
So, why should you care? We believe that facts enable us to achieve freedom and that distributed trust will have a profound impact on people in all walks of life.
As a music lover, perhaps you want to use art as a means of earning a living. As a customer, perhaps you want to know where the hamburger meat in front of you is coming from. As an immigrant, maybe you’ve had enough of the exorbitant fees involved in sending money to your home country.
As a woman from Saudi Arabia, perhaps you want to buy a fashion magazine. As a relief worker, maybe you need to identify the owner of a certain piece of land so you can help them rebuild their home after the earthquake.
As a citizen, maybe you’ve had a hard time with the lack of transparency and accountability of opinion leaders. As a social media user, maybe you feel that all the data you generate should be valuable to you and that your right to privacy cannot be ignored.
Innovators are creating blockchain-based applications for these areas of need. This is just the beginning.
We already know that it is possible to verify transactions without the need for a third-party institution. Now you may be thinking that since databases are often considered reliable asset stores, can’t databases do the same thing?
In blockchain, ledgers are used to keep an irrefutable record of those registered transactions that have been verified by the blockchain network. Let’s look at two scenarios for databases and blockchain ledgers.
When you open an account with a bank, you are effectively giving up real control of that account. The bank gives you the illusion that you have full access and control over your account.
Every time you want to access or make a payment through your bank account, it is because you have given the bank implicit and complete trust that the bank gives you explicit access. This is actually an illusion as well. Access to an account is essentially a reading of a database that keeps track of how much money you have in the bank.
You think you own the money, but that’s actually an illusion created by the bank. The database records how much money you have, and the bank owns the database, so the bank actually has a higher level of access.
Banks are complex, but simply put, I want to emphasize the fact that the bank has the ultimate level of authority to decide whether to accept or deny your request for access to the money you have in the bank. The same applies to any digital asset (stocks, bonds, marketable securities) that you place in a financial institution.
Take a look at how the blockchain works. In the simplest case, the same scenario in a blockchain does not present the complexity described above. A user can make a payment to another user through a specific wallet, and the blockchain network takes care of reviewing, verifying and completing the transfer, usually in less than 10 minutes, with or without a cryptocurrency exchange as an intermediary.
This is the most basic demonstration of blockchain magic. It’s also why I recommend that anyone who wants to apply blockchain first experience the transaction with their own wallet. You can do this by downloading an existing e-wallet app, or you can sign up for a bitcoin exchange near you to complete the transaction. Once you try it, you’ll be able to understand what it really means to not need a credit broker and start to question why we need them so far.
