To begin the book on blockchain we must flashback to the year 2007.
The global economic crisis was beginning to take root. House prices were falling dramatically as the US sub-prime mortgage industry’s bubble well and truly burst. People started defaulting on their secured finance after years of irresponsible lending and borrowing now began to yield the inevitable consequences. Trust in the banking sector had hit a new low, and people were desperate for an alternative.
Into this vacuum stepped a mysterious individual (or organization) named Satoshi Nakamoto. Nakamoto came up with a revolutionary new concept – a digital payment network which required no centralized trust (i.e. a bank) to authorize and guarantee peer-to-peer transactions.
The result of this concept was the world’s first cryptocurrency – Bitcoin. Users of this revolutionary new currency were the sole owners of their digital assets (as opposed to the Federal Reserve or the Bank of England, for example) with no single point of failure.
And it was (and still is) all made possible by blockchain technology.
Blockchain is a new way of transmitting money across a computerised network – as well as a means to store data in a transparent and unalterable way – and is what makes cryptocurrencies such as Bitcoin possible. Many people use the terms “blockchain” and “cryptocurrency” synonymously, but this is a common mistake. Blockchain underpins cryptocurrencies – but there are in fact many more applications for this revolutionary technology.
Blockchain acts as a digital and decentralized public ledger which records and authorizes transactions (we’re going to use the word “transactions” a lot in this article, but it should not be taken to refer exclusively to financial interactions). A “block” refers to a single transaction. Once a transaction has been authorized by a user, it is entered into a permanent database which provides a public record of every stage, or block, in the history of that transaction – hence, blockchain.
(Image source: blockgeeks.com)
Each block in the chain is connected to all the others in chronological order by containing a hash of the block which precedes it. Hashing uses a complex algorithm which provides an immutable record, rendering any changes to the blockchain immediately apparent, and thus significantly reducing the opportunity for cybercriminals to distort the transactions.
Take the following three words as an example:
You can see that, even though only a single character in each word has changed (from upper to lowercase (i.e. “Bitcoin” to “bitcoin”), and from an alphabetical character to a numerical one (i.e. “bitcoin” to “bitco1n”)) the hash sequence has altered dramatically. This means anyone involved in a blockchain transaction can be confident that the chain has not been interfered with, for the hash will immediately flag up any errors or fraudulent alterations that have been made.
Other data recorded in the blockchain includes the “blockindex”, which tracks the total number of blocks in the chain to date, the “timestamp”, which records the time and date of each transaction, the public key of the receiver, and the address of the sender.
The validity of cryptocurrency as the next generation of currency is still very much up for debate, with supporters declaring it to be the ”biggest thing since the internet,” while its detractors label it a bubble set to burst. However, blockchain technology has numerous applications beyond financial interactions.
For example, in the procurement industry, blockchain technology can be employed to securely track the progress of shipments. Cargo can be scanned at every step of the shipping process, with each incidence of scanning creating a block in the chain. Inbuilt sensors in the shipping containers can record the environmental conditions within and report the data to a central platform. This means, should anything go wrong with the shipment, the point where the incident occurred can be accurately traced.
“Creating consistent traceability of goods will remain a major objective for future supply chains,” said Management Consultant for Digital Supply Chain Management at Capgemini Consulting, Daniel Heinen. “To achieve transparent and reliable documentation of all transactions, end-to-end communication in supply chains must be taken to a new level of maturity. Most networks already fail at the creation of communication or data exchange between the members as well as on legal questions about data sovereignty.”
The main barrier to blockchain technology is that each block needs to be stored on a computer. This means that as the chain grows, the amount of memory required to store the information increases exponentially, which has implications both in terms of practicality, and the ecological impact of the amount of hardware required.
Regulation of blockchain is something currently being discussed by lawmakers around the world who want to ensure the technology has the same rules for all users, and accountability for errors and breaches, without losing its inherent advantages.
The security of blockchain also has a big question mark against it. If the tools used to create a blockchain become compromised, then the cybercriminal responsible would control the network in its entirety and could alter transactions freely. The Bank of England, the Federal Reserve and the Bank of Canada are presently conducting investigations into blockchain security.
While the jury is still very much out on Bitcoin and the blockchain technology which underpins it, it is certainly interesting to follow the story. With applications beyond cryptocurrency, it’s likely blockchain technology will be around in one form or another for many years to come.