Originally created by an unknown individual – or group – going by the pseudonym Satoshi Nakamoto, the blockchain is essentially coding which allows for peer-to-peer transaction to be made, recorded and stored on an irreversible and transparent ledger. It is regarded by many to be the most disruptive technology since the internet. Whilst still in its infancy, blockchain technology is increasingly attractive to start-ups looking for new means of conducting business across the globe.
So how does it work?
The best way of explaining blockchain is to use an example:
- An individual (Party A) tries to buy a gift from a local shop (Party B);
- The intended transaction for the gift is entered into the blockchain software i.e. Party A wants to send £X to Party B;
- The network of computers who all run the same copy of the blockchain software (called nodes) receive this information and work to confirm the transaction is legitimate i.e. that Party A actually has £X in his account to spend and wants to do so;
- The process of confirming the transaction involves these nodes following a set procedure and being rewarded for their work (most often in the form of a nominal transaction fee);
- Once confirmed, the details of that transaction are pooled together with other confirmed transactions into what is known as a ‘block’ (think of a block as a sort of spreadsheet containing information on several transactions);
- Using cryptography the block is then timestamped and linked to the previous block of transactions, extending the overall length of the chain (hence the name ‘blockchain’);
- This process repeats and the blockchain continues to grow.
The notable factor in this example is the lack of an influential third party. Nodes do not care for the amount being spent (other than to confirm the buyer has the amount they need for the sale), what item is being purchased, or who or where the parties are. They work purely to validate the transaction.
Why should you be interested?
Peer-to-peer transactions
Blockchain allows for instant worldwide peer-to-peer payment via virtual currency i.e. cryptocurrency. Imagine you work abroad and hope to send a proportion of your salary back to a family member in your home country. Traditionally organisations such as Western Union facilitate these payments. However the transfer can take days to be processed and only after you’ve incurred a hefty fee. Within a country, the closest we have to peer-to-peer payments is via mobile apps i.e. Chinese-based WeChat. Nonetheless, this is little more than an interface for your centralised bank account and fall short of being accessible to the masses (i.e. if you work abroad you may not meet the requirements to create a bank account). On the other hand blockchain technology allows for instant and secure transfers of money without the need for any intermediary or bank account, opening the door to a much broader pool of users.
The concept can be taken a step further. Take the Australian start-up Power Ledger (POWR). A peer-to-peer energy trading platform, POWR aims to incentivise people to make better use of renewable energy by facilitating the sale of surplus energy supplies (i.e. via privately owned solar panels). POWR’s blockchain-based solution connects with smart meters and records the output in terms of electricity that is being generated, as well as when somebody purchases or consumes electricity elsewhere. In essence, consumers become peer-to-peer energy suppliers. Landlords are significantly more likely to invest in solar panels if they know that not only will their tenants have cheaper utility bills (thereby making the property more attractive) but excess energy can generate further income.
Decentralisation
The blockchain software is decentralised in terms of both politically (no single person controls it) as well as architecturally (no central server runs it). Every user of the blockchain stores the same copy of the ledger thereby removing a single point of attack for any would-be hacker. Take Bitcoin – its blockchain confirms transactions via a ‘Proof of Work’ algorithm. This mechanism relies on more than 50% of all nodes agreeing on a transaction before it is added to the blockchain. A fraudulent party would therefore have to infiltrate more than 50% of all nodes in order to confirm a fraudulent transaction and prevent others from doing the same. Intention and ability aside the energy and equipment needed to perform such an attack has been estimated to be in the region of $2.5 billion USD.
So whilst in theory it would be possible, the reality is that an attack would be extremely unlikely.
Transparency
One of the most influential and disruptive ways that blockchain technology may disrupt ordinary life is during elections. When verified (perhaps via national ID cards) members of the public can vote for their chosen candidate as a sort of transaction. A voter sends their single ‘token’ to their chosen candidate’s wallet, with the winner being decided by which candidate receives the most tokens. The outcome will be undeniable; everyone will be able to view the registered votes (although not the voter’s name) and ensure that the votes have not been removed or altered in any way.
Smart Contracts
Through specific coding, agreements can be automatically signed and enforced on a blockchain. As an illustration, think of the sale of a property. In simple terms you as a buyer want to make sure that the seller is the actual owner of the property and that there are no reasons why the property cannot be brought (or enjoyed in the way you thought). The seller only wants to transfer ownership of the property after receiving the agreed funds and the buyer will only send that amount if he thinks the property he receives will be free from any encumbrance i.e. the seller’s mortgage. Using a smart contract, coding could stipulate that funds should only be transferred upon the mortgage holder confirming that the seller’s mortgage has been discharged. Upon that information being provided and verified on the relevant blockchain, funds and ownership can be simultaneously transferred to each party without the need for third party involvement.
Despite all of the hysteria surrounding Bitcoin and related cryptocurrencies, there are few who suggest that blockchain will not remain. If applied correctly, it has the capability to transform the way that people and organisations communicate and conduct business. 2018 will most certainly be an interesting year for blockchain and its development, and an increasing amount of start-ups
Note: the use of blockchain extends far beyond those outlined in this article including: logistics, humanitarian aid, education, auditing, business management, loan services, entertainment, etc.
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