In this digital age, technology is at the heart of just about everything. It enables humans to value and to violate each other’s rights in profound new ways. The explosion in online communication and commerce is creating more opportunities for cybercrime. We still can't reliably establish one another's identities or trust one another to transact or exchange money without validation from a third party like a bank or a government. Trust is a major challenge, and understanding blockchain technology is the first step towards facing it.
To solve the problem of trust, a pseudonymous person or persons named Satoshi Nakamoto outlined a new protocol for a peer-to-peer electronic cash system using a cryptocurrency called bitcoin. This protocol established a set of rules in the form of distributed computations that ensured the integrity of the data exchange among billions of devices without going through a trusted third party. This seemingly subtle act set off a spark that has excited, terrified and captured the imagination of the banks, governments, insurance firms, private advocates, and journalists, to name a few. It appears that once again, the technological genie has been unleashed from its bottle.
This has never happened before - the trusted transactions directly between two or more parties, authenticated by mass collaboration and powered by collective self-interests, rather than by larger corporation motivated by profit. This protocol is the foundation of a growing number of global distributed ledgers called blockchains - of which the bitcoin blockchain is the largest. The function of blockchain explained simply is this—they enable us to send money or a value directly and safely from one person to another, without going through a bank, a credit card company, or PayPal. Rather than the Internet of Information, it is the Internet of Value! It’s a platform for everyone to know what is true - at least with regard to structured recorded information.
Big banks and some governments are implementing blockchains as distributed ledgers to revolutionise the way information is stored and transactions occur. Their goals are - speed, lowering cost, security, less errors, and elimination of central points of attack and failure. These models don't necessarily involve a cryptocurrency or payments. However, the most important and far reaching blockchains are based on Satoshi's bitcoin model. Understanding blockchain technology as it pertains to the bitcoin model can work as the basis for further and more diverse implementation:
Bitcoin or other digital currency is not stored in a file, it’s represented by transactions recorded in a blockchain - like a global spreadsheet or ledger, which leverages the resources of a larger peer-to-peer bitcoin network to verify and approve each transaction. Each blockchain is distributed - it runs on computers provided by volunteers around the globe, there is no central database to hack. The blockchain is public. Anyone can view it at any time because it resides on the network, not within a single institution. It is encrypted - it uses heavy-duty encryption involving public and private keys to maintain security.
Every ten minutes, like the heartbeat of the bitcoin network, all the transactions conducted are verified, cleared, and stored in a block which is linked to the preceding block, thereby creating a chain. Each block must refer to the preceding block to be valid. This structure permanently timestamps and stores exchanges of value, preventing anyone from altering the ledger. If someone wanted to steal a bitcoin, they would have to rewrite the coin's entire history on the blockchain in broad daylight. That's practically impossible. So the blockchain is a distributed ledger representing a network consensus of every transaction that has ever occurred. Like the World Wide Web of information, it’s the World Wide Ledger of value - a distributed ledger that anyone can download and run on their personal computer.
This new digital ledger of economic transactions can be programmed to record virtually everything of value and importance: birth and death certificate, marriage certificates, deeds, title of ownership, land registration, insurance claims, votes, and anything else that can be expressed in code. The new platform enables a reconciliation of digital records regarding just about everything in real time. Internet of Everything needs a Ledger of Everything.
With blockchain technology explained, it is easy to imagine the profound implications it may have in coming years, for many institutions. In five to seven years, the financial system may be unrecognizable!