Created by the infamous Satoshi Nakamoto, blockchain tech has, unequivocally, become a framework for a whole new digital society led by financial technology. As Bitcoin began to make a name for itself and cryptocurrencies alike, more people asked the crucial question: how does blockchain work?
“An Open, Decentralised and Distributed Ledger”
In layman’s terms, blockchain technology is exactly what it says on the tin — a digital ledger designed to hold data in the form of a chain of blocks.
With regards to cryptocurrency, each block holds certain information about a unique transaction. This information will include a timestamp on when the transaction took place and the actual transaction data itself. To form the chain that links the blocks together, every block will also contain the output of a hash function that has been applied to the previous block. Put simply, a hash function is a mathematical algorithm applied to an input to produce a unique output called a checksum.
A blockchain is public so anyone can access the information contained inside the blockchain. It is controlled by a peer-to-peer network which is a collection of devices, referred to as nodes, that all have equal privilege. As a result of this, the blockchain will be decentralised. Therefore, a central authority does not manage the blockchain, but rather the network of nodes has to reach a majority consensus. Putting this into practice, the process is launched when a transaction is made, and a block is created containing the relevant transaction data. Through the peer-to-peer network, the transaction is then verified by the nodes until a consensus is reached. After being validated, the block is added to the chain that is distributed and updated regularly across the network of users.
The Security of Blockchain
Theoretically, blockchain technology can be secure, authentic and reliable, but the implementation must be correct. Many people believe that a blockchain cannot be altered; however, this is not technically true. Blockchain isn’t immune to modification – it is just extremely difficult. As the blockchain is distributed throughout the network of equally privileged users, modifying one of the blocks already connected in the chain requires a user to take possession of over half of the nodes in the network. They must then alter the block as well as the successive blocks within a small period of time, which is almost next to impossible. Overall, the assumption is that the greater and more distributed the network of users is, the more reliable the blockchain is.
On another note, while the data being public and accessible across, potentially, thousands of nodes increases transparency, there is the issue of data privacy. Understandably, blockchains only store data that isn’t of much value. However, the publicity of the information makes it susceptible to pattern recognition and data analysis, which can uncover private knowledge that was even encrypted.
Where is Blockchain Heading?
While blockchain technology shows promise, we must question whether the strengths outweigh the weaknesses. Originally devised for the popular cryptocurrency Bitcoin, other industries are now looking at ways to capitalise upon the concept of blockchain technology by providing their own implementation that goes beyond the financial market.
Scalability of blockchain is definitely a long-term issue that companies must think about. As a blockchain grows, the volume of data will increase. This means that on the peer-to-peer network, once a node reaches capacity, it will be difficult to consistently accommodate more transactions. Therefore, smaller start-ups may struggle to acquire resources that will keep scalability favourable, especially compared to larger companies such as IBM, who have launched their own Blockchain Platform. This was demonstrated by the blockchain game, CryptoKitties, which created significant traffic for the Ethereum network as approximately 30% of all transactions on the network were because of the game.
Projects such as Ethereum leverage the functionality and concept of the blockchain technology to facilitate the programming of smart contracts, which are automated contracts that execute when specific instructions are met.
Believe it or not, blockchain can also hold a place within future elections and politics. Using the transparency and accessibility of blockchain technology, results of poll-taking and elections could be distributed; thereby, bringing a new level of clarity to something usually shrouded in conspiracy and obscurity. Additionally, it eliminates the possibility of election fraud by making a vote equivalent to a block that cannot be tampered with.
One benefit to blockchain technology is “cutting out the middleman”, consequently removing transaction fees from intermediaries by enabling direct peer-to-peer payments between parties. Blockchain technology can certify the origin of products and intellectual property, thus allowing for copyright protection and the usage of smart contracts to automate the sale of property.
The healthcare industry can also take advantage of blockchain technology to store a patient’s medical records. Once created, signed and linked to the rest of the blockchain, they can also be encrypted using a private key only available to trusted individuals, ensuring data privacy as well as confidence that the record cannot be altered.
According to Deloitte’s 2020 Global Blockchain Survey, 41% of 1000 surveyed companies across 7 countries were presumed to install an application supporting blockchain technology within the next 12 months. That being said, 34% had concerns about adopting blockchain technology due to concerns over sensitivity of proprietary information as well as potential security threats.
While blockchain technology’s key pillars of immutable and encrypted data blocks can clearly flag any attempts to modify data, it must be understood that the application and integration of blockchain is still fairly new to many industries looking to utilise its strengths. Security is usually assured through robust architecture, thoroughly researched design and protected policies. Therefore, companies should adhere to this when thinking about integrating the technology into their system while ensuring stability and protection for the consumer.
Ultimately, the statement still stands – blockchain technology will make corporate and government processes more efficient, protected and authentic as long as the execution is accurate. Although there are still steps to be taken before it is mass integrated into daily systems, there is no question that blockchain will eventually become a key part of this new technology-driven society, but only if people work to make this concept into a reality.