What is crypto?
If you have tried to dive into this mysterious thing called blockchain, you will be forgiven for retreating in horror at the opacity of the technical jargon often used to compile it. So before we learn what cryptocurrency is and how blockchain technology can change the world, let’s discuss what blockchain really is.
Simply put, a blockchain is a digital book of transactions, unlike the books we have used for hundreds of years to record sales and purchases. The function of this digital ledger is almost identical to that of a traditional ledger, recording debits and credits among people. This is the basic concept behind blockchain; the difference is who keeps the book and who approves the transactions.
With traditional transactions, it involves a kind of intermediary to facilitate the payment process from one person to another. Suppose Rob wants to transfer 20 pounds to Melanie. He can either give him cash in the form of a £ 20 bill or use a banking program to transfer the money directly to his bank account. In both cases, the bank is the intermediary that confirms the transaction: Rob’s funds are checked when he withdraws the money from the ATM or checked by the program when making a digital transfer. The bank decides whether to continue the operation. The Bank also keeps track of all transactions made by Rob, and is only responsible for updating Rob when he pays or receives money from someone’s account. In other words, the bank keeps and controls the ledger and everything goes through the bank.
This is a big responsibility, so it’s important for Rob to feel that he can trust the bank, otherwise he won’t risk his money with them. He must be sure that the bank will not deceive him, that he will not lose his money, that he will not be robbed, and that he will not disappear overnight. This need for confidence supported almost every major behavior and aspect of the monolithic financial industry to such an extent that even during the 2008 financial crisis, when the banks were found to be irresponsible about our money, the government (another intermediary) allowed them to collapse. save them from the risk of destroying the last fragments.
Blockchains work differently in one main way: they are completely decentralized. There is no central clearing house like a bank and no central book in the hands of an institution. Instead, the booklet is distributed over a large computer network called nodes, each of which stores a copy of the entire book on its hard drives. These nodes are connected to each other through a piece of software called a peer-to-peer (P2P) client, which synchronizes information on the network of nodes and ensures that everyone has the same version of the accounting book at any time. .
When a new operation is added to the blockchain, it is first encrypted using the most modern cryptographic technology. Once encrypted, the transaction becomes something called a block, a term commonly used for a new group of encrypted transactions. The block is then sent (or broadcast) to a network of computer nodes, where it is checked by the nodes and, after verification, transmitted over the network so that the block is added to the end of the booklet on everyone’s computer, under a list of all previous blocks. This is called a chain, so the technology is called a blockchain.
The operation can be completed after confirmation and recording in the book. Cryptocurrencies like Bitcoin work that way.
Eliminate responsibility and trust
What are the advantages of this system compared to the banking or central clearing system? Why should Rob use Bitcoin instead of normal currency?
The answer is trust. As mentioned earlier, with the banking system, it is very important that Rob trusts his bank to protect and manage his money properly. To ensure this happens, there are huge regulatory systems in place to monitor the actions of banks and ensure that they are appropriate. Governments then regulate regulators, creating a kind of level control system whose sole purpose is to prevent mistakes and misconduct. In other words, organizations such as the Financial Services Authority exist precisely because banks cannot be trusted on their own. Banks often make mistakes and misbehave, as we have seen many times. When you have only one source of authority, power becomes abuse or misuse. The relationship of trust between people and banks is awkward and uncertain: we don’t really trust them, but we don’t feel they are very alternative.
Blockchain systems don’t need you to trust them. All transactions (or blocks) in the blockchain are checked by nodes in the network before they are added to the accounting ledger, ie there is no failure point and no single confirmation channel. If a hacker wanted to successfully break into a blockchain, he would have to hack millions of computers at the same time, which is almost impossible. The hacker will also not be able to bring down the blockchain network, because they still need to be able to shut down every computer in the network of computers around the world.
The encryption process itself is a key factor. Blockchains, such as Bitcoin, use deliberately difficult processes for verification procedures. In the case of Bitcoin, blocks are often checked in the form of puzzles or complex mathematical problems by deliberate processors and nodes that perform a series of time-consuming calculations, which means that the check is neither instantaneous nor accessible. The nodes that provide resources to check the blocks are rewarded with a transaction fee and a reward for newly minted bitcoins. It has the function of both encouraging people to become hubs (because the development of such blocks requires very powerful computers and a lot of electricity), and at the same time manages the process of creating or releasing currency units. This is called mining, because it requires considerable effort (in this case by computer) to produce a new commodity. This also means that operations are audited in the most independent way possible, more independently of a government-regulated organization such as the FSA.
This decentralized, democratic, and highly secure nature of blockchains means that they can operate without the need for regulation (self-regulation), government, or other non-transparent intermediaries. People work not in spite of each other, but because they do not trust each other.
Let it diminish for a while, and let the excitement around the blockchain begin to make sense.
Where things are really interesting are non-cryptocurrency blockchain applications such as Bitcoin. Given that one of the key principles of the blockchain system is secure, independent verification of transactions, it is easy to imagine other ways in which such a process can be valuable. Not surprisingly, many such programs are already in use or under development. Here are some of the best:
- Smart contracts (Ethereum): Probably the most interesting blockchain development after Bitcoin is that smart contracts are blocks that contain code that must be executed to execute a contract. The code can be anything, as long as the computer can execute it, but in simple terms, it means that you can use blockchain technology (with independent verification, unreliable architecture and security) to create a kind of savings system for any operation. you can use. . For example, if you are a web designer, you can create a contract that checks whether a new client’s website is up and running, and then automatically releases the funds to you. No more harassment or invoicing. Smart contracts are also used to prove ownership of an asset, such as property or art. With this approach, the potential to reduce fraud is great.
- Cloud storage (cloud storage): Cloud computing has revolutionized the Internet, which in turn has led to the emergence of Big Data, which ushered in a new AI revolution. However, most cloud-based systems run on servers stored on single-site server farms owned by a single entity (Amazon, Rackspace, Google, etc.). This presents the same problems as the banking system, because your data is managed by a single, non-transparent organization that represents a point of failure. The distribution of data over the blockchain completely eliminates the problem of trust and also promises to increase reliability, because it is very difficult to dismantle the blockchain network.
- Digital identification (ShoCard): Two of the biggest problems of our time are identity theft and data protection. Large centralized services such as Facebook, for example, store a lot of information about us, and the potential for abuse of our personal information by the efforts of various developed world governments to store digital information about their citizens in a central database is terrible. Blockchain technology offers a potential solution to this problem that can be verified by a blockchain network by gathering your basic information into an encrypted block and proving your identity. Its applications range from the obvious change of passports and identity cards to the change of passwords. This can be huge.
- Digital voting: Very relevant after a study of Russia’s influence in the recent US elections, digital voting has long been both unreliable and highly susceptible to fraud. Blockchain technology offers a way to verify the successful sending of a voter’s vote while maintaining anonymity. This promises not only to reduce election fraud, but also to increase overall voter turnout so that people can vote with their mobile phones.
Blockchain technology is still in its infancy, and most applications are far from common use. Even Bitcoin, the most established blockchain platform, is subject to great volatility, an indicator of its relatively new status. However, blockchain’s potential to solve some of the major problems we face today makes it an incredibly interesting and engaging technology. I will definitely pay attention.