What blockchain is in layman’s terms
Most likely, you have already heard about blockchain by now. Perhaps you did not pay much attention to it, considering it just another buzzword or a piece of IT jargon. But in fact blockchain is a breakthrough technology that is expected to alter most industries in the coming years. Whether you work in the financial world, healthcare or any other sector, you will probably face the consequences yourself soon enough. But what is really this thing you’re going to face?
Today we’ll try to explain blockchain in layman’s terms.
Blockchain is a distributed database existing on multiple computers at the same time. It is constantly growing as new sets of recordings, or ‘blocks’, are added to it. Each block contains a timestamp and a link to the previous block, so they actually form a chain. The database is not managed by any particular body; instead, everyone in the network gets a copy of the whole database. Old blocks are preserved forever and new blocks are added to the ledger irreversibly, making it impossible to manipulate by faking documents, transactions and other information.
All blocks are encrypted in a special way, so everyone can have access to all the information but only a user who owns a special cryptographic key is able to add a new record to a particular chain. As long as you remain the only person who knows the key, no one can manipulate your transactions. In addition, cryptography is used to guarantee synchronization of copies of the blockchain on each computer (or node) in the network.
You can think of blockchain as a digital medical record: every record is a block which has a label stating the date and time when the record was entered. The medical history is extremely important for diagnosis and treatment purposes, so neither the doctor nor the patient should be able to modify the records already made. Nevertheless, the doctor owns a private key that allows him to make new records, and the patient owns a public key that allows him to access the records anytime. This method makes the data both accessible and secure.
So, blockchain is by definition independent, transparent, and secure. The advantages of such a distributed ledger are obvious: being it cost and risk reduction, data security, or transactions transparency, companies from most industries can surely benefit from this new technology.
The idea itself isn’t new, though: it was originally outlined in a 1976 research paper New Directions In Cryptography, but for a long time it was regarded as complicated and not safe.
But in 2008 an unknown person or group of people known by the pseudonym Satoshi Nakamoto introduced Bitcoin —a simpler implementation of blockchain technology as a digital currency. Bitcoin became one of the first digital currencies to use peer-to-peer technology to facilitate instant payments. Thanks to blockchain, it also became the first digital currency to solve the problem of double spending. More importantly, Bitcoin seems to be controlled by absolutely nobody and unable to be manipulated.
The permanence, security, and distributed nature of Bitcoin made it one of the fastest growing assets. The growing popularity of Bitcoin attracted attention to its underlying technology. Now dozens of tech startups are rushing to produce the Next Big Thing based on blockchain, and more and more people working in finance and other sectors begin to recognize the practical benefits beyond the Bitcoin hype.
“Bitcoin the currency, I think, is going to go nowhere… the blockchain is a technology which we’ve been studying and yes it’s real,” — Jamie Dimon on CNBC.
So what are those benefits, exactly?
Today, we are all pretty much used to sharing information through a decentralized interactive platform — the Internet. But when it comes to sending money or other valuables we usually have to use the same old services provided by centralized financial institutions (i.e. banks). Sure, there are methods of making payments via the Internet (the most obvious example is PayPal), but they usually require integration with a bank account or credit card, otherwise they can not really be used.
Blockchain technology offers an attractive opportunity to get rid of this «extra link». It’s perfectly designed to take on all three most important roles of the traditional financial services: registration of transactions, identity verification and contracting.
That’s really promising, as the financial services industry is the world’s largest market in terms of capitalization. If some part of those services will switch to using blockchain, this will certainly disrupt the industry as we know it, but at the same time it will significantly improve the efficiency of those services. As transactions are completed directly between the parties with no intermediary and in digital form, settling a deal can be faster than ever. Add perfect transparency, traceability and security and you will understand what all the fuss is about.
Moreover, blockchain can be used not only for sending digital money but as well for tracking physical goods in a supply chain, helping companies to monitor their suppliers in real time.
But let’s go back to contracting. This particular feature can be very useful even outside the financial services sector. You already know that blockchain technology can also be used to store any type of digitalized information, including computer code.
With blockchain, you turn any contract into a program that will be executed only when both contracting parties enter their keys, thereby agreeing to a contract. The same program can track information from external data sources (i.e. stock prices, weather forecasts, news headlines and everything else that can be analyzed by a computer) and create contracts that will be automatically executed when certain conditions are met.
This mechanism is called «smart contracts», and the areas of their possible application are almost infinite. You can use smart contracts for all sort of situations from financial derivatives to insurance premiums to property rentals to legal processes to crowdfunding.
Let’s suppose you want to rent an apartment using smart contracts. You pay in cryptocurrency and, by a specified date, receive a digital entry key. If the key doesn’t come on time, the blockchain makes a refund, making sure you won’t lose your money. The key starts working exactly on the specified date and becomes useless when the rental period is over, so the landlord is safe, too. The system can not be fooled as it is witnessed by thousands of people.
The same approach can be used to control the use of intellectual property, determining how many times a user can access, share, or copy the information. It can also be used to create voting systems protected from falsifications, to help people access and receive information from diverse sources without censorship, and much more.
There are some challenges, of course, too, — the tech is still developing and its legal and regulatory status is uncertain. Other worries concern integration and universal adoption, as to be truly effective the platform would need to be implemented across all industries.
But the possibilities is so promising there can be no doubt that blockchain will become an integral part of our daily life in the very near future, and now might be the perfect time to benefit on it.