The world may be fascinated by the potential for financial, political and societal change offered by blockchain technology. But the fact remains that the underlying innovation is simply a new kind of database.
A blockchain is a ledger – a collection of financial accounts – distributed across different computers that are located either on the internet or on a private network. It contains a comprehensive set of security checks and balances. This security is automatic, removing the need for a central authority. A blockchain is built to be trusted, even if the organizations or individuals need not be.
Part of the appeal to developers is the simplicity of the system. At its most basic, entries on the ledger (the unique ID of the person executing the transaction, the unique ID of the recipient, and the amount involved) are recorded. Each of these events is signed as secure using encryption technology developed and still in use by the United States’ National Security Agency (NSA).
These signed entries are collected into ‘blocks’ of software code, which are then given another layer of encryption security using NSA technology. The blocks are added together in a sequence to become a blockchain.
Once a block has been added to its blockchain, it is impossible to change the data contained within it without invalidating every entry that follows, giving the blockchain a permanence that would be impossible to achieve with a traditional, centralized database.
The different computers hosting the blockchain, known as ‘nodes’, are designed to listen for digital signals that indicate a transaction has taken place that should be added to the blockchain.
If a criminal tries to forge or hack a transaction via a node under their direct control, other nodes in the network compare the false data to their own records and recognize it. It is therefore rejected from the blockchain automatically.
The first blockchain was proposed as part of a now-famous white paper describing Bitcoin, released in 2009 by the individual or group known as Satoshi Nakamoto. It is assumed by most that Nakamoto is an alias, as he, she or they have not revealed their true identities to the public to date.
It did not take long for the computer software community to see the potential to create a variety of distributed networks of trust using blockchain. Their usefulness is being tested across many different aspects of human endeavor, and an industry has quickly emerged to capitalize on these opportunities.
A second generation of blockchain technology emerged soon after Bitcoin. Software developers found a way to include ‘smart contracts’ in their systems. Initially, these were simple if/then functions like ‘If there is ‘x’ amount of currency on the ledger, apply an interest rate of ‘y’. Regardless of the function, the important thing remains that these contracts are also secure and trusted.
This removes so-called ‘friction’ in the system, and allows processes and finances to flow smoothly. This second wave was lead by Ethereum, an open-source project that builds on the original plans put forward for Bitcoin, but with key advances and improvements.
The blockchains of 2018 are effectively autonomous, trusted, cloud-based computers. The next big developments in blockchain technology range from simple improvements like faster transaction times, to blockchains communicating directly with blockchains: An internet of automated, trusted cloud computers executing billions of transactions with no human intervention.