As Albert Einstein once said:
“If you can’t explain it to a six year old, you don’t understand it yourself.”
Honestly I believe the concept of blockchain technology may be too complex for a six year old to understand, no matter how simply you explain it, but in the following article I will attempt to explain the concept of blockchain as simply as possible. In any case, I believe that any adult will be able to understand the explanation which follows, even if I don’t understand it as completely as I could.
The first thing I do need to say about blockchain is this:
Bitcoin is not blockchain.
That’s important to understand if you’re just beginning to learn about blockchain technology, Bitcoin and other digital assets and digital tokens.
Bitcoin is simply one expression of the utility of the blockchain. It was the first, and is the most well known currently, but there are more than 1,000 other digital tokens that have been created using blockchain technology (As of October 2017), and with the technology being so new there will likely be thousands more created in the coming years. In fact, 20 years from now it is completely possible that hardly anyone will be using Bitcoin.
But, back to blockchain.
What is Blockchain?
Blockchain as currently understood is an immutable distributed ledger system that seeks to improve on the security of traditional ledger systems, and as a result allows for increased trust in business or other transactions.
The blockchain technology was first explained and used to create Bitcoin in 2008 by an anonymous programmer or group of programmers going by the name of Satoshi Nakamoto. It is interesting to note that at the time the blockchain that created Bitcoin was simply designed as a way to overcome the double spending problem of digital currencies without using a central server. It was only later that others discovered that the blockchain technology could be used for many other applications.
Because blockchain is a ledger system it was first associated with financial transactions, as those most logically fit into the ledger concept. Since those early ideas it has been discovered that blockchain technology can be used in any industry where record keeping is necessary – which means pretty much every industry. Here is a sampling of the industries that are expected to benefit heavily from blockchain in the coming years and decades:
– Supply Chain
– Internet Based Platforms
– And any industry that would benefit from an immutable store of records.
The Blockchain Ledger
While you might not refer to it as such, you’re likely already familiar with the concept of a ledger. The most common example of the ledger is your bank statement. It is a recording of all the transactions in your bank account.
While it traditionally isn’t referred to as a ledger, you can see the same transactional recording in many other industries. For example, the company Carfax was built upon collecting all the records regarding automobiles. For example, the ledger for an automobile would consist of when and where it was manufactured, where it entered the country, which dealership sold it, the sale date, any accidents it was involved in, its maintenance history, etc.
Carfax was groundbreaking in as much as this information typically wasn’t available to buyers prior to the Carfax service, meaning buyers simply had to trust used car salesmen when buying a used car. And we all know how poorly that often worked out.
However, even with Carfax there are trust issues in buying a used car. The way records are currently kept means someone can easily tamper with records, changing ledger entries or even removing entries completely from the ledger. Say a car had been involved in a flood and later restored. You would want to know about this before purchasing the car, but in the traditional recording of a ledger the information could easily be removed from the cars’ history. Obviously you would overpay for such a car, and would probably run into issues later that would be unexpected.
The blockchain improves on the ledger system, making it impossible to tamper with the ledger, and thus increasing the level of trust in any transaction involving a blockchain ledger. There are other benefits to the blockchain ledger system such as:
– Decreased friction in transactions
– Lowered costs
– The removal of middlemen in transactions
The blockchain ledger improvement:
The ledger still contains all the same updates as in the traditional ledger, but with some very important improvements. The most important of these is the addition of a security key to each transaction or what are now known as blocks. This security key is where the “crypto” in cryptocurrencies comes in as it is generated by cryptography – we won’t get into the complex math behind this, but it is safe to say that these keys are each unique and unable to be broken or hacked. This makes each block in the ledger immutable or permanent and unchangeable.
The first block created is known as the genesis block and every block thereafter contains a hash that incorporates information from the previous block – hence the “chain” part of blockchain, as all the blocks are endlessly chained together. This creates additional security as any change in a block will be recognized by other blocks, and will need to be verified. But the real permanence of the blockchain comes from the next characteristic of the blockchain, which is its distributed nature.
The Distributed and Immutable Nature of Blockchain
With a blockchain technology like Bitcoin, the entire database of transactions is distributed. That is, it is copied to every single user running the blockchain protocol, and each copy is updated in real-time as new transactions are added to the ledger. This decentralized and distributed nature of the blockchain is what makes it so secure and immutable. Any change to any block needs to be verified by the entire distributed database, and if there is a discrepancy, the unproven change is discarded. In other words, once a transaction is recorded in the blockchain there is no way to change it or delete. It remains forever in the blockchain for anyone to see.
How Blockchain will Disrupt Traditional Business Models
This is extremely powerful in creating trust between parties, as well as a frictionless system of transactions. And it has the potential to free up massive amounts of capital. With a blockchain system in place to track transactions the need for third party intermediaries is heavily discounted. In the current state of affairs we use third parties extensively to facilitate trust in transactions. Think of title companies, financial services such as credit card companies, credit reporting bureaus, even your local bank is in many cases nothing more than an intermediary that serves to create trust between you and the opposite party in any transaction. These companies exist to do nothing more than keep records securely, and create trust between two parties in a transaction.
The blockchain will do away with all this because no more will you need a third party to verify that some piece of information in transactional history is correct. Additionally, the blockchain actually provides additional trust, because unlike our current traditional third party trust granting entities, there is no way to change the immutable blocks on the blockchain. It’s a game changer the likes of which hasn’t been seen since the introduction of the internet.