It took several years after the appearance of Bitcoin for people to notice that its blockchain might have greater potential than supporting digital currencies. But what is blockchain and its underlying technology? In a nutshell, the blockchain essentially represents a secure ledger. This ledger acts as a network that records and stores data transactions of any type.
Developers throughout the world have now realized the blockchain’s potential and are thus using it to revolutionize a variety of industries. In this article, we will uncover how the blockchain works, its multiple uses, and the challenges the technology faces. Most importantly, we will define how the blockchain is changing the world, while also addressing both its short-term and long-term future.
Exploring Blockchain In-depth
The first implementation of blockchain technology was brought about by Bitcoin’s creator, or creators, called Satoshi Nakamoto. At the time, Nakamoto designed the blockchain to allow for Bitcoin’s implementation. It worked as a distributed ledger that would permanently record and secure Bitcoin transactions for the purpose of ensuring decentralization, quick transactions, and low transfer fees.
Because of all this, and before we dive too deeply into our Blockchain tutorial, we first need to understand Bitcoin and what made the digital currency so appealing. As Marc Andreessen said, “Bitcoin gives us, for the first time, a way for one internet user to transfer a unique piece of digital property to another internet user, such that the transfer is guaranteed to be safe and secure. Everyone knows that the transfer has taken place, and nobody can challenge the legitimacy of the transfer. The consequences of this breakthrough are hard to overstate.”
How Does the Blockchain Work?
Blockchains are shared databases coexisting on a network of computers, where you can only add data, not modify it. To understand how this technology works, it’s important to mention that most implementations are based on three key elements: cryptography of private keys, a distributed and decentralized network with a shared data ledger, and a user incentive for network maintenance.
The Private Keys System
All people who choose to transact on the blockchain will need a public key and a private key. The combination of the keys is used to obtain a secure digital identity reference, which can then be used as a highly secure digital signature, providing data ownership control to its users, alongside the ability to authorize transactions. In the case of the Bitcoin blockchain, the sender needs to log in to his wallet via the private and public key before making a transfer.
The Decentralized Network
By storing the blockchain on a multitude of computers, network participants rely on mathematical verification to check whether a transaction has been sent. This creates a trustless form of proof, where the entire network supports your transaction claim. The protocol also ensures that past transactions won't change, thus keeping the chain secure. As such, any modification to past transactions or the network in general requires a majority consensus.
Additionally, via the decentralized network, transactions are publicly available and are accessible by any interested party, therefore increasing the network’s transparency. The decentralized network is also relevant in the realm of Bitcoin casinos, as it allows the implementation of a provably fair protocol, meant to verify that casinos aren’t cheating players.
But why would people choose to invest their computer’s processing power in sustaining the blockchain network? With most public blockchains, the network offers node owners and miners a form of incentive. In Bitcoin’s case, miners earn what’s referred to as the block reward, which is currently 12.5 BTC, for solving the transaction block’s complex mathematical equation, thus verifying its authenticity.
Together, these three components create the blockchain network, which can be leveraged for a variety of purposes beyond digital currency transactions.
At this moment in time, thousands of companies throughout the world are testing the blockchain. Everyone is applauding its massive potential, yet apart from cryptocurrencies, we don’t really deal with the network in our daily lives. The reasoning behind this is that blockchain technology is still dealing with a few challenges, some of the main ones being the following:
Due to their build, blockchains can encounter trouble when processing a large number of transactions. The issue is especially pressing in the case of digital currencies, where coins such as Bitcoin have faced massive jams on the blockchain ledger, thus leading to considerably lower transaction speeds, followed by increased processing fees.
Currently, there are several solutions for the scalability concern, but they can’t help with all implementations of the technology. Further research awaits before all types of blockchain can scale efficiently.
A blockchain requires a massive amount of energy to work. This is mostly due to the energy-inefficient consensus algorithms that are employed by cryptocurrency blockchains. A world powered by the technology will also increase pollution, so green solutions must be implemented to reduce environmental impact.
Why is security a challenge? Haven’t we said that blockchains are immutable and secure? They are—as long as the attacker doesn’t control more than 50% of the total mining power. If they do, they hold the key to consensus and are able to modify the network however they wish.
This is why some blockchain experts believe that a set of standards has to exist for all blockchains, to ensure that a miner holding 50% of the mining power can’t wreak havoc. It’s like owning stock. Having over 50% gives you majority, hence the freedom to do as you please.
What Is Blockchain Used for, and How Will It Be Used in the Future?
The Token Economy
Apart from facilitating cryptocurrency transactions from A to B, the blockchain can create a worldwide token economy. During the last couple of months, numerous blockchain-based start-ups have entered the digital market, promising revolutionary solutions to everyday problems.
This led to the creation of the ICO market, where start-ups distribute tokens to investors in exchange for the pooled capital. These tokens can hold both value and utility. As such, users can choose to hold and trade tokens for profit generation purposes or use the tokens to get access to the services provided by the token issuer.
So far, numerous research papers have been written on the potential of blockchain technology for the healthcare industry. This is so due to the fact that blockchain can literally save lives. To put things into better perspective, the healthcare system is currently dealing with a plethora of issues, including high patient numbers, long hours for staff, a lack of data interoperability integration systems, increasing prices, security risks, and more. These issues are basically lowering the quality of healthcare and making it harder for patients to get the treatment they need.
In this regard, blockchain technology can act as a standardized database for improving record keeping and data interoperability. Allowing health workers and doctors to easily access the health records of patients can lead to smarter medical decisions, especially in emergency situations. This data can include information about past and ongoing medical conditions, blood type, and any medications the patient is currently taking.
The blockchain can also ensure better supply-chain management for the industry. Via the distributed ledger, hospitals and pharmacies can easily keep an inventory of the available drugs and medical equipment. Lastly, the blockchain can also handle several of the industry’s administrative aspects, such as insurance claims, funding, fraud detection, and payment options.
As part of our “Blockchain for Dummies” guide, we need to talk about the the tech’s administrative potential. Governments throughout the world can leverage this technology to create massive administrative reform. As such, some of its uses in this niche include identity management, submission of records, and taxation.
- Identity Management
People verify their identity in various ways on a daily basis. The blockchain can provide an easy-to-use identifier, thus opening up a sea of possibilities. On the other hand, government documents can be easily falsified, thus allowing scam artists to open bank accounts, purchase products on credit, or travel to another country. The blockchain, by definition, introduces an effective identity-management system, thereby preventing fraud, document falsifications, and identity theft.
- Submission of Records
By utilizing the distributed ledger, the authenticity of numerous documents, including death, marriage, or divorce certificates, can be verified. The blockchain can also verify documents legalizing the transfer of property or authorize other operations, such as land or vehicle registration. Through this method, bureaucracy will improve, saving citizens time.
- Tax Reporting
In most countries, tax reporting is quite difficult, due to confusing guidelines and a lack of public education on the matter. Implementing a blockchain-based tax reporting system would make the process easier for both citizens and state authorities.
Improving the Energy Industry
What is blockchain in relation to improving the worldwide energy market? The last couple of years have increased this market’s complexity—rising concerns over pollution, alongside increased prices and old grids, are encouraging innovation.
For this niche, the blockchain can facilitate the appearance of electricity-trading markets and help increase efforts to fight pollution. An energy-trading platform would allow individuals to purchase excess energy from one another at a lower price. It would also make electricity grids more competitive, thus encouraging innovation and lower prices. As such, when having blockchain technology explained, it is essential to mention its eco-friendly potential.
The blockchain is the backbone of smart contracts, which are part of an exciting trend. For those who don’t know, smart contracts are digital agreements that self-execute when both parties meet a set of conditions. There are numerous advantages to the use of smart contracts—which were first implemented on the Ethereum blockchain—and these include transparency, clear communication between the signing parties, accuracy, efficiency, security, and storage.
An elementary example of a smart contract would be: Person A, who resides in the UK, would like to sell his house to person B, who lives in the US. They can’t meet for payment and contract signing, so they create a smart contract. Once B sends the funds, both parties automaticaly sign the contract, thus transferring ownership of the house to person B.
Blockchain development is still underway, so we can expect smart contracts to stick around. In the future, governments will work on a regulatory framework that legalizes the use of smart contracts in a variety of settings. Before this happens at a legal level, smart contracts will help to make a variety of digital processes more efficient, especially in the realm of digital currencies.
Voting and Governance
This is especially relevant to companies holding ICOs or those under public ownership. So what is blockchain when it comes to business decisions? By implementing the blockchain, shareholders can easily vote on important decisions or deals. The blockchain will ensure that votes weigh as much as they should and that no shareholder can cheat the system. This governance system is applicable in a variety of industries and can support a democratic method of decision making.
The Future of Blockchain Technology
In the future, many of the blockchain applications discussed so far will likely come true. As such, the blockchain will be yet another layer of our daily lives, just like the internet. Many experts believe that the future of technology will consist of the blockchain, artificial intelligence, and big data. As the blockchain scales and as people start using it throughout the world, we will see a widespread distribution of data models. We will also see a standardized regulatory framework, DLT government systems, and an increase in automation.
In the short-term, however, we will notice a shift from companies researching and trying out blockchain tech to actual implementations beyond using cryptocurrencies. The process will likely ride on a new increase in the popularity and prices of digital currencies, thus once again increasing awareness and preparing the public for what’s next. So now there’s an answer when you’re asked, What is blockchain? It is the future.