Blockchain technology has been the craze of the past year. But how does it work exactly? To put it very simply, blockchain is an automated bookkeeper that registers transactions on a distributed database. With this technology, the control of transactions does not require a trusted third party, like a bank or clearing house. This is done automatically, in a decentralized method by using the resources of a P2P network.
There is no master copy; instead each node of the network holds a copy of the blockchain (or database). When a new set of transactions needs to be recorded, all the nodes check the consistency and validity of the data. Once a consensus is reached, meaning that at least 51% of the nodes have validated the transaction, the blockchain is updated.
One of the main advantages of a distributed network is that it is reducing the risk of centralized corruption or failure. With today’s means, it is considered impossible for a hacker to corrupt data on a blockchain.
Is blockchain the new internet?
The internet itself has proven to be durable for almost 30 years. It has a track record that bodes well for blockchain technology as it continues to be developed. Information held on a blockchain exists as a shared database. The blockchain database isn’t stored in any single location, which means the records it keeps are truly public and easily verifiable. This type of technology bodes well for business processes which include multiple actors using public data. Picture a spreadsheet being duplicated thousands of times across a network of computers. The blockchain concept allows to regularly view and update this spreadsheet.
But we already had Bitcoins?
Bitcoin is the first blockchain, created in 2009. But there are an estimated 700 cryptocurrencies (Bitcoin-like exchangeable value tokens) already available. A range of other potential adaptations of the original blockchain concept are currently active or in development. Every node in the blockchain is an administrator and joins the network because it wants to. However, each node has an incentive for participating in the network: the chance of winning Bitcoins. Nodes are said to be ‘mining’ Bitcoin, but this is actually not fully correct. Each node is competing to win Bitcoins by solving computational puzzles.
The objective of Bitcoin was to initially record all transfers of the cryptocurrency done between people. But other projects have come up with fascinating use cases. For example, the Ethereum blockchain records “smart contracts”. A smart contract is actually a computer program, executed automatically once a set of criteria are met. For example, a farmer could have a smart contract with an insurance company in case of droughts. Once an agreed number of days without rain is reached, the insurance automatically pays compensation to the farmer. Blockchain technology ensures that the contract has not been tempered with and that the met execution criteria are validated.
Combined with the concept of smart contracts, and the use of information security technology to ensure privacy, blockchain could be used in multiple business applications, especially in the ones that require the interaction of multiple actors: sharing economy (Airbnb, Uber,…), crowdfunding, healthcare, supply chain, voting, Internet of things, data management… And many more to come as this technology is getting more widely used and known.
As blockchain technology is switching from theory and unknown territory to big market players showing interest in it, it is only a matter of time until its full potential spreads worldwide. If you don’t want to be the last one jumping on the bandwagon, be sure to keep your eyes open and your virtual wallets ready.