If you’ve tried to dive into this mysterious thing called a blockchain, you’ll be forgiven for backing away in horror at the sheer opacity of the technical jargon often used to frame it. So before we get into what cryptocurrency is and how blockchain technology can change the world, let’s talk about what blockchain actually is.
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Simply put, a blockchain is a digital book of transactions, unlike the books we have used for hundreds of years to record sales and purchases. The function of this digital book is actually quite identical to a traditional book in that it records debits and credits between people. This is the core of the concept behind blockchain; the difference is who keeps the book and who checks the transactions.
In traditional transactions, payment from one person to another involves some kind of intermediary that facilitates the transaction. Let’s say Rob wants to transfer £ 20 to Melanie. He can give her cash in the form of a £ 20 banknote or he can use some kind of banking application to transfer money directly to her bank account.
In both cases, the bank is the intermediary that verifies the transaction: The slave’s funds are checked when the money is taken out of the ATM or the application checks them when the digital transfer is made. The bank decides whether the transaction will continue. The Bank also keeps records of all transactions made by Rob and is solely responsible for updating them whenever Rob pays or receives money into someone’s account. In other words, the bank holds and controls the book and everything flows through the bank.
It’s a big responsibility, so it’s important that Rob feels he can trust his bank, otherwise he wouldn’t risk his money with them. He must be sure that the bank will not deceive him, will not lose money, will not be robbed and will not disappear overnight. This need for trust has supported almost every major behavior and aspect of the monolithic financial industry, to the extent that even when it was discovered that banks were irresponsible with our money during the 2008 financial crisis, the government (second intermediary) decided to save them , instead of risking destroying the final fragments of trust by letting them collapse.
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Blockchains work differently in one key respect: they are fully decentralized. There is no central clearing house like the bank, nor is there a central ledger kept by one entity. Instead, the book is distributed through a vast network of computers, called nodes, each of which contains a copy of the entire book on its hard drives. These nodes are connected to each other through a piece of software called the peer-to-peer (P2P) software, which synchronizes data across a network of nodes and ensures that everyone has the same version of the general ledger at any point in time.
When a new transaction is entered into the blockchain, it is first encrypted using state-of-the-art cryptographic technology. Once encrypted, a transaction is converted into something called a block, which is basically a term used for an encrypted group of new transactions. This block is then sent (or broadcast) to a network of computer nodes, where the nodes verify it and, after verification, forward it to the network, so that the block can be added to the end of the book on everyone’s computer, below the list of all previous blocks. This is called a chain, so the technology is called a blockchain.
After approval and entry in the general ledger, the transaction can be completed. This is how cryptocurrencies like Bitcoin work.
Responsibility and removal of trust
What are the advantages of this system over the banking or central clearing system? Why would Rob use Bitcoin instead of normal currency?
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The answer is trust. As already mentioned, it is crucial for the banking system that Rob trusts his bank to protect his money and treat it properly. To ensure this happens, there are huge regulatory systems that check the performance of banks and ensure that they fit their purpose. Governments then regulate regulators, creating a system of check levels whose sole purpose is to help prevent mistakes and misconduct.
In other words, organizations like the Financial Services Authority exist precisely because banks cannot be trusted on their own. And banks often make mistakes and behave badly, as we have seen too many times. When you have one source of authority, power is often abused or abused. The relationship of trust between people and banks is uncomfortable and insecure: we don’t really trust them, but we don’t feel there is much alternative.
Blockchain systems, on the other hand, don’t need to be trusted at all. All transactions (or blocks) in the blockchain are verified by nodes in the network before being added to the book, which means that there is no fault point and no authorization channel. If a hacker wanted to successfully tamper with a book on blockchain, they would have to hack millions of computers at the same time, which is almost impossible. Hackers also would largely not be able to crash the blockchain network because, again, they should be able to shut down every single computer in a network of computers distributed around the world.
The encryption process itself is also a key factor. Blockchains like Bitcoin use deliberately difficult processes for the verification process. In the case of Bitcoin, blocks are checked by nodes that perform a deliberately processor- and time-intensive series of calculations, often in the form of puzzles or complex mathematical problems, meaning that the check is neither instantaneous nor available.
The nodes that bind the block verification resource are rewarded with a transaction fee and the benefits of newly minted Bitcoins. This has the function of encouraging people to become nodes (because processing such blocks requires quite powerful computers and a lot of electricity), while also controlling the process of generating – or minting – currency units. This is called mining because it involves considerable effort (in this case a computer) to produce new goods. It also means that transactions are verified in the most independent way possible, more independent of a government organization like the FSA.
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This decentralized, democratic, and highly secure nature of blockchains means that they can function without the need for regulation (they are self-regulating), government, or other opaque intermediary. They work because people don’t trust each other, but in spite of it.
Let the significance of that sink in for a moment and the excitement around the blockchain starts to make sense.
Things that are getting really interesting are blockchain applications outside cryptocurrencies like Bitcoin. Given that one of the fundamental principles of a blockchain system is secure, independent transaction verification, it is easy to imagine other ways in which this type of procedure can be valuable. Not surprisingly, many such applications are already being used or developed. Some of the best are:
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- Smart contracts (Ethereum): Probably the most exciting blockchain development after Bitcoin, smart contracts are blocks that contain code that must be executed in order for a contract to be fulfilled. The code can be anything, as long as the computer can execute it, but in simple words it means that you can use blockchain technology (with independent verification, untrusted architecture and security) to create a kind of escrow system for any type of transaction. For example, if you’re a web designer, you can create a contract that checks to see if a new client’s website is running or not, and then leave the funds to you automatically. No more rushing or invoicing. Smart contracts are also used to prove ownership of assets such as property or art. The potential for reducing fraud with this approach is huge.
- Cloud Storage (Storj): Cloud computing has revolutionized the network and led to the emergence of big data that in turn triggered a new AI revolution. But most cloud-based systems run on servers stored on single-location, single-entity servers (Amazon, Rackspace, Google, etc.). This presents the same problems as the banking system, because your data is controlled by an opaque organization that represents a single point of failure. Distributing data on the blockchain completely removes the issue of trust, and also promises to increase reliability, because it is so much harder to crash the blockchain network.
- Digital Identification (ShoCard): The two biggest problems of our time are identity theft and data protection. With huge centralized services like Facebook containing so much data about us and the efforts of various governments of the developed world to store digital information about their citizens in a central database, the potential for misuse of our personal data is daunting. Blockchain technology offers a potential solution to this by wrapping key data in an encrypted block that the blockchain network can verify whenever you need to prove your identity. Applications of this area range from the obvious exchange of passports and ID cards to other areas, such as the exchange of passwords. It could be huge.
- Digital voting: Extremely topical following an investigation into Russian influence in the recent US elections, digital voting has long been suspected of being unreliable and very sensitive to unauthorized interference. Blockchain technology offers a way to verify that a vote has been successfully sent, while maintaining its anonymity. It promises not only to reduce election fraud but also to increase the overall voter turnout as people will be able to vote via their mobile phones.
Blockchain technology is still in its infancy and most applications are far from general use. Even Bitcoin, the most established blockchain platform, is subject to high volatility, which indicates its relative status as a newcomer.
frontier airlines reservstions However, the potential of the blockchain to solve some of the major problems we face today makes it an extremely exciting and seductive technology. I will definitely be careful.