We are at the dawn of a very important opportunity to write an extraordinary new chapter into the story of human progress. That opportunity is called blockchain.
You may have heard that blockchain technology has the potential to completely transform business, government and society as much as, or perhaps even more than, the internet has.
And you may be wondering what is blockchain technology and what is it used for?
Most of the time people start by looking at a definition, however a better question to ask first is: what are the benefits of blockchain and what can the technology do?
In other words, why should we even care what blockchain is?
What Is Blockchain Used For & What Can It Do?
While blockchain is a very young technology, the possibilities are completely transformational. Imagine a world where you can do the following (some of these are already a reality and some will soon be):
- Move money directly from one person to another anywhere in the world quickly and securely (using a cryptocurrency such as bitcoin).
- Buy a house without having to pay a large fee to a middleman and have the contract and transaction recorded permanently in an unalterable way forever.
- Never have to worry about a major data hack, such as the Equifax hack, again, because companies such as Equifax would no longer have any reason to exist.
- In the event of a disaster, hold up a scannable QR code on your phone so that people can send you money in minutes.
- Scan food items at a grocery store, such as an apple with a bar code sticker on it and instantly see the entire history of how the apple was grown, where it from, if it is truly organic, etc.
- Rent out the extra space or processing power on your computer and getting paid for it passively without doing anything (think Airbnb for your computer’s extra unused space).
- Own your own data, such as your personal health records.
- Censorship resistance in oppressive countries – such as a decentralized version of Google Docs for journalists so documents could get shared without the possibility of a centralized organization shutting it down.
- Sell the surplus energy from your home’s solar panels directly to your neighbors at a price that is a win-win for you both.
- When asked for identification, be able to pull up only that which is necessary. For example, imagine buying alcohol and only needing to pull up your date of birth and having the cashier know for certain that your date of birth is absolutely correct.
- All of your taxation done simply and automatically. No need to worry about trying to understand the tax code, no need to file taxes and no need to ever worry about being audited. And the IRS would be a fraction of the size it is now.
- A 99% reduction in the amount of government corruption because all of their transactions are publicly available and cannot be altered.
- Land and housing titles and deeds stored in a permanent unhackable record. No more wealthy oligarchs or corrupt governments stealing land that is not rightfully theirs.
- No more having doctors send your medical records to each other or having to call in prescriptions. Those who need access will already have it safely and securely.
- Birth, marriage and death certificates stored permanently forever in a way that can never be tampered with or destroyed.
- Numerous types of middlemen disappearing, such as lawyers, accountants, all sorts of agents, stock brokers, notaries, etc.
All of these things are or will soon be possible because blockchain has a few incredible characteristics:
- Blockchain technology creates a system of electronic transactions where you don’t need to trust the other party. It eliminates the need for a trusted third party – instead of trusting in people or institutions it is a software that is secured by cryptography and objective mathematics.
- It allows people to interact and connect directly online without anyone or anything in between them – no middleman.
- For the first time in history, blockchain has made it possible to create something digital that is unique and cannot be duplicated and cannot be tampered with.
To help you better understand, let’s look for a moment at these three characteristics in an couple examples.
Example 1: Imagine that you are travelling in a foreign country and someone steals your wallet and leaves you without cash or credit cards. Unfortunately, you can’t get a hold of your family or friends. The only person you reach is a coworker who you barely get along with. He doesn’t like you and you don’t like him, but you tell him you will trade him 5 of your vacation days for a bit of money. Your boss okays they deal so you tell your coworker a string of numbers and within minutes you have funds in an online wallet which you can quickly convert to the local currency.
The money went directly from him to you, without any bank in between. You both could trust that the money was no longer his and is now yours with 100% certainty. And the details of the transaction could never be disputed because they could be pulled up at any time and you would both be certain that the details had never been tampered with or altered in any way.
So, even though you don’t trust each other, you could transact in a way that you knew was safe and accurate, without any middleman taking a cut or delaying the transaction, and being certain that once the money was sent electronically that it was indisputable and irreversible.
Example 2: You decide to buy my house and I agree to sell it to you. We decide on the price and terms. You inspect the house thoroughly and ensure that everything is the way you want it to be when you take possession of it. Once we are both ready to make the transaction, we enter a secret code we each have into a computer and some software then executes.
This software checks to make sure that certain things have been done. For example, it confirms that I do in fact own the title to the house and that it is free from any liens or other problems. It also checks to make sure that you really do have the funds ready and waiting for the transaction. Once the software realizes that all necessary conditions are met, then your funds are automatically sent to me and the title is automatically transferred into your name, simultaneously.
Despite the fact that I don’t know you, we can trust in the software which we know will only initiate the transaction when we are both satisfied and all terms are met and will ensure that I get paid and that you get the title to the house. We didn’t need to use any middleman, because we knew the software would perform all the functions of a traditional middleman.
In addition, I can be certain that once the funds are sent to my account, nobody can reverse the transaction. At the same time, you can be absolutely positive that the title is legitimate and real and that I have given you all rights to it.
So now you have an idea of what blockchain can do and the advantages and benefits of blockchain technology. But what is blockchain exactly and how can it do all of this?
Blockchain Explained Simply
Let’s start with a simple explanation and then gain a deeper understanding as we go along.
Blockchain was first introduced as the technology that powered bitcoin.
A block is a record of the most recent transactions.
These transactions could be the sending and receiving of a cryptocurrency like bitcoin. But the blocks could also be many others things such as a collection of contracts, land titles or election votes.
Every time a new block is created it is attached to the previous chain of blocks: a blockchain.
All transactions on a blockchain are encrypted, and they are processed by computers solving complex math problems (instead of being processed by MasterCard or a bank, for example).
Computers all over the world are engaged in a race to solve these math problems and whichever solves each block’s math problems first gets something called a block reward. In the case of bitcoin, the person who first solves the block would be rewarded with bitcoins.
This process is called blockchain mining and the people who run the computers are called miners.
In the case of bitcoin and cryptocurrencies, the bitcoins or cryptocurrency are placed in a virtual wallet that is identified by an address, which is a string of random numbers and letters.
If you are the owner of that wallet you can access and use those bitcoins or altcoins by entering something called a private key, which is like a password that is a long random string of numbers and letters.
And everything on a blockchain is open and public. And the blockchain network is decentralized and distributed meaning that the network is run on many different computers all over the world and doesn’t depend on any one central computer or server.
The blockchain is secure by design and virtually tamper-proof.
That is blockchain technology explained simply. Now, let’s gain a better understanding by digging a bit deeper.
What is Blockchain Technology?
Because blockchain is such a new technology, there’s no real official definition. But blockchain can be summed up as follows:
- Blockchain technology is a continuously growing electronic ledger (a history of transactions) that is distributed and decentralized across many different nodes (computers and servers) that cannot be altered or tampered with and allows for direct peer-to-peer transactions between two parties in a verifiable and permanent way. It is secure by design and inherently tamper-proof.
Clear as mud, right?
Blockchain structure is pretty hard to grasp at first, but no worries, after we look more carefully at that definition down and give a few more examples you’ll be an expert.
To better understand what blockchain really is, it helps to take a look at the very first use of blockchain: bitcoin.
What is Bitcoin?
“Bitcoin is a remarkable cryptographic acheivement and the ability to create something that is not duplicable in the digital world has enormous value.” – Eric Schmidt, CEO of Google
Blockchain was first created in 2008 by an unknown person or people who went by the name Satoshi Nakamoto for use in the cryptocurrency bitcoin.
Bitcoin is a software that, for the first time ever, solved the problem of electronic double spending without the need for a central server of trusted authority.
In other words, for the first time, bitcoin was able to create something that was not able to be duplicated, could be sent directly from one person to another and did not require a trusted third party, organization or computer server in the middle that was serving as the source of trust.
In the words of Satoshi Nakamoto, bitcoin is “a system for electronic transactions without relying on trust.”
But, you might be wondering, why is this significant? Why does this matter?
It is significant because the technology underpinning it, blockchain, opens up a whole new world of possibilities for the future of business, government and society. We will explore these in more detail later on.
But, let’s finish looking closely at the bitcoin blockchain first.
Think of the bitcoin blockchain as a ledger that exists in the cloud. This ledger contains every single transaction that has ever been made since the very beginning of the network. And this ledger is open and publicly available.
Anyone in the world (including you!) can go back and look at the very first transactions that happened in January of 2009 and you can also see every transaction that has happened since then.
Also, this ledger exists as copies in many, many computers worldwide. In fact, you could put it on your computer if you wanted to. And it is regularly and continuously updated across all of the computers.
Because of this, there is no centralized place where a hacker could gain control of it and alter it. The hacker would have to take control of a huge number of the computers on the bitcoin network all over the world.
And even if the hackers managed to do that, it would still be nearly impossible for them to change any of the previous groups (or blocks) of transactions because they are all strung together in a chain where each block is uniquely tied together in perfect order with cryptography.
All of the bitcoin transactions that take place within 10 minutes are walled off and grouped together into something that is called a block, which is essentially a group of transactions that are labelled as one whole.
And each block also contains some information that links it to the previous block, so that all of the blocks form a long chain of the entire history of all transactions. Hence the name blockchain.
Each block is given a unique identifier called a hash and it is essentially created by putting the block through an algorithm which generates this unique hash. Each block contains the hash of the previous block, which links them together in a block chain.
And it is because of this that the blocks are virtually tamper-proof because if you try to change even a tiny bit of information within the block then it will produce a completely different hash, making it obvious what is and isn’t the original, genuine data from the block.
Let’s illustrate this with an example.
Imagine that I sent you one bitcoin the other day. And a hacker tries to alter that transaction so that the bitcoin would be sent to them, not you. When they change the information in the block, then it will become obvious that it had been tampered with because it will output a completely different hash, and not the same one as is in the following block.
The network would recognize this as invalid and the hacker’s change would never get made. You can sort of visualize it like a block that is left dangling.
Now, it is possible for someone to gain control over a majority of the network and be able to approve the false block, but getting this much control is incredibly difficult and ridiculously expensive on the bitcoin network, making it nearly pointless.
And even if someone managed to gain control of the network, they’d probably only have success with changing the most recent transactions because altering previous transactions would require changing each link in the chain.
So, this is why many people consider blockchain technology to be virtually un-hackable and inherently secure.
For a more detailed understanding, see our article on bitcoin explained simply.
Where Do These Blocks & Cryptocurrencies Come From?
You might be wondering, where do these bitcoins and blocks even come from in the first place?
Remember that a block is simply a collection of transactions that are grouped into a whole and labelled as a block. And each block is generated after a period of time called a block time. The bitcoin block time is 10 minutes, but other blockchains can have different block times (the Ethereum block time is about 15 seconds).
But what about the bitcoins and cryptocurrencies themselves? Where do they come from?
In the case of bitcoin and most cryptocurrencies, they are created through a process called mining.
What Is Blockchain Mining?
New bitcoins or other cryptocurrencies are essentially released by the software in a process called blockchain mining. With each new block a certain number of coins are released.
So, in the case of bitcoin, when the software was first launched it was releasing 50 new bitcoins with each block. In other words, 50 new bitcoins were created every 10 minutes. And these new bitcoins that are released with each block are called the block reward.
And every four years, the software undergoes something called a halving event where the number of bitcoins being released is cut in half. So, after the software had been running for four years, the number of bitcoins released with each block was decreased to 25. And in 2016 it was cut again to 12.5 bitcoins per block.
The reason this is called the block reward is because someone wins these new bitcoins.
So, who wins the block reward? Who gets the new bitcoins or cryptocurrencies that are being mined?
The people who win them are the miners whose computers solve a math race before any others on the network.
The miners are people from all over the world who are using their computers to “solve” each block. Basically, the miners of the world are in a mathematical race to find the correct answer that will create the correct hash.
Whoever wins this race gets the block reward for that particular block. Then, for the new block, the race starts all over again.
The reason the block reward exists is to incentivize people to run the blockchain network. And what’s really interesting is that the more computer power a person puts on the network, the more likely it is that they will win the block reward.
So with bitcoin, for example, the more computers you have mining bitcoin, the more bitcoins you will win.
And what’s really neat is that the more computer power that is on the network the more secure it is because the harder it is for one person to gain control of the majority of the network power.
Remember earlier when we said that if a hacker tried to tamper with a block, the network would recognize it as invalid? This is because all of these miners are running the same program all over the world and if something pops up as altered, the majority will detect that it was tampered with and the altered block will not be approved.
So, it really is a pretty amazing circular mechanism that incentivizes people to secure the network while working in their own self-interest. As more and more people try to win the cryptocurrency, the harder it gets for anyone to take control of the blockchain.
Whew! That’s a lot of information to digest, so how about if we review and consolidate just a bit.
- is a type of software that creates and records a history of all transactions and groups them into blocks
- the blocks are linked together in a chain using cryptography (encrypted secret codes)
- the information is permanent and virtually impossible to alter
- the entire history of all transactions is kept on many different computers all over the world called nodes
- it is regularly updated on all nodes at the same time so that everyone has the same and most recent version
- the information recorded on the blockchain is open to anyone in the world, and is searchable
- it is virtually unhackable and tamper proof
- the bitcoin blockchain is the first instance where something cannot be copied in the digital world
- it is decentralized and distributed
Looking at a few analogies will also help you to gain an even deeper understanding of blockchain.
Blockchain as the Internet of Value
The internet enabled us to easily, quickly and cheaply exchange data and information online.
The blockchain enables us to easily quickly and cheaply exchange money and value online.
The blockchain allows us to exchange and transfer anything that can be represented digitally, such as land, car, house and building titles, your identity, health records, votes, contracts, precious metals and stones, art, music, tax payments, contracts and more.
Blockchain as Google Docs
The entrepreneur William Mougayar gave a very clever analogy for understanding blockchain technology. Before Google Docs came on the scene, he explained, collaboration on a piece of writing was much more tedious.
If you and I were editing a document together we would have to email it back and forth and wait for each other to email it back before making further changes. But with Google Docs many people can simultaneously edit a document because everyone always has the latest version, just like a blockchain.
Most computer databases today work like the outdated Microsoft Word, whereas blockchain is like Google Docs, updating the information across the entire network continuously so that everyone has the latest version.
So, in blockchain for banking, financial transactions can be seen and confirmed simultaneously by both sides of the transactions, eliminating the tedious, slow and expensive process of reconciling accounts.
An interesting side note is Graphite Docs, which is basically Google Docs on a decentralized blockchain. Any journalist should immediately recognize its value. With Google Docs, it is Google that actually owns your documents and they could restrict your access to it at any time, if there was significant pressure from a local government.
But with Graphite Docs, journalists can collaborate and share without any fear that they will lose access to their work or be unable to share it with others. In the case of repressive regimes, it would be nearly impossible to censor journalism. This is a new project, and is fascinating, but it remains to be seen if it will scale well. Let’s hope it can.
Private Blockchains vs. Public Blockchains
The first blockchains, such as the bitcoin blockchain, are open and publicly available and searchable. In the case of bitcoin, many people mistakenly assume that it is anonymous since you can buy and sell it without providing much personal information.
However, there is a different type of privacy that is being debated and being experimented with inside the blockchain community: private blockchains.
Essentially, a private blockchain, also known as a permissioned blockchain, is a type of blockchain which you can only access, view and use if you have been invited by a network administrator and is controlled by a single entity.
Many companies and organizations have legitimate reasons for not wanting all of their information and transactions to be publicly available and are now experimenting with how private, internal blockchains might help their operations become more efficient and organized.
Some people argue that a private blockchain is not really a blockchain since one of the inherent characteristics of blockchain technology is that it is open. While this may or may not be the case, if the technology proves valuable, which it almost certainly will, we will begin to see private blockchains being implemented throughout the business, government and non-profit world.
A third type of blockchain is called a consortium blockchain, in which is also permissioned but is not controlled by a single organization. Instead, a number of companies and organizations might operate a node on the network, similar to how miners operate nodes on a cryptocurrency network.
The Power of Decentralized and Distributed Blockchains
Blockchain technology is often referred to as distributed ledger technology or DLT. Blockchains are both decentralized and distributed. This graphic does a good job showing the difference.
Being distributed, blockchain has no central point of failure. Being decentralized, there is no single authority which controls all of the data.
Being distributed and decentralized means that people can interact directly, or peer-to-peer. This speeds things up greatly, reduces unnecessary middlemen and their fees and decreases inefficiency as a whole.
Because of this, blockchain technology makes mass collaboration much easier, quicker and more secure. The possibilities of this mass collaboration are virtually endless. The way this could transform our world is truly only limited by our imagination.
And this brings us back to the possibilities of blockchain technology.
The Blockchain 2.0 and The New Internet
Now that you have a clearer understanding of what blockchain is, let’s look more closely again at the exciting possibilities that lay in front of us.
As bitcoin and blockchain technology have became more well-known, interest has increased in the technology. Talent is being attracted and investment in research and development is increasing exponentially.
Many major corporations, organizations and governments are pursuing and investigating blockchain technology such as IBM, Coca-Cola, Wal-Mart, UPS, the United Nations and most governments around the world.
Over the past few years, lots of smart and hard working people have come up with a whole bunch of new ideas and applications for blockchain.
One of the largest is Ethereum. And one of the most powerful aspects of Ethereum is a feature known as smart contracts.
The Ethereum blockchain has one of the largest and most vibrant communities surrounding any blockchain. And part of the reason is Ethereum’s ability to execute smart contracts.
Remember our second example from above, the one where you bought my house? That is an example of a smart contract.
Essentially, a smart contract is a form of software that will only execute when certain conditions have been met and then the transaction is recorded on the blockchain. where they are protected from revision, tampering and deletion.
So, taking our example from above of you purchasing my house, the smart contract would be created in advance with all necessary conditions programmed in. Then, the smart contract sent me your payment and gave you the house title as soon as all of the conditions were met by both sides.
The United Nations is currently using the Ethereum blockchain’s smart contracts to send aid to Syrian refugees in Jordan. This has allowed the UN to save about $40,000 a month that would go to local banks as a fee. Instead that money ca be used as aid, rather than go to local banks. Also, it has allowed the UN avoid sharing refugee identity information with the local banks.
A neat side note is that as part of the UN effort, UNICEF has recruited gamers to mine Ethereum in aid of Syrian children.
There are many more incredible examples of the uses of start contracts. For a deep understanding of smart contracts, see our article on Ethereum explained.
Here are some other exciting blockchain projects that are currently underway:
- More than a million diamonds have been put on a blockchain, creating a digital twin which allows for tracking of where they came from and ensuring they are not blood diamonds, as well as including information such as color, carat and certificate number.
- Wal-Mart and IBM have partnered to put Chinese pork on the blockchain, ensuring that any tainted or diseased pork counld be easily traced.
- Sweden is using blockchain to improve land sale transactions, the Republic of Georgia is implementing a blockchain-based land registry and India is fighting land title fraud with the help of blockchain.
- Coca-Cola and the U.S. State Department are using blockchain to fight back against forced labor.
- Steemit is a fully decentralized media platform where anyone can create content and get paid for it. But you’re not paid by people, but rather by the Steemit blockchain.
- Estonia is putting all of its citizen’s health records on a blockchain to ensure they don’t get lost and are easily shared between doctors and hospitals.
- The startup Gem is working with the Centers for Disease Control to put disease outbreak data onto a blockchain in order to speed up response time and improve disaster relief.
- The government of Dubai has set the goal of becoming the first blockchain-powered state.
- Followmyvote.com allows for the creation of voting systems that are transparent and secure, helping to prevent power grabs and voter fraud.
- The national currency of Tunisia, the e-Dinar, was the first blockchain-based state currency. Senegal has followed suit with their eCFA currency.
- OpenBazaar is a decentralized version of eBay, where buyers and sellers engage directly without a middleman.
But the most exciting applications are yet to come. Remember, blockchain is a very young technology which people are only now just beginning to experiment with. But, some of the possibilities include:
- Empowering the poor and unbanked by giving them access to the financial world and loans
- Allowing donations to go directly to those who need it
- Protecting land owners around the world from powerful oligarchs or governmental land grabs
- Being able to send disaster relief in minutes and ensuring that none of it gets lost along the way
- Making international financial boundaries a thing of the past
- Finally allow us to protect our identities and own our personal data
- Dramatically reduce corruption and increase government transparency
- Peer-to-peer insurance
- Significantly improve the efficiency and cost of health care
- Solving intellectual property issues in the digital age
- End the remittance rip-off by allowing for quick and cheap international transactions
The Bottom Line: Blockchain and Trust
Government, business and society are built on trust. Trust is what keeps human society from crumbling into a dog-eat-dog, law of the jungle, survival of the fittest.
If you could not trust your banks, landlords, police force, firemen, tax authority and government, then society would break down and we would have to return our attention to obtaining food, shelter and basic safety.
Throughout human history we have relied on certain people and organizations to provide this sense of trust. Those who have built up reputations are the glue holding it all together.
However, this is all very inefficient, costly and full of errors and deceit.
Blockchain technology provides for us an opportunity to be able to improve this situation, to be able to establish a more effective and impartial source of trust for our society.
In addition, blockchain technology is poised to make a huge positive social impact in two major areas:
- Censorship resistence
- Ownership of personal data
If you wish to get involved and do good for the world in the crypto and blockchain space, these are two areas in which blockchain could have a very positive and transformative effect.
We are at the very early stages of what blockchain technology will do and how it will transform nearly every industry and organization on Earth.
A World Economic Forum report from 2015 predicted that by 2027 ten percent of global GDP would be stored on blockchain technology.
It is an exciting time and we are very fortunate to be able to witness the birth of a technology that will transform how we establish and apply trust, perhaps on a truly historic scale.
Some people have placed blockchain technology up there with the invention of the wheel, printing press, electricity, internal combustion engine and the internet.
So, it seems like a pretty good idea to be able to answer the question, “What is Blockchain Technology?“. And now you can.
If you would like to gain an even deeper understanding, we recommend the following articles:
Feel free to ask any questions in the comments section below and share your predictions and ideas on blockchain and cryptocurrencies and how they might transform our world.
Richard has developed and ran multiple online websites and communities with tens of millions of monthly visitors. He first discovered bitcoin and blockchain in 2012 and has been helping to educate others on its potential since then. Richard is very passionate about the crypto community. Read his inspiring story into cryptocurrency here.