A year ago, among the casual conversation, one might overhear at the local coffee shop, a word like blockchain was about as likely to be uttered as “qubit” or “cybernetics.” Whether exhausted from our day or simply enjoying some rare time off, all but the nerdiest wrote it off as esoteric technobabble.
But those nerds might be onto something… and lest you become convinced by your prankster brother-in-law that your blockchain should be replaced every 100,000km, familiarizing yourself with revolutionary technology would probably serve you well—especially in the constant fight to remain ahead of the curve in the constantly evolving 21st-century business world.
Is blockchain the same thing as Bitcoin?
If you’ve heard of a block chain, you’ve likely heard it in the context of Bitcoin. But beware, for these are not synonymous terms! Rather, blockchain is the technology which allows digital currencies, like bitcoin, to function.
While Bitcoin was released in 2009, block chains have existed in some form since the early 90s. The brainchild of cryptographers looking for an efficient method for verifying time-stamps on documents, it wasn’t until 2008 that the fabled Satoshi Nakamoto applied it to the first decentralized cryptocurrency, Bitcoin.
What is a blockchain?
At its core, a blockchain is a ledger. It’s a list of changes or, in the case of Bitcoin, financial transactions. But that’s hardly worthy of the term “revolutionary technology,” so clearly there’s more to this story!
A ledger is useful, but it’s also vulnerable. Like any document held by a single party, trust and security are always a concern. Further, if a single party controls a single ledger to which multiple parties are attempting to append records, a scarcity of time and resources encourages the assessment of fees by that single party.
Described above is, at its core, the current paradigm of modern banking. You want to send cash to your American buddy, and so you initiate a bank transfer, pay some obligatory fee, wait 2-5 days for transaction validation, and have faith that every unseen third-party financial institution on either side of the border comes through for you.
In the context of cryptocurrency, this is where blockchain shines.
You see, blockchain is a ledger, but it’s not merely a ledger. Instead, it’s an open, distributed ledger. Where the process above is (relatively) untrustworthy, slow, and expensive, a blockchain transaction is trustworthy, instant, and free from institutionalized fees. Instead of a single party having access to a single hidden ledger, a blockchain is available for everybody to see. It is an open ledger. Because we know how much Bitcoin we began with (in what’s called the genesis block), the record of transactions ensures the validity of each subsequent transaction. That is, if the records show Bob had $10 and gave $5 to Alice, he can’t turn around and give $7 to Sam.
Further, instead of a single party having sole access to a single copy of a publicly visible ledger, a blockchain is available for everybody to access and update. It is a distributed ledger and is spread across all participating network nodes. This effectively eliminates the time required to validate transactions.
So in the context of bitcoin, a blockchain transaction is instant, decentralized, and publicly verifiable. But then, how is the blockchain transaction verified? Is the transaction free?
How does blockchain work?
The work of verifying transactions in a given block is performed by network nodes called miners. Enterprising tech-heads, whether homebrew amateurs or large-scale corporations, run specialized computer hardware whose sole purpose in life is to find solutions, called hashes, to computationally difficult cryptology problems. The problems are based on the data held in that block, as well as the hash of the previously found block. By finding the solution, they verify that block of transactions. Because of the mathematics of cryptology, the blocks are secure by design; each of these blocks links uniquely with the previous block, just as the following block links uniquely with it—like a chain.
Did you catch that? It’s a chain of blocks. It’s a blockchain.
If just one bit of data in a previously solved block is changed, the hash of that block likewise changes, along with the hash of every following block. The chain is broken. It’s immediately recognized as illegitimate by every other blockchain record in existence. So, it’s not enough for Mr. Nefarious to maliciously change a block to boost his bitcoin—he’s gotta change every copy of the blockchain on every participating network node in the world, simultaneously. What happens in the real world? Upon discovery of this discrepancy, the out-of-consensus block is just ignored until it’s updated with the correct information.
Finally, why are all these amateurs and professionals spending their resources verifying blocks of transactions? Because that’s how they mine sweet, sweet Bitcoin.
For every block of transactions a miner verifies, the miner is rewarded with a hard coded, defined number of Bitcoin. Originally that number was 50, but it halves about every four years (or more specifically, every 210,000 blocks). At the time of this writing, verifying an entire block of transactions earns you 12.5 Bitcoins. That halving exists because the Bitcoin model is built on what’s called artificial scarcity, and this keeps the value of Bitcoin growing against traditional reserve currencies like the Canadian dollar.
Are these bitcoins pulled from thin air? Not quite. Remember those pesky bank fees? Well, with Bitcoin and similar blockchain cryptocurrencies, any fee associated with a given transaction is derived from the reward a miner earns for verifying that transaction. It is a well-defined and fair amount, designed to make verifying transactions an incentivized endeavor. And at over $5200 per bitcoin, the incentive is clear.
Why should you care?
At the very least, having a basic knowledge of blockchain technology might impress your friends, or more hopefully, your boss. Being leading edge and tech savvy is never a bad thing in the workplace. But this new technology has a greater far-reaching potential.
Blockchain is currently used for cryptocurrencies like Bitcoin, so if you’re working in the financial sector, you’d best take special note. But the possibilities hardly stop there. In the larger sense, blockchain technology was created for document verification, timestamping, digital signing—any situation where something needs to be recorded as happening at a specific moment in time. Bitcoin might be the first large-scale application, but don’t be surprised to see the technology arise in places like the insurance industry, information systems, and online voting.
In coming years, we’re likely to see this technology become the foundation for many new applications, which might very well touch every field and industry. Indeed, if we want to strive for success in our careers, we have a choice to make. We either learn about this technology while we have a head start, remaining ahead of the curve, or else we assume that this revolutionary technology is transient at best, and risk falling into irrelevance as we play catch-up in this constantly changing, technological world.