You would have no doubt heard of bitcoin and cryptocurrencies, and depending on which way you look at it it’s either the future of technology or a quick way to lose your life savings.
Ignoring the hype (the HODLing and get-rich-quick schemes) there is something worth explaining which underpins all of this. Whilst you may have heard of Bitcoin, a digital currency, you may not have heard of the technology which enables it; the blockchain.
So what is a blockchain and why should I care?
Blockchain is a big deal. But in order to understand why, we need to understand why it was created. In 2009 a mysterious figure by the name of Satoshi Nakamoto developed Bitcoin; a digital currency. Satoshi appears to have been motivated to create a currency free of central bank control. In order to do so Nakamoto perfected the distributed ledger.
The distributed what now?
A ledger, in financial terms, is a record of transactions; e.g. Jane paid Jill $40 at 1:25pm on Thursday. However, since the beginning of time ledgers have been required to be managed by an intermediary, someone both parties trust to prevent fraud or disagreements.
What the distributed ledger allows is the removal of this middleman through network consensus. So instead of having one party determine trust (which can easily allow fraud), the distributed ledger motivates an entire network of users to validate the information through a process called mining which rewards these ‘miners’ with the currency – providing them economic incentive to keep the network running. So when Joe pays Jim $20 at 3:24pm on Friday, this information is sent to the ledger to be verified and verified and verified until consensus is agreed by all parties.
The traditional model on the left has a single point of failure, on the right, many.
With Bitcoin, transactions are stored as a continuous chain of ‘blocks’ of data, hence the name blockchain. Each block is added after the previous in such a way that editing an earlier block is not possible (due to the required network consensus). This prevents fraud and creates trust in the system, meaning that the data stored on the blockchain is true.
This is the big deal. This means that no one person or company can control the information. A blockchain is a record of truth.
As Don Tapscott writes:
“On the blockchain, trust is established, not by powerful intermediaries like banks, governments and technology companies, but through mass collaboration and clever code. Blockchains ensure integrity and trust between strangers. They make it difficult to cheat.”
Ok, so it’s a truth machine. Whoop de doo. How is that so revolutionary?
Trust and truth in the data is everything. It allows new levels of innovation to be created, free from bureaucracy and centralised, slow mechanisms of transfer. To be idealistic, it puts power back to the people.
So, let’s talk about power. The traditional model is to consume and pay for power from the government through a power plant. If you’re savvy you might have solar panels which sell excess generated power back to the grid, or even more savvy, have an installed battery to further reduce costs.
But what if using your solar panels to generate electricity also generated a currency? And what if this currency was tied to the power you generated that was stored in batteries? And what if then, you could trade this within a network, effectively transferring excess power from one user to another without the grid at all? A neat idea right? Well, this is possible with blockchain; and already being worked on. This could have dramatic implications in developing countries who struggle with power reliability.
Another example is personal data privacy. You currently most likely use Google or Facebook to sign into services, or have unique accounts across a plethora of systems, or even have to authorise an account through KYC (know your customer). The use of blockchain can give you control of your details and only allow companies to understand whether you are who you say you are and not store your details on their servers. This is also being worked on; no usernames and no passwords required.
Ok ok, so it has potential. But what does that mean to me right now?
These are just a couple of examples and we’re only at the infancy of the technology in terms of adoption. So right now, not a whole lot. But in the coming years it will be utilised as a tool within an incredible amount of services. It will become more pervasive in powering our data-driven world and allow for a dramatic increase in efficiencies in the way we access, share and control data.