What is blockchain?

Blockchain. It's a concept so hyped that even a whisper of it elicits eye rolls from many. It’s been pitched as the future of industries as disparate as finance, real estate and food production. But what exactly is it? Because blockchain - or distributed ledger technology (DLT) as it’s also referred to - is a tricky concept to understand.

Despite winning hordes of eager supporters in the tech and business worlds, as well as fervent fans in online crypto communities, for many members of the public and even the odd tech journalist, an exact understanding of what blockchain is remains elusive.

Here, we demystify the term and describe to you in the plainest English what exactly blockchain technology is, the main ways it's being used now, and what the future may hold.

What is blockchain?

To describe exactly what blockchain is, it’s useful to start with where it came from. The first incidence of blockchain technology being used was the cryptocurrency bitcoin.

In the case of bitcoin, the underlying blockchain technology is rather simple. Its sole function is to allow transactions in the currency to take place. But how exactly does the tech work? You may have heard a lot of talk about ‘decentralisation’. This is because it's one of the most radical features of blockchain technology.

In layman’s terms, it simply means that any transaction processed in bitcoin does not have to be approved by one central ‘hub’ - instead the transaction is processed by a dispersed network of ‘nodes’ (i.e. computing systems) at the same time, meaning that the transaction is recorded by all of them. In the case of cryptocurrencies, you would never be able to spend the same digital tokens twice because every computer on the network would know.

To offer a counter example, when you pay for something using your debit card, the transaction is verified by your bank, whereas if you transact in Bitcoin, your transaction is verified by thousands of computers present on a dispersed network.

This obviously changes the concept of ‘trust’ within a blockchain system. Unlike a centralised form of processing transactions, where you must place trust in a governing body like your bank, in a blockchain network, your trust is placed within the technology itself, and the fact that many different independent actors are verifying each transaction.

The 'block' in blockchain

Let's break it down further. At the technical level, there are 'blocks' or bundles of transactions, which are verified by every computer on the network before the next block in the chain is initiated.

What links these blocks together? Each block has a unique code associated with it (its own 'fingerprint' if you will), and different segments of this code link to the preceding block and the upcoming block respectively. This means that if someone, somehow tampered with one block, they would have to change every block in the chain to make the block concordant with the rest. This is one of the reasons that blockchain is considered to be so secure.

All of the blocks in this chain create a public record available to all the computers on the network at all times, which also reduces the chance of anyone being able to tamper with the record without computers on the network being alerted.

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What are miners?

We're now familiar with some of the main features of blockchain technology, but there are still things to clear up. The first being, if you've heard about cryptocurrencies like bitcoin, you've probably heard of mining.

Mining is a fundamental element of the blockchain systems adopted by most cryptocurrencies, because the 'miners' are the people running each of the nodes (computers) on a network, and are therefore the ones verifying each block of transactions and maintaining the security of the system.

To throw some more technical talk at you, miners are not necessary in every blockchain system. Whether or not there are 'miners' depends on how the system creates trust and security: which 'consensus algorithm' it adopts. Bitcoin adopts a 'proof-of-work' model to ensure the security of the system, but there are many other possible types of consensus algorithms, a notable one being 'proof-of-stake', which is employed by a growing number of blockchain systems, and which we will revisit later.

But for now, this is how 'proof-of-work' works. Each computer (or node) on the network competes to process a finished ‘block’ on the chain. To do this, a computational programme installed on the computer attempts to come up with a code which is smaller than or equal to that of the randomly generated code of the block, by coming up with multiple 'guesses' very quickly. The 'code' in question is in fact a 64-digit hexadecimal number known as a 'hash' that looks like this:


However, it's simpler to imagine it as a code with an assigned value. The computer that ‘wins’ gets to sign off on that block, and the miner is rewarded with a sum of the currency (such as bitcoin) in question.

Obviously, if you’re competing against thousands of other computers in a dispersed network, the chances your computer will solve it is unlikely, meaning that miners have actually banded together to form groups that share winnings between everyone. This means that what was initially intended to be a completely dispersed network of computers has in fact become a bit more centralised. For example, bitcoin miners are mostly concentrated in one of several major mining pools.

Of course, the process embodied in the proof-of-work model is a very intensive process that consumes a huge amount of computing power and energy. It’s for this reason that bitcoin has been denounced as an environmental disaster.

To counter this worry, there is a growing lobby for an alternative way of mining cryptocurrency supported by the blockchain. As we mentioned earlier, the ‘proof of stake’ model is gaining ground.

In this model, actors in the network nominate themselves to be in a pool of 'verifiers', which are selected based on how much of the currency is in question and how long they have held it for. This indicates how invested they are in the network and therefore increases their trustworthiness. This model can also involve staking a certain amount of the cryptocurrency in question, meaning that if this individual did turn out to be a 'bad actor', they would have to forfeit their tokens and risk being barred from the network.

Beyond cryptocurrency

While blockchain was almost exclusively used to build cryptocurrencies at first in 2013, 19 year old Vitalik Buterin came up with the idea of ethereum. Ethereum is different from bitcoin as its underlying protocol (i.e. base level of technology) is not the same. It's an expanded version of the technology underlying bitcoin - it’s not solely optimised for transacting bitcoin or other cryptocurrency.

Instead, the ethereum protocol can be used as the base layer for building a range of decentralised applications (dapps) or even decentralised autonomous organisations (DAO) on top of. Some of these include decentralised file storage and social network applications, as well as peer-to-peer marketplaces such as decentralised forms of Uber and Airbnb. These work by executing smart contracts, which are much like the legally binding contracts we are familiar with, except written into code ('cryptographically signed').

For example, decentralised home sharing platform Beenest uses smart contracts to ensure the site runs smoothly without the need for a central body to govern interactions on the site. One smart contract could be ‘as soon as the time of stay has completed and both parties indicate they are happy, release the payment tokens to the host and release the deposit tokens back to the guest'. And of course, these smart contracts could relate to any number of ‘If X, then X’ commands.

To execute these contracts, you need ‘gas’ which is crypto talk for ‘ether’, the token powering the executing of smart contracts on ethereum networks (as opposed to the bitcoin token). Thus, ethereum should be visualised as a platform for building applications on top of, rather than a cryptocurrency. Having said that, ether still has utility outside of ethereum applications, and can be traded for other (crypto)currencies on exchanges. In fact, it is the second most valuable crypto token after bitcoin because of the value derived from the platforms built on top of it.

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ICOs and tokenization

To backtrack a little, blockchain technology is used to support the transacting of cryptocurrency tokens or 'coins'. But tokens in decentralised apps such as Beenest have slightly different characteristics.

Firstly, when these dapps are launching, they need an influx of cash. The way this is achieved for blockchain-based companies is by holding an initial coin offering (ICO). This means creating a new crypto token and offering it up for sale to the public. These new tokens could be built on entirely new blockchains, although most of these apps are in fact launched on Ethereum as it's already optimised for this purpose.

These tokens can be traded on exchanges for different cryptocurrencies, and their market price will reflect the demand for that particular token. Thus, if Beenest becomes more popular, the price of their token on external crypto exchanges will go up - much like the stock price of a company. However, usually the tokens will also have an ongoing utility within the site too, for example, on Beenest, users will pay for their stays in bee tokens.

Tokenisation is an area which is fast gaining traction, because people are interested in applying it to areas of real-world assets, thereby 'tokenising' the value of a real world entity. Real estate is one area where there is an appetite for this because tokenising the value of real estate could get rid of a lot of the complexities and bureaucracy currently involved. In essence, it means that the value of a real-world item can be more easily split between different parties to create equity.

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Big enterprise and blockchain

What began life as an underground cryptocurrency used to facilitate transactions on the dark web has come a long way. Blockchain technology is now a buzz word in banking, and many other long-established industries. This is because the ability to track information on a distributed, immutable ledger is very appealing to a range of industries.

Many large banks are investigating the tech's potential in various different fields including clearing and settlement, facilitating payments (particularly cross-border payments) and identity of customers among a broad range of other areas.

Another potential application of blockchain technology is food production or the transportation of goods, because the systems in these industries are currently heavily paper-based and antiquated. Large companies testing out the tech in this regard are Walmart and Nestle.

But, I hear you say, isn’t the adoption of blockchain by big business counter to the underlying tenets of the technology as distinct from a single controlling entity, facilitating decentralised networks?

The blockchain projects from big corporations are less likely to be built on public blockchains, and are instead kept inside private perimeters - known as 'permissioned' rather than 'permissionless' networks.

These systems are highly adapted to particular companies and use cases. For example, a project recently released by Microsoft adopts a ‘proof of authority’ model, where trusted actors are able to verify transactions in the network. This system is less 'decentralised', and is more suited to networks in enterprise where all the parties are trusted, while proof-of-work and proof-of-stake models are more suited to networks comprised of strangers where there is no implicit trust.

Read next: How blockchain is being used in enterprise

What is the future?

Clearly, the most exciting first use cases of blockchain technology have involved cryptocurrencies unpegged to any central governing body, and decentralised applications built on top of the ethereum blockchain.

However, much in the same way corporations may make use of ‘open source’ technology that is then bound within private perimeters, corporations can also build their own, closed blockchain ecosystems. In fact, many big corporations such as IBM and Oracle have developed 'blockchain-as-a-service' software which can be implemented seamlessly by various different companies.

What's almost certain at this stage is that blockchain will be around for the foreseeable future. The adaptability of the tech means that it will almost certainly be implemented in major industries in the coming years.

The more radical applications of the tech - relating to cryptocurrencies, decentralised applications and peer-to-peer marketplaces are still in their infancy but certainly hold a lot of promise. It's likely that these too will endure but become subject to much more regulation and increasing interest from larger corporations, governments and banks. Stay tuned.

This story, "What is blockchain?" was originally published by Techworld.com.

Copyright © 2018 IDG Communications, Inc.

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