When people hear the word blockchain, most think it has something to do with bitcoin or another cryptocurrency. And while it’s true that cryptocurrencies use blockchain to record transactions, it’s more than that. In fact, experts predict that in the coming years, many more industries will be dramatically changed due to blockchain.
What is blockchain?
When I first began researching blockchain a few years ago, explanations left me confused. A distributed ledger? A chain of data blocks? I kind of understood, but I was often left grasping when I tried to explain it to people.
Here’s what’s made sense for me. If you balance your checking account in a checkbook, you’re using a ledger where you write down each check or deposit in order of when the transaction occurred. If you’re married or have a partner, both of you can go into the checkbook at any time to see the balance or update recent withdrawals.
This is essentially what blockchain is doing, just on a larger basis. There’s a digital ledger available to members of a group. Each member can see all transactions that occur but can’t edit the blockchain entries. If there’s a mistake of $22.95, you will see a separate entry with the correction in the same amount.
Furthering the checkbook example, imagine that your check register was only one page, then you had to get another page to continue recording items. That’s where the block part of blockchain comes in. In this example, each page is a block. When you finished your second page of transactions, this block would be chained to the other and so on.
Finally, just like you and your partner can see all transactions in your checking account, the group can see all transactions in the blockchain. If you are home and discover a $500 withdrawal in the checkbook, you can ask what it was for in the hopes of reaching agreement on whether the withdrawal is accurate. If a member of the group notices a questionable transaction, they can also discover what’s going on.
So what?
I’m sure many of you are wondering why this is such a big deal?
By setting up blockchain in such a manner, it makes it difficult to change or hack the database. People in the group can see all transactions, so even if one wanted to corrupt the database, others would be able to react and hopefully stop what was occurring.
The inability to edit also makes it easy to follow the data through the blockchain to confirm its authenticity. Instead of wondering if something was deleted from the list, you are assured that the transactions shown are all the transactions that occurred.
It’s more than bitcoin
A business could realize tremendous savings by using blockchain. For instance, when you purchase a home today there’s a title search and often expensive title insurance to purchase. What if every owner of the property was listed in a blockchain database? Your mortgage broker or bank could quickly check to verify ownership and potentially reduce not only the cost of a search but also the need for insurance.
It could even make our food safer. If there’s an outbreak of some food-borne pathogen, it can take weeks or months just to pinpoint where the item was sold and from what processing facility it originated. By recording a product’s route from ingredient origination to final point-of-purchase, investigators could more quickly pinpoint the problem and notify the public, while working to rectify the issue.
How a blockchain transaction works
When researching blockchain, I’ve discovered very in-depth discussions of how a transaction works. However, these steps from Ledger Academy sum it up nicely:
- Someone requests a transaction, which could involve cryptocurrency, contracts, or other information.
- The transaction is broadcast to members of the group, which verifies the transaction. Every computer in the network checks the transaction against rules specific to that blockchain network.
- Validated transactions are stored into a block and sealed. New blocks can be added to the chain when needed and verified through a code specific to each block.
- The transaction is complete and cannot be altered in any way.
Is it absolutely unhackable?
As blockchain becomes more popular, there are increasing reports of chains being hacked successfully. An MIT study noted that “hackers have stolen nearly $2 billion worth of cryptocurrency” since 2017. There are specific vulnerabilities inherent in the blockchain system that some criminals discovered. Combine that with sometimes “shoddy execution” or “unintentional software bugs” and there are opportunities for criminals. Fortunately, new companies are providing monitoring and verification services that can help alleviate the threat.
Remember though that banks also experienced instances of data and money theft when they first offered online banking. Installing cookies to verify your computer and two-factor authentication are some of the ways they have limited hackers from successfully infiltrating their systems. The difference of course is that banks provide insurance if your money is stolen. Quite often, lost cryptocurrency is just that – lost.
Where blockchain stands today
Blockchain technology shows great potential for saving businesses money while also providing a more seamless method of transactions for consumers. Some of that has already started to be realized. But as blockchains grow it will be hard to ignore the threats inherent in their systems as they currently stand. This isn’t particular to blockchain; as I mentioned, banks and other platforms have had to change – and continue to update – their technology as hackers have changed their tactics. Blockchain will need to be similarly innovative.
Photo by Shubham Dhage