The internet is moving from an exchange of information to an exchange of value. E-commerce, online banking, healthcare, and human resources are just some of the industries that offer services in exchange for value. And it’s not just monetary value, either. Data has become extremely valuable as well. To conduct these value-based transactions, people use cryptocurrencies such as Bitcoin, and their underlying technology: blockchains. In this post, we’ll explain what a blockchain is, how it works, and its potential uses.
A blockchain is basically a decentralized database kept in a network where each record (or transaction) is linked to the previous one and updated in real time. This means the data is nearly impossible to corrupt, because altering one record in the chain requires altering every record afterwards, and a majority of the network has to agree to the changes. For transactions that appear later in the chain, this isn’t as difficult, but in a chain such as Bitcoin, new transactions are added every 10 minutes. So, changing a record would either require extreme finesse in timing, or a huge amount of computing power that most people don’t have, keeping the records safe from unwanted alterations by attackers.
There are two types of blockchain: Private and public. Bitcoin uses public blockchain, where the network is entirely public and watched over by a peer-to-peer group of machines, or nodes. Anyone can join the network, and anyone can read the transactions in each block. The nodes that create the blocks and the people who run them (called miners) continuously work to verify and stamp transactions and as they do so, they are rewarded with Bitcoin. The incentives miners have and the size of the network is what protects it, because high compute power (aka lots of money) needed to mine blocks is enormous. While this works great for a globally used digital currency like Bitcoin, a private business might not find it so appealing.
A private blockchain is also known as a permissioned blockchain. Participants must be invited, and there is an access control mechanism in place. Once the participants have been validated, the network will continue to operate in a decentralized manner. Only the entities participating in a particular transaction will have knowledge and access to it. Private blockchains are a curious promise and of interest to enterprises who want the incorruptibility of the distributed ledger without the resource expense of a public network and need to keep transactions secure for privacy or compliance reasons.
Blockchain is of particular interest to financial institutions and the fintech industry because of the secure nature of the transactions. They’re also interested in the approach of the decentralized distribution of transactions that effectively cuts out the middleman (ie the bank), saving consumers a lot of money in fees. Therefore, there’s a vested interest in getting ahead of this technology so that the banks are not left behind and can compete effectively with the numerous startups that have come into play.
There are reports that the mobile industry has invested in blockchain development in an effort to compete with the financial industry and reach people in previously untapped markets, such as Africa. voter registration machines for accurate voting, real estate for smart contracts, digital identity management, and more. In theory, anyone with a mobile phone could have access to Bitcoin, meaning everyone would have equal access to items of value such as buying a house, getting a driver’s license, or paying for a doctor’s visit.
Other uses are for securing other sensitive data, such as medical records and Social Security numbers. According to one article, all of Estonia’s health records have been secured with blockchain. It’s also being advocated as a way to secure IOT devices, an increasing concern with the rise in the number of devices being used in botnets.
The nature of blockchain is secure; however, it’s not a fail-proof security method (nothing ever is). The applications that use blockchain, such as Bitcoin wallets or exchanges, must still be secure themselves, and for enterprises looking to build their own private blockchain, they must be prepared for the risk of their own network being compromised if it is not wide enough. There is some debate whether private blockchains truly offer security like a public chain or if they are simply distributed databases on a corporate network.
The decentralized network that puts together a blockchain means no single copy is kept anywhere to be susceptible to corruption or attack, eliminating the single point of failure vulnerability. A cryptocurrency such as Bitcoin or Litecoin is used to help facilitate transactions. There is immense promise for blockchain technology, but it’s definitely still a work in progress. The more the technology is developed, the more promise we will see in terns of scalability and security.