Blockchain technology is changing industries around the world. It’s bringing organizations, governments, financial institutions, and payment platforms into a new digital age. It’s revolutionizing everything around us – and yet many people have no idea what blockchain is or how blockchain technology works.
Today, we’re explaining the core things you need to know about blockchain and blockchain technology.
What Is Blockchain?
Blockchain is an open, distributed ledger that can efficiently record transactions between two parties in a verifiable, permanent way. Blockchain is the technology at the heart of bitcoin and other cryptocurrencies. Without blockchain, cryptocurrencies would not exist in their modern form.
Why Is Blockchain Technology So Important?
Contracts, transactions, and the records of them have long played a crucial role in our modern world. Our legal and political systems rely on contracts and transactions for virtually every core function.
Contracts, transactions, and records are used to protect assets or set organizational boundaries. They’re used to verify identities or chronicle events.
Every day, the world around us is governed by contracts and transactions. However, the way in which we record these contracts and transactions is stuck in the past. These critical tools have not kept up with the digital revolution.
As one article in the Harvard Business Review explained, “They’re like a rush-hour gridlock trapping a Formula 1 race car.” That article goes on to explain that, “In a digital world, the way we regulate and maintain administrative control has to change.”
That’s why so many companies are seeking to implement blockchain technology into various industries – the potential benefits are enormous.
Blockchain Could Eliminate The Need For Lawyers, Brokers, & Bankers
Think of the importance of blockchain like this: much of the world’s infrastructure consists of intermediaries – or middlemen.
We’re not just talking about middlemen like businesses that take a cut of profit for selling goods or services.
We’re talking about lawyers who act as an intermediary between the public and the law, or bankers who act as an intermediary between individuals and their access to creditors. There’s a possibility that lawyers, brokers, and bankers could be made obsolete by blockchain technology in the future.
Instead of requiring intermediaries, blockchain technology would allow individuals, organizations, machines, and algorithms to interact freely with one another.
We’re already seeing this with blockchain and bitcoin. When two individuals want to exchange bitcoin or other cryptocurrencies, they don’t go to a bank and pay a hefty transaction fee. They complete a peer-to-peer transaction over the blockchain.
How Does Blockchain Work?
The blockchain is a distributed ledger that embeds contracts and transactions in digital code.
This digital code – and the record of these transactions – is stored in a transparent, shared database. This database is decentralized, which means it’s held by people (“nodes”) all over the world. This decentralized system protects the blockchain from tampering, deletion, and revision.
Using the blockchain, everything we do has a digital record. That means every process, transaction, task, and payment has a digital record. Each record can also be traced back to an individual: it has a signature that can be identified, validated, stored, and shared.
Ultimately, this allows organizations or individuals to conduct business in a more efficient way: with blockchain, we have a tamper-proof, verifiable, and permanent way to record transactions between two parties.
Could Blockchain Fail To Revolutionize The World?
There’s enormous hype in the world of blockchain right now. Blockchain startups are springing up every day. Many are comparing it to the internet revolution in the early 90s, when companies rushed to take advantage of the power of this dramatic new invention.
However, some – like the HBR.org article mentioned above – cast doubt on the ability of blockchain to revolutionize the world. It’s far from a certain thing.
Some point to security issues outside of the blockchain – like the infamous 2014 Mt. Gox hack, when users lost $450 million USD worth of bitcoin.
Others point to the history of technological innovations. With most major technology changes, there needed to be a substantial technological, governmental, organizational, and societal change to pave the way for that technology.
With a change as substantial as blockchain technology, countless modern institutions would need to fall before blockchain could fully be implemented.
As the Harvard Business Review explains, “It would be a mistake to rush headlong into blockchain innovation without understanding how it is likely to take hold.”
The Technology Behind Blockchain
As we mentioned above, blockchain is a distributed, digital ledger. It’s a peer-to-peer network that lies over top of the internet.
One of the key features of this technology is that it’s a distributed database. It’s decentralized. The database exists in multiple copies across multiple computers. Each of these copies is identical. The computers – or nodes – all form a peer-to-per network, which means there’s no centralized database or server.
Today, organizations maintain centralized databases and servers where all their data is held. This makes these servers a lucrative target for hackers. Blockchain decentralizes data and makes it public but encrypted. Many people believe this makes it tamper-proof.
When a transaction occurs on the blockchain, data about that new transaction must be sent to all computers – nodes – on the network. This means the blockchain stays in sync as one “world wide ledger”. Instead of having multiple conflicting ledgers, there’s a single version of “the truth”.
Another key feature of blockchain is that each transaction on the blockchain is signed digitally, using public key cryptography. Public key cryptography involves the use of two keys – a public and private key. The public key is used to sign and encrypt the sent message, and anyone can see this key.
However, only the recipient has the private key, which means only the recipient can decrypt the transaction. Public keys are used for more than just encrypting messages: they’re also used to authenticate an identity.
Blocks Of Transactions
The reason it’s called a blockchain is because it’s literally a chain of blocks.
Each block in the blockchain consists of a list of transactions. Each block also contains a block header. Headers contain three sets of metadata, including structured data about the transactions in the block; a timestamp and proof-of-work algorithm data; and a reference to the parent block, or previous block, using a hash.
Using these three sets of metadata, each block is chained together – hence the word blockchain.
You may have heard of bitcoin mining. It’s significantly different from traditional mining, to say the least!
Mining is the process by which new blocks are created on the blockchain. In Bitcoin, a new block is mined every 10 minutes. Some cryptocurrencies have a faster block transaction time, while others have a slower time. Essentially, this means that a Bitcoin transaction takes a maximum of 10 minutes to process.
Mining validates each new transaction on the blockchain. In order to do that, the miner (which is a computer or processor) solves a unique, difficult math puzzle. These puzzles require enormous computational power.
Since Bitcoin was first introduced, the difficulty of these puzzles has increased exponentially, which means more power than ever is needed to solve the puzzles.
To put the computational power into perspective, miners were tracked trying 450 thousand trillion solutions per second to solve the puzzles – and that was all the way back in October 2015 as reported by The Economist.
Why would someone spend all this computational power on math puzzles? It’s because they get rewarded with bitcoin – or other cryptocurrencies, if you’re mining other cryptocurrencies. Miners receive a set amount of cryptocurrency for every block that is mined, along with a cut of the transaction fees for all transactions in the block.
A Brief History Of Blockchain Technology
You could write thousands of pages on the history of blockchain technology, including all of the minor improvements, major leaps, and companies formed over the past decade. Instead of boring you with that information, we’ll give you a brief history of how blockchain technology came to be what it is today:
The first mention of blockchain can be found in the original source code for Bitcoin. You can view the original code for bitcoin on Github.
Bitcoin was the world’s first major virtual currency. It was the first time we saw the impact of blockchain technology on the world around us. The currency was officially introduced in October 2008 when a mysterious figure named Satoshi Nakamoto wrote a paper called, “Bitcoin: A Peer-to-Peer Electronic Cash System”.
In January 2009, bitcoin’s code was released onto the internet as open source. Satoshi Nakamoto – whoever that person is – “mined” the first bitcoins and officially launched the world’s largest cryptocurrency.
Soon after, in April 2011, Satoshi disappeared from the internet and stopped contributing to bitcoin forums, papers, or code. Despite numerous attempts to discover who Satoshi Nakamoto is, and even a few cases of misidentification, we know nothing about Satoshi to this day (we’ll talk more about the identity of Nakamoto below).
2013 marked the first year when people really started to hear about bitcoin. Investors surged into bitcoin and blockchain-related startups. The price of bitcoin hit a high of $1108 in November 2013 (a high that has since been surpassed).
Over the years since, other cryptocurrencies have been created. These coins are called “altcoins” – or alternative bitcoins – because they’re cryptocurrencies that aren’t bitcoins. Litecoin and Dogecoin were two of the first to appear, for example. Today, Ethereum holds a solid position as the number two spot behind bitcoin.
Major Innovations In Blockchain Technology Over the Years
There have been a number of innovations over the history of blockchain. Without these innovations, blockchain technology wouldn’t be nearly as useful as it is today. Those innovations include all of the following:
By nature, this is the first and most obvious blockchain innovation.
The second innovation is when people realized that the underlying technology behind bitcoin – the blockchain – could be used for more than just bitcoin.
People realized it could be used for other cryptocurrencies, for example, or for a wide range of other industries and purposes. This is where the history of blockchain technology and innovation really took off.
Ethereum & The Smart Contract:
The second major blockchain platform after Bitcoin was the Ethereum blockchain. The primary advantage of the Ethereum blockchain over previous blockchains was the smart contract system.
Essentially, this involved building small computer programs directly in the blockchain. This allowed conventional financial tools – like loans or bonds – to be represented on the blockchain, instead of just bitcoins and cryptocurrencies.
Proof Of Stake:
Proof of stake started appearing in late 2016 and early 2017. Today, most blockchains are secured by Proof of Work, which means the group with the largest computing power makes the decisions (i.e., the miners with the biggest share).
New blockchain technology replaces this with proof of stake. This is a key security innovation because it removes one of the only security flaws in traditional blockchains – the fact that miners with a 51% share of processing power could take control of bitcoin or other cryptocurrencies.
Scaled blockchain technology will accelerate blockchain processing in the future. Today, blockchain technology requires every computer in the network to process every transaction. This is slow and inefficient.
Scaled blockchain technology will accelerate the process by determining the precise number of computers needed to process each transaction, and then utilizing other computers for other tasks.
Ultimately, the history of bitcoin is a history of the world’s elite computer scientists pushing computer and internet technology past their known limits. And all of this innovation can be traced back to Satoshi Nakamoto.
Who Invented Blockchain? Who Is Satoshi Nakamoto?
Blockchain technology was first introduced in a paper, written by Satoshi Nakamoto, entitled, “Bitcoin: A Peer-to-Peer Electronic Cash System”. In that paper, Satoshi describes the basis for blockchain technology. All blockchain innovations can be traced back to Satoshi Nakamoto. He’s the inventor of blockchain and bitcoin.
Who is Satoshi Nakamoto? Nobody really knows. “He” could be a single Japanese man. Or he could be a group of individuals. Satoshi disappeared from bitcoin and blockchain development in April 2011, although he hadn’t contributed to bitcoin’s development since December 2010.
Here are some of the things we know – or think we know – about the mysterious creator of blockchain:
- When bitcoin was first introduced, Nakamoto claimed to be a Japanese man who was born on April 5, 1975.
- However, many people believe the use of a traditional Japanese name was a decoy; most research into the identity of Satoshi has focused on cryptography experts and computer science specialists living outside of Japan – mostly in the United States and Europe.
- Why do people believe Nakamoto isn’t Japanese? One big reason is because he wrote with perfect English in all online communications; many people also believe he is British or Australian because of his use of British English idioms like “bloody hard” in forum posts.
- Another clue to the identity of Nakamoto is his timestamps: Swiss coder Stefan Thomas analyzed all of Nakamoto’s bitcoin forum posts and found that he consistently didn’t post during certain hours of the day; based on this information, it was believed that Nakamoto lived in the Eastern Time Zone or Central Time Zone, which could narrow his location down to North America or parts of Central and South America (assuming Nakamoto is a single person with a normal sleep schedule).
- The first “breakthrough” into the identity of Satoshi Nakamoto occurred in 2015, when parallel investigations by Wired and Gizmodo revealed that Australian programmer Craig Steven Wright could be the inventor of bitcoin; in May 2016, Wright told the BBC that he was Satoshi Nakamoto; Wright, however, has offered no proof, and many people believe Wright was simply scamming the world or seeking attention. Others, however, firmly believe Wright is Satoshi.
- Other individuals that have been suspected to be Satoshi Nakamoto include Nick Szabo, a “reclusive American man of Hungarian descent” and a brilliant coder; Dorian Nakamoto, a Japanese man living in California whose birth name is Satoshi Nakamoto; and Hal Finney, the first person other than Satoshi to work on the bitcoin software. Interestingly, Hal Finney is a next door neighbor of Dorian Nakamoto in California. Some suspect he ghost-wrote his neighbor’s forum posts, while others suspect he used his neighbor’s identity to throw off pursuers.
- Today, some people even believe bitcoin is one big government conspiracy, and that Satoshi Nakamoto is a government agency.
- Whoever he is, it’s estimated that Satoshi Nakamoto owns approximately 1 million Bitcoins, making him valued at over $2.5 billion USD as of May 24, 2017.
Ultimately, the inventor of blockchain technology may never be known. Or, it could be one of the names listed above. Until the mystery is solved, it will play an increasingly interesting role in the myth behind bitcoin. In any case, Satoshi is undoubtedly the world’s most anonymous billionaire.
Where Is Blockchain Going Next?
We’re only beginning to see the potential of blockchain technology. Innovations in blockchain have made it increasingly attractive – and usable – to organizations outside the cryptocurrency world.
Financial institutions, political organizations, cloud storage providers, and even online casinos have all started using blockchain technology. We don’t know where blockchain technology is going next, but we can’t wait to see.