What you need to know about the technology
By now, almost everyone has heard of the blockchain, a concept popularized by the cryptocurrency, Bitcoin. But the blockchain as a model has the power to influence and transform society with its ability to create an unchangeable digital ledger of transactions, protected by encryption and distribution over hundreds of thousands of independent computers.
Imagine a document that you upload to Dropbox and share with say, 100 random people. Everyone you have shared the document downloads it immediately and stores it on their own computer. They now have timestamped “copies” of this digital document, and if you were to go back and change it, 100 other people have the original document to compare your changed one to. If someone wanted to hack into your computer and change the document, he would have to also hack the 100 other computers and change all of those too.
When an author finishes writing a manuscript to a book, she sends it to a publisher, who then copies it hundreds of thousands of times. It is now decentralized and, in a sense, unable to be changed because you have thousands of other copies to compare it to. No one dreams of changing The Bible or Harry Potter, because millions of copies exist worldwide, and no one is going to accept your modified version. This is the beauty of the blockchain.
In the world of digital transactions and contracts, the blockchain removes the need for a middleman, such as a bank or a contractor. You don’t need a third party to participate in your deal because once the transaction is complete, it’s done. You cannot double-spend, change a contract or forge because the transaction is set in stone and irreversibly documented on the blockchain. There are less risks because the sensitive data is not being held in one place, and the blockchain uses encrypted technology called cryptography to store it.
Public key cryptography uses a pair of keys, one public and one private to transfer messages and data through the blockchain. Anyone can see or use someone’s public key to encrypt a message, but once it is encrypted, only the person holding the private key is able to decrypt it. If Joe wants to send an encrypted message to Alice, he would use Alice’s public key to encrypt his message. If someone were to see that message, all they would see is seemingly random numbers and letters. Once Alice has received the encrypted message, she uses her private key to decrypt it.
Remember the 100 people you shared your Dropbox file with earlier? In the world of the blockchain, those people are called miners or nodes. The blockchain can only be updated by total consensus of these nodes, and once new data is added, it can never be erased.
If the blockchain is like an infallible history book, recording everything that happens as it occurs, the nodes are the fact-checkers, interested in preserving the integrity of the chain for their own gain. The nodes solve extremely difficult puzzles on the blockchain network and as a result, have a chance at winning Bitcoin, which is worth nearly 9000x one US Dollar. It is a tradeoff that works because of the value of Bitcoin and the extreme amount of electricity and space required by these computers completing the puzzles, which are proof-of-work algorithms that keep the blockchain network running.
So what does all this mean? The US Dollar is no longer backed by gold, which means our paper money is only valuable because we as a society believe it to be valuable and rely on it. In online banking, the number in your account is literally just a number that you or your bank cannot change without fulfilling specific conditions, such as a purchase on your debit card, a withdrawal, or an overdraft on your account. Our currency is all about authenticity and the meaning we give it, so the same is true for the blockchain and cryptocurrency.
Contracts, online payments, checks, birth certificates, and cryptocurrency are all valuable because of the confirmation of their authenticity. Without that affirmation, any of these things could be forged and ultimately worthless. The blockchain eliminates the ability for forgery in its infallible record of transactions and data.
Whatever the future of the blockchain, its concept is revolutionary. Whether it will transform society in the way many people believe remains to be seen, and in order for that to happen, our entire society would have to be turned upside down, removing the trust we put in central banks, the federal reserve, third party contractors and the government, replacing that trust with faith in the blockchain.