Last year saw bitcoin take off on the stock markets. But more importantly, businesses began to realise there was untapped potential in the technology that underpins it: blockchain. Understanding blockchain technology isn’t easy. So how does it improve security and transparency – and what are the opportunities for businesses?
Elon Musk has sent a Tesla Roadster barrelling into interplanetary space. Its driver is a robot whose only source of information and connection to home is a screen saying, ‘Don’t Panic!’ It’s an immense technical feat, for sure.
But we’re here to talk about a technology that has more implications for how we live now, and is far closer to home than SpaceX’s Starman. Unless you’re very much like the Tesla robot on his space odyssey, you’ll have heard of it.
Blockchain is that technology. At Cyber-Duck, we’ve been pretty excited about blockchain for a while now, but a lot of people still don’t know what it is or how far we’ll be able to push the complex technology.
In this article, we’ll look at what blockchain is and what your business can do with it. Next week, I’ll show how we used blockchain to solve a key FinTech challenge – restoring trust in donations for the charity sector – during our last hackathon.
Blockchain Explained Simply
- Blockchain is a distributed database, or ledger, that records information by adding a block of data to a chain in chronological order; it is both permanent and unalterable
- It is the technology that supports bitcoin and other cryptocurrencies; it is an authentication system that guarantees security and prevents fraud
Looking at bitcoin is the best way to explain blockchain simply. Bitcoin is the cryptocurrency that has been making waves for years now, but recently saw a spectacular rise and a hasty decline on the stock market. For those of you who don’t know, bitcoin is a decentralised virtual currency. Namely, it is a portion of code, arranged in a specific way and validated by an online ledger system of interconnected computers. You can use a bitcoin to pay for things electronically, so long as both parties are willing.
Bitcoin arose in the aftermath of the financial crisis of 2008, when a secretive programmer known as Satoshi Nakamoto (of whom nobody knows the real identity) released bitcoin. At least in part, bitcoin was an attempt at solving the problems the Great Recession highlighted in the banking system. It aimed to make finance transparent and accountable, unlike the financial system that had caused the crisis.
But the question of authenticity was crucial. If bitcoin was digital, how could Nakamoto make sure that people didn’t counterfeit bitcoin by replicating the code?
Secure public ledger
The answer was to create a public ledger to validate each bitcoin transaction. This would ensure that bitcoins weren’t counterfeited. The ledger system would therefore need a private code, with which you could claim bitcoins as your own, and a public code that would confirm the bitcoins you say you have actually exist.
The public code of bitcoin is shared across every active member in the bitcoin community. These active members, or nodes, are basically computers that are constantly switched on and connected to the system. They act as servers for a distributed ledger system, or public database, in which the code for every bitcoin is stored. If one node goes down, the system doesn’t fail because it is replicated across all nodes in the network. So a record of every bitcoin and every transaction in existence is stored throughout the entire ledger system. To claim that a bitcoin exists and belongs to you, you need to match a private key with the corresponding piece of code in the public database.
Because the database is replicated across multiple machines all around the world, it is difficult to hack. But there is an additional element to the system that makes it impossible to hack into and change the system. For every new bitcoin that is ‘mined’, more information is added to each ‘block’ in the system.
I say ‘mined’ a bitcoin – what I mean by this is that everyone who connects their computer as a node to the system will need to keep their machine connected. After all, if all the machines are turned off, how can bitcoins be recorded and validated in the ledger?
For some, keeping their machine on all the time could be an inconvenience. Estimates suggest that bitcoin uses more electricity than New Zealand and Hungary, and almost as much as Peru, at over 42TWh of electricity a year. This is both expensive and dangerous for the climate, prompting drives for sustainable energy sources.
Verifying authentic transactions
What’s the incentive to stay connected? Your machine will begin to ‘mine’ for bitcoins. Mining creates a transaction history for bitcoin in a way that is resource-intensive and difficult. This ensures it is impractical for any one entity to falsify transactions.
All nodes in the system are asked to validate each transaction. To do this, they need to complete billions of calculations a second to validate new transactions in the queue. Every ten minutes, a new block will be created which verifies a transaction.
As mining is resource-intensive, there needs to be a reward for users who offer up their hardware to the system. This reward comes in the creation of bitcoins, a by-product of creating new blocks. Miners are paid transaction fees as well as a subsidy of newly created coins, which are distributed randomly across nodes to maintain the decentralised nature of the currency and the ledger. The more nodes a user has connected to the system, the more likely they are to receive bitcoins as a reward.
Now it’s worth noting why the system is incorruptible. Transactions are recorded in blocks of data, and when these reach a designated size they are chronologically locked into the chain of the system. Each block has a unique, time-stamped hash. This hash corresponds with the hash of the block before it, meaning the block can only be built in one direction. When you add a new block, the chain is replicated across all nodes. Therefore, it is impossible to hack an earlier part of the chain to change it. In this way, the code constantly evolves and grows, giving bitcoin its security.
That’s blockchain explained simply: it’s an ever-growing and constantly updated chain of code, duplicated countless times across a vast network of computers. It isn’t stored in a single location, so it cannot be controlled or corrupted by anyone and it has no single point of failure. Originally, it was the authentication system behind bitcoin, but the technology has the potential to be so much more.
What Are Smart Contracts?
- A smart contract is a digital conditional contract that is secured via blockchain; with a smart contract, you can exchange money, property, shares and any other valuable item via a transparent system, free of both middlemen and conflict
Once you begin understanding blockchain technology, you realise there’s so much more you can do with it. Smart contracts are just one way you can use blockchain. These are conditional contracts stored within the blockchain, with the technology acting as the binding authority between parties. You could use a smart contract for myriad reasons, but the one that we’ll look at is a simple transaction.
With any transaction, you make it because you want to exchange one thing of value for another. This could be selling a house, recycling your old mobile phone in return for a discount on your new one, or even donating to a charity because you want to help those in need. For the most part, you currently hand over the thing of value and expect to receive something in return, but not every transaction is a legally binding one.
Here’s where a smart contract could help. The contract could bind the two parties to the transaction, and funds would only be exchanged once the agreed conditions had been met. Being written into a blockchain, the code of the smart contract cannot be altered, it cannot be hacked and it encourages confidence in investment and exchange.
Similarly, a smart contract removes the middle man from the equation. Currently, facilitators create contracts on behalf of parties and take a cut of the proceeds. But with blockchain, you would be able to create a binding contract without the need to have it backed up by the legal system, purely because funds wouldn’t be exchanged until certain conditions were met and validated by the system.
The Future of FinTech
Now, let’s turn to blockchain technology applications. In this day and age, we’ve all seen examples of a cyber-attack. Just last year, the NHS suffered a huge ransomware attack, while there is evidence that rogue states like North Korea are attempting to hack banks the world over. These examples are worrying, but as our societies become ever more reliant on digital technology, these attacks could cause catastrophic damage.
But with blockchain, we can defend our digital infrastructure from outside attack. In particular, it means blockchain is perfect for providing security and transparency for financial technology, or fintech.
One of the most sensitive areas in any society is the financial sector. Since the agricultural revolution, it has been an intrinsic part of our economic model. However, in the digital age it is more vulnerable than ever. Manipulation and fraudulent behaviour on an industrial level could destabilise the financial system. But we have an excellent security mechanism by using blockchain technology in finance.
Anyone trying to attack an institution using blockchain to manipulate funds would find it impossible. This is because the ledger and all its sensitive data would be stored across every node in the blockchain. The computing power needed to attack all nodes simultaneously makes it difficult, but because blockchain builds on data previously inserted into it, manipulation becomes impossible.
Blockchain’s reliability, meanwhile, also encourages transparency. The blockchain and all its entries are visible – though anonymised – to all parties in the chain. Using this technology could help restore trust in both the financial system and the authorities following the Great Recession and recent political upheavals. Trust seems to be diminishing rapidly across the world, and one area in which it is fading fast is the charity sector.
BlockAid: A Cyber-Duck Hack
At our last hackathon, we were keen to see how we could help restore trust in the charity sector using blockchain. We know that understanding blockchain technology is very difficult for the average user. Our challenge was to see how we could promote blockchain’s benefits in an accessible manner, and how to create a business model around it.
We’ll soon be talking more about our experience with blockchain technology applications and how we created BlockAid, a donation platform that uses blockchain and smart contracts to guarantee donations. Remember to check it out.