While it might have a slightly mechanical sound to it, the blockchain is actually a crucial aspect of online data processing. But what is it, how does it work, and why might it be important in the coming years?
Work started on developing a cryptographically secure chain of blocks in the early 1990s to prevent a series of events being retrospectively edited or copied. In essence, data could not be amended once it was uploaded, ensuring a single version of the truth. That principle of fixed reporting was identified by the anonymous developers of the bitcoin cryptocurrency, who developed a pioneering blockchain database. This publicly visible digital ledger recorded each transaction involving bitcoin in chronological order, right down to early test transactions.
Although bitcoin lacks the distinguishing characteristics of individual banknotes and bullion bars, it is possible to trace the movements of every coin or Satoshi (a tiny fragment) throughout its existence. Fraud and false accounting are effectively eliminated, even though bitcoin is exchanged without either party in a transaction knowing the other’s true identity.
It was engineered into bitcoin’s development that the blockchain would be automatically updated as soon as a transaction took place, with a timestamp being added to the server. A block contains a unique mathematical algorithm, known as a cryptographic hash, which is repeated in the subsequent block to link these two blocks together. Because each transaction is tied to its predecessor in the chain, it’s effectively impossible to alter a specific timestamp without adjusting every subsequent block as well. There are no weak links in the chain, and nobody retains overall control of this peer-to-peer network. As we’ll see shortly, decentralization represents a strength but also becomes a weakness.
One way to imagine the blockchain is by picturing a hundred copies of the Google Sheets cloud-hosted spreadsheet, open on a hundred different devices. Each end-user terminal is known as a node. When one user makes a change to their Sheets document, every node displays that revision. Bitcoin’s blockchain is updated on a ten-minute cycle, though rival cryptocurrencies update their own chains far more frequently. There are around 1,700 cryptocurrencies already in existence, but financial transactions represent just one possible use of the blockchain. Others are summarized below:
Vulnerabilities and victims
Because the blockchain is so robust, instances of fraud (of which there have been many) tend to center on individual client accounts. Instances of cryptocurrency theft have been rife, often involving the seizure of funds from insecure digital wallets used to store cryptocurrencies. More dramatically, hackers identified vulnerabilities in Tokyo-based Mt. Gox’s vaults, enabling them to steal almost a million bitcoin. Mt. Gox was forced into liquidation in 2014, and administrators announced a couple of weeks ago that an online filing system has been established for creditors to report losses. However, it’s currently unclear how a liquidated company might be expected to repay creditors, particularly as bitcoin’s value has fluctuated wildly at the hands of stock market investors since 2014.
Clearly, for consumers to have faith in blockchain processing, greater development and regulation is required relating to personal storage of sensitive information. Nevertheless, high-profile instances of theft and fraud haven’t involved blockchain technology so much as third-party software. The blockchain didn’t fail when Mt. Gox was plundered – a lack of protection for user wallets was the culprit. Similar sentiments applied when the Ethereum-based DAO project collapsed after funds were siphoned off. Yet DAO failed due to programming errors, and a lack of legal foresight around how this digital investment platform would be managed on a day-to-day basis.
One of the blockchain’s underlying principles – its ability to create irrevocable records of important information – is being viewed with interest by authorities and industries beyond the financial services sector. It would be perfect for keeping land ownership records, preventing title disputes, and maintaining a public ledger of who owns what. At the precise moment, a contract was agreed between two parties, the blockchain would be updated and everyone could see what had just occurred.
Stock market trading and ecommerce transactions are other industries where blockchain technology might be advantageous since cryptocurrency payments can’t be recalled once they’re made. Contracts could be set to execute as soon as payments are received or specific criteria are met, automating processes to prevent delays or procrastination. Crowdfunding is an obvious example, with donors automatically receiving something when a target is met, or a threshold is surpassed. Copyright and auditing are further examples of industries where being able to trace the lineage of a product, service or event ought to reassure people about authenticity and accuracy. Little wonder that many analysts believe the blockchain may one day become almost as significant as the internet itself.
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