Blockchain - What Is It, And Why Does It Matter
Blockchain Introduction
The term "blockchain" is almost certain to be familiar to you. However, you are likely unaware of what it is or how it works, let alone why it generates such a buzz. That is perfectly acceptable; the vast majority of people do not.
This hasn't stopped it from becoming a buzzword used in virtually every industry, from finance to shipping to fantasy football. Amazon (AMZN), Facebook (FB), IBM (IBM), and Walmart (WMT) believe blockchain technology can be used to track shipments and store data more efficiently, among other things. They are far from alone in their enthusiasm for technology, which many believe has the potential to transform logistics, food safety, banking, and even voting.
Not bad for an esoteric technology developed by the enigmatic figure responsible for the invention of bitcoin.
None of this, of course, answers your question: What is blockchain?
A Public Digital Ledger
In its simplest form, a blockchain is an immutable public digital ledger. Once a transaction is entered, it cannot be altered easily. A comparison may assist in explaining how it works.
Consider a time when individuals kept track of their purchases and payments using a checkbook register. Now multiply that by millions of transactions and imagine that thousands of computers hold copies of the register. Before a transaction can be recorded in the register, each computer must verify it. A transaction is recorded in permanent ink once it has been verified.
The register maintains a log of transactions for a specified time period, which can be as little as ten minutes. Once completed, the register is stapled shut and labeled with an alphanumeric sequence that uniquely identifies it. Following that, a new register is created and glued to the previous one. Eventually, a chain of registers will result.
That, in a nutshell, is the definition of a blockchain. Because these registers are stored on a large number of computers, they are virtually unchangeable and unhackable. To continue the analogy, you'd have to work backward, ungluing each checkbook until you reached the one containing the transaction you'd like to modify before making the revision. And this procedure would have to be repeated for each register copy. You could not get away with it.
The primary advantage of public blockchains is that once data is logged, it cannot be changed. There is a permanent record, and because the ledger is distributed among numerous entities, hacking it is nearly impossible.
Additionally, the entries are made under pseudonyms, ensuring that the ledger maintains some level of privacy and that no single individual has complete control over it. Thus, blockchain technology is ideal for bitcoin and other cryptocurrencies.
And a great deal more — although opinions vary on its effectiveness in certain applications.
Blockchain History
The individual or group of individuals responsible for the technology, which was developed concurrently with bitcoin, goes by the presumed pseudonym Satoshi Nakamoto. Nakamoto, an enigmatic figure who has proven nearly impossible to identify definitively, desired a decentralized, permanent, and public method of recording the creation and distribution of each bitcoin. Today, blockchain technology serves as the foundation for an overwhelming number of cryptocurrencies.
Over 18 million of the 21 million bitcoins that will ever exist have been mined thus far. Each of them, as well as any transactions involving them, has been blockchain-encrypted. This illustrates the magnitude of data that the technology is capable of handling.
Although Nakamoto intended blockchain to be a public ledger, it wasn't long before permissions-based blockchains controlled by a particular company or group became popular. They lack the same level of immutability as blockchains due to the fact that they are stored on a much smaller number of computers. And, contrary to popular belief, the thinking behind them is not novel.
According to Nicholas Weaver, a senior researcher at The International Computer Science Institute, permission-based blockchains are a twenty-year-old concept. "Whenever someone says 'private blockchain,' mentally substitute a non-editable Google Doc."
Practical Applications Of Blockchain
Businesses are utilizing blockchains to manage pharmaceutical data, track freight shipments, and trace the origin of food. Each application emphasizes blockchains' ability to maintain an immutable record of data.
Nonetheless, some criticize the technology's utility. Without a doubt, it's beneficial for cryptocurrency. However, critics dismiss the notion that it will usher in a new era. "Anyone who claims that blockchain technology can be used to solve Problem X does not understand Problem X," Weaver explained.
He cites the widely-publicized example of using a blockchain to track food production and distribution. Proponents argue that it would enhance safety and make it easier to trace the source of a salmonella outbreak, for example. RFID chips or QR codes, he explained, would be far more convenient. Such technology creates a more reliable record because it eliminates the need for an individual to manually enter data into the ledger, a process that invariably introduces human error.
However, Catherine Tucker, a professor at MIT's Sloan School of Management, believes blockchain technology holds tremendous potential. Blockchains, she believes, will be most beneficial for managing digital currencies and tracking health and insurance data.
"I believe we can all agree that the way we store and record data has not evolved at the same rate as other aspects of our use of digital data," she said. "It makes perfect sense to develop more advanced technologies for storing and protecting data."
Tucker stated that it is critical for early adopters of blockchain technology to remember that the technology is "evolving" and that businesses should not embrace it solely for the sake of adoption. Rather than that, she said, they should ensure they truly require the technology and, once adopted, ensure they can adapt to changes as they occur.
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