Updated: Sep 19, 2020
“Imagine a database that could be trusted by anyone and everyone in the world, that could record transactions securely and in real-time, that could be easily shared and accessed just like Google Docs.”
Blockchain has been claimed as one of the most disruptive technologies in modern times with the potential to solve issues such as lack of mutual trust, high transaction cost, and fraud. It came to prominence in 2008 soon after the introduction of the Bitcoin White Paper. Blockchain is a technology created for users to exchange value and information over the Internet without the need of centralised intermediaries.
The History of The Internet
By understanding the history of the Internet we can better appreciate the value blockchain brings. When the Internet was created in the 1990s it allowed developers to create a website and share information with their users. As the internet developed, users were able to create content on websites and interact with each other (e.g. social media and e-commerce). The issue with the internet is that it was impossible to verify individuals and transactions over the Internet without central providers (such as banks). That is where blockchain technology comes into play: allowing previously untrusted individuals to securely make agreements and exchange value over the Internet.
How Does Blockchain Enable This?
To help aid this learning, I will explain the architecture of blockchains and the most famous application, Bitcoin. Bitcoin is described as a public permissionless blockchain because anyone in the world can download and join the network. It is a peer-to-peer decentralised financial network; it allows participants to send and receive digital money from one device to another: without the need of a bank.
Firstly, it is important to understand the participants on the Bitcoin blockchain:
Users - individuals (such as me and you) who download and use the blockchain-powered services and goods.
Miners/Nodes - devices that download the blockchain and verify transactions on the blockchain network.
Software Developers- who manage the coding of the blockchain software.
Business organisations -individuals that build digital goods and services on the blockchain network.
How Do They Participate in The Bitcoin Blockchain Network?
When User ‘A’ initiates a transaction to send 1 Bitcoin to User ‘B’. The transaction between user ‘A’ and ‘B’ is broadcasted to the whole network and all the nodes work to verify the transaction. Once the transaction has been verified, the 1 Bitcoin is sent from User ‘A’ to User ‘B’. The transaction is saved to the blockchain ledger and is connected in a chain-like manner. This process is completely automated.
The architecture of blockchain networks creates some unique features.
● Decentralised- no one has full control of the database
● Censor resistant- the use of distributed ledgers means that the database is hosted by nodes around the world and no central point of failure which makes blockchain censor resistant
● Transparent - all the verified network transactions are saved on the shared and distributed database and can be viewed and audited by anyone
● Secure - through the combination of technology and economic concepts, it is computationally extremely difficult to change the saved transactions on the blockchain. (Bitcoin has never been hacked since its concept 12 years ago)
● Automated - the transactions are verified by smart contracts with no need for human intervention leading to faster settlement
The concepts found in the Bitcoin blockchain network have now been studied and re-engineered in many other industries outside of the financial industry. Businesses have begun developing different blockchain structures to Bitcoin’s public permissionless blockchain networks such as private, permissioned blockchains.
The implementation of blockchain encourages information silos to be opened up which can have a positive effect in business through the ease of sharing information, more trust, and faster transactions on the Internet. We are currently going through a period where the adoption of blockchain applications will start to accelerate as the understanding of the technology’s potential increases. This will happen in multiple industries: creating some novel business innovations but also some novel legal challenges.
Bitcoin: A Peer-to-Peer Electronic Cash System <https://bitcoin.org/bitcoin.pdf>
The Evolution of the Internet, From Decentralized to Centralized <https://hackernoon.com/the-evolution-of-the-internet-from-decentralized-to-centralized-3e2 fa65898f5>
“Blockchain Application and Outlook in the Banking Industry”, Guo and Liang (2016) <https://jfin-swufe.springeropen.com/articles/10.1186/s40854-016-0034-9>