Blockchain is a technology that allows you to send money securely to anyone in the world without going through a bank. It has applications in many areas, not just finance, and has the potential to disrupt the traditional centralized system.
If we could send money directly to anyone in the world without going through a bank, we could save money on currency exchange and transfer fees; if we had serverless cloud storage, we could keep our data safer because hackers wouldn’t have a base to attack from; if we had an internet address system that didn’t require an administrator, there would be fewer disputes over internet addresses; and if we had a system that didn’t require an administrator, there would be fewer disputes over internet addresses. These three things aren’t imaginary – they’re already technically possible. The key technology that makes them all possible is blockchain.
Blockchain is most often mentioned in discussions about Bitcoin. Bitcoin is the bankless global financial market system I mentioned at the beginning of this article. In the five years since its inception, Bitcoin has grown to become one of the world’s top 100 currencies by market capitalization, and it’s all thanks to the blockchain.
A blockchain is a ledger of transaction information that is viewed as a single chunk of transactions, linked one after the other. Unlike a real-world ledger, which is kept only by the trader, this ledger is open to everyone. While this may sound like a risky way to keep track of your transactions, it’s actually safer and more convenient. Blockchains don’t require a third, government-authorized entity like a bank to make transactions. Instead, transactions can be made directly between individuals without going through a bank, a process known as peer-to-peer (P2P). A peer-to-peer network is not simply one-to-one, but a spider web of interconnected users. This isn’t new: torrents, which allow you to download videos, photos, programs, and more, utilize P2P networks. Instead of downloading data from a single server somewhere, you get files directly from other users who have shared them with you. By using a peer-to-peer network to spread the load, it’s easier to implement services that require large resources.
While these systems offer convenience, they also leave you wondering if you can trust the person you’re connecting with every time you use them. This raises the issue of safety. When we shop online, we send money to people we don’t know without question because our bank guarantees the transaction and the movement of the funds. If we didn’t have a bank, we’d need something else to prove that the transaction wasn’t faked. Blockchain solves this guarantee function with a unique open algorithm. It decentralizes the function of consensus among network participants.
To take the example of Bitcoin, which first demonstrated the possibilities of blockchain, all Bitcoin users connect to a peer-to-peer network and share copies of the same transaction ledger. They meet every 10 minutes to update the transaction book to keep it up to date. To prevent a few users from tampering with the book, only transactions that have been approved by the majority are recorded. Once the transaction history has been rewritten, the newly created ledger is again shared among all Bitcoin users. Each set of transactions that is created every 10 minutes is called a block, and not just anyone can create a block. Creating a block requires solving a math problem, and the first person to solve it gets the right to create the block. This process is called mining, and the people who do it are called miners. Because solving the math problem quickly enough to create a block requires a lot of computing power, competition is so fierce that there are companies that specialize in mining.
If someone were to put a huge amount of computing power into mining and be the only one mining all the time, Bitcoin wouldn’t have the same trust as a bank, because they would have the power to modify the transaction history at will every time. But for this to be possible, they would need to control a majority of the computing power of all miners, say 51%, which is virtually impossible. All the computing power in Google’s data centers combined is only one-tenth of one percent of the total.
Bitcoin is also immune to malicious hacks that attempt to falsify or alter transactions. This is thanks to the structure of the blockchain. When a new block is created, it stores the unique value (hash value) of the previous block, which is how all blocks are connected. If someone maliciously tampered with the transaction history, they would change the hash value of the block containing the history, which would change the hash value of the next block that stores it, which would change the hash value of the next block. Eventually, the information in all blocks after the hacked block would have to be cascaded, which is extremely difficult. Furthermore, the blockchain ledger is shared by all users. Even if one individual’s transaction book is altered, it can be quickly restored to its original state because many users already share the same book, meaning that to change the transaction history, a majority of all users would have to modify their books at the same time.
Bitcoin is a very secure system, but it’s not ideal for use in the financial world because open blockchains like Bitcoin, where anyone can join, take a long time to confirm transactions. This is why financial institutions are planning to form associations or unions to run closed blockchains that restrict users. The idea is to limit users so that when other users agree on a transaction, they can create it as a block. For example, in a closed blockchain with 10 brokerage firms, let’s say that Brokerage Firm A wants to store a contract with a client on the blockchain. The contract will have digital signatures from the client and Brokerage Firm A stating that they agree to the terms of the contract. After verifying that both signatures are present, the other nine brokerage firms will validate the contract, meaning that the rest of the users of the blockchain will all confirm that all contracts stored on the blockchain have been agreed upon by the parties to the transaction. If the customer or brokerage firm A wanted to secretly modify the contract, it would be impossible because the ledger is shared by the participants who have already approved the transaction.
The changes that a blockchain designed in this way would bring to the financial world would be so profound that Brock Pierce, an entrepreneur who runs more than 30 Bitcoin companies in the U.S., has said, “The innovation that blockchain will bring will be bigger than the Internet revolution.” For example, take the case of insurance contracts, which require the consensus of many institutions. In order for an insured to file a claim with an insurer, the insurer needs the consensus of an organization to prove the accident, a hospital to prove the insured’s health, and so on. But if the insurer has codified the contract and stored it on the blockchain, there is no need for humans to be involved in this whole process of consensus. The hospital electronically creates a medical certificate and uploads it to the blockchain network, and the insurer approves it after checking whether it matches the duration, validity conditions, etc. of the contract stored on the blockchain. The insurer then automatically pays the insured, which is also stored on the blockchain. The whole complex process is automated.
If you ask someone where to go to make a cash transaction, it’s common sense to say a bank, but the fact that transaction information is stored in only one place means that if it collapses, the damage is enormous. Of course, traditional financial companies like banks and credit card companies keep their transaction ledgers secure. They have human and physical security measures in place to ensure that no one can access their servers, they have servers deep in their buildings that store transaction ledgers, they have security equipment and programs in place, and they employ guards and security staff. But maintaining these systems is complex and burdensome.
Blockchain not only turns this on its head, but also offers a safer and more convenient way of doing things. Blockchain is also a technology to watch in the future, as it has endless possibilities for application in many fields, not just finance.
