What is Blockchain and WHY was it Developed? (A Simple Explanation)

You’re probably wondering what blockchain is, why it was developed, how it is being used now, and how it could be used in the future. So let’s start off with the first question: What is blockchain? The word “block” refers to a list of records, while “chain” describes the linked relationship between these lists. Imagine a list of records linked to another list of records. That’s basically what the term blockchain describes: linked sets of records. The first known use of blockchain-type technology was in 1991 by Stewart Haber and Scott Stornetta. However, the method gained its current fame thanks to Satoshi Nakamoto and Bitcoin.

Modifying Digital Records

The advent of digital technology raised myriad concerns about the accuracy, security, and modifiability of digital records. This is because it is imperative to maintain the integrity of digital records by ensuring they cannot be modified, back dated, or forward dated. Early on, third party time stamping services were the only options available to address these concerns. However, time stamping services were susceptible to bribes or security breaches. Haber and Stornetta worked on developing a technology that automatically ensured the accuracy, security, and modifiability of digital records using computers and mathematics. They decided to employ use of cryptology to achieve the desired level of privacy and security for digital record-keeping.

Cryptology and Security

Now Cryptography is the study of secure communications while Cryptology is the term used when you study the application of mathematics to cryptography. In 1992 Sanada and Bayer enhanced their cryptographically based blockchain technology by adding the use of hash trees, which are also known as Merkle trees. Let me break this down for you further. Let’s talk about hashes. I’m going to give you an idea of what hashes and hash functions are using Social Security numbers we receive in the United States.

Imagine a list of unassigned Social Security numbers. You can see all of these Social Security numbers are in a standardized format. Each Social Security number contains a set of three whole numbers, a dash, two whole numbers, a dash, and four whole numbers. Now, imagine the United States uses a computer function to map each person’s name to a unique social security number. Regardless of the length of a person’s name or the letters used within a person’s name, the computer function maps it to the standardized social security number.

Now back to hashes. Any computer function that maps arbitrarily sized data (like a lists of people’s names) to a fixed form of data, (like Social Security numbers) is called a hash function.  The output of the hash function is a fixed form of data, just like a social security number, and this output is commonly known as a hash value, hash code, or digest.

Records on the Chain

Going back to how the word “block” representing a list of records, imagine several lists of social security numbers that are stored in blocks, where each block represents a region. And the child blocks stemming from this represents states, and a child block stemming from that represents cities, and etc That should give you a very simplistic idea of what a hash tree is: blocks of hashes stemming from each other that resemble a tree with branches and leaves. The incorporation of the hash tree to early blockchain-type technology allowed the secure storage of large sets of digital records.

Bitcoin and Cryptocurrency

Onto the next question, how is blockchain used now? It wasn’t until 2008 that the first distributed blockchain was created for use as the underlying technology of digital currency. It was made by an anonymous person or group that goes by the pseudonym Satoshi Nakamoto. A common misconception is that bitcoin is synonymous with blockchain. That however is not the case. The blockchain facilitates the secure and private transfer of the digital currency called Bitcoin, as well as posts the transactions to a public ledger to maintain data integrity.

Private Transactions

Right now most financial transactions are facilitated and recorded through the use of private parties such as banks, Visa, MasterCard, and other financial institutions. The blockchain foundation allows Bitcoin currency transactions to occur securely and privately. It also maintains transaction accuracy by posting a time-stamped, un-modifiable record of the transaction to a public ledger without the use of a third party.

Instead, it uses computers, mathematical algorithms, and cryptology to perform these functions. The result allows a direct connection between  Bitcoin users without the need for a third party. So again imagine a list of transactions as a block and each block is being recorded on a public ledger. So as blocks of transactions are recorded on a running ledger, it creates a chain of blocks, hence the term blockchain.

Ledgers and Nodes

So where is this blockchain and what does the term public ledger mean? Every transaction between Bitcoin users is processed by a computer that has a processing software called Bitcoin client. This computer is connected to other computers via an online network. So imagine a computer with Bitcoin processing software on it connected to the Internet, which allows the computer to connect to a network of other computers online with Bitcoin processing software.

The technical term for each computer that participates in the blockchain network is the word “node.” So the blockchain network has several nodes or computers that it saves all of the recorded blocks of transactions on. This is where the word distributed or decentralized ledger comes from. Since every transaction is saved on every node or computer with Bitcoin client software on the Bitcoin network, the ledger of all Bitcoin transactions is described as distributed.

If you have a laptop with Bitcoin client software and keep it connected to the Internet and the Bitcoin network, you will have the entire Bitcoin transaction ledger saved on your computer. Then, if your computer breaks it will not affect the ledger because the same ledger is being distributed on several other computers around the world.  Safety is also addressed since the network cannot be taken down at any specific point. All of these computers process and record blocks of transactions to this public ledger that is saved on all the nodes connected to the Bitcoin network.

The blockchain process creates unique hashes for each transaction to ensure security and privacy. Anyone can go and look at the Bitcoin public ledger and see all of the transactions. When you send or receive Bitcoin, you can identify your transaction by the unique hash that’s created, the address of the user it was sent to, which is a randomly generated set of numbers and letters, or the IP address it was sent from.

Blockchain Uses in the Future

So on to the next question: How can blockchain be used in the future? How else can we utilize blockchain technology besides facilitating digital currency transactions like it does for Bitcoin? There are several applications for blockchain technology in multiple types of industries. Blockchain technology creates transparency, validates and secures records, manages smart contracts, and eliminates middlemen or third parties.

Some examples of how blockchain could be used includes recording land record transactions or mortgages, maintaining digital smart contracts like wills or promissory notes, managing digital identities like passports or birth certificates, housing distributed cloud networks to store information like documents or media, and a myriad of other exciting things. Two of the most promising uses are Tokenization and decentralized apps, or Dapps.

Tokenization

Tokenizing assets is the process of assigning a digital amount to them, which can be fractionally owned like a Bitcoin.  Take a painting’s value, for instance.  Most people will never have the wealth to pay $40,000,000 for a masterpiece like a Picasso or Monet.  However, if a painting’s value is determined and tokenized, several people could invest in fractions of that same painting.  Instead of buying the whole painting, you could own 0.00094 of it just like you could own 0.00094 BTC, corresponding to a value in your currency.

Another example is a high priced stock like Amazon at over $1500 per share or even Berkshire hathaway at $300,000 for one share!  A tokenized version of stock allows for ownership of a percentage of one of these shares, rather than an entire share.  The possibilities for digital assets are endless.

Decentralized Apps

Dapps are applications that utilize blockchain technology, but are not financial in nature like cryptocurrency. The key isthe lack of an intermediary for transactions, just as Bitcoin eliminated the need for a bank to transfer money.

A simple way to look at it is with a comparison to the Apple App Store or Google Play.  The apps you can buy there are are centralized apps. A decentralized app could be a “smart” contract between two parties that executes automatically when certain conditions are met.

Many d-apps utilize Etherium’s blockchain, rather than Bitcoin’s. Their uses are numerous and growing every day.

 What’s Next?

Blockchain will revolutionize our economy and lives over the next few years. What do you think blockchain technology has in store for us in the future? What other information should we know and understand about blockchain that I may have missed? Leave your comments below.

As found on Youtube