The technology likely to have the greatest impact on the future of the world economy has arrived, and it’s not self-driving cars, solar energy, or artificial intelligence. It’s called the blockchain.
-Don Tapscott, Bestselling author of Wikinomics
Blockchain, the second generation of the internet payment system has started. It is peer-to-peer exchange of digital money. Blockchain has proved that we don’t have to have an intermediary – a powerful bank or a credit card company – trying to authenticate who we are. Exciting fact is that it works in the same way as we do when we move to a shop and buy something anonymously. This all requires a protocol, a protocol trying to build trust among peers rather than an institution to whom we can trust. The private institutions monetise the data collected or, in the case of governments, use it to spy on us, and our privacy is compromised. So, we will now try to understand the aspects and the challenges that are lying ahead of this new technology.
What is Blockchain
Blockchain acts as a public ledger of all the online transactions that have ever been executed. It is growing at an exponential rate as ‘completed’ blocks are being added to it with a new set of recordings. The blocks are added to the blockchain in a linear, chronological order. Each node (computer connected to the network using a client that performs the task of validating and relaying transactions) is facilitated with a copy of blockchain, which gets downloaded upon joining the network.
Block essentially refers to a part of blockchain, which acts as a page in the ledger. Block is like a permanent store of records which, once written can’t be altered in any case. The hash pointer list (a type of Data Structure) used in the network helps us to make sure that the information is not altered.
How the Blockchain works
The blockchain basically works as a global spreadsheet that runs on millions and millions of computers. It’s distributed and open source, meaning that anyone can view the code and see what’s going on. It doesn’t require any particular system to settle the transactions. The Blockchain is practically unhackable database of digital assets. It is essentially a platform for building trust.
All the blockchains have a digital currency of some kind associated with them, but Bitcoin stands apart from them and is biggest of them all. Thus these two terms are used interchangeably.
Although there lies hypothetical risk of attack on Bitcoin, called “51% attack” in which if a group of 51% of the miners can prevent new transactions from gaining confirmations, allowing them to halt payments. They could also double-spend the coins. But they won’t be able to destroy the old blocks or coins that are transferred.
Let’s understand the working of Blockchain with the help of an example, if Alice owes Bob $100, Alice will initiate the transaction in Bitcoin, but it is needed to be approved by someone. This someone is the bitcoin miner. The bitcoin miners have powerful computing resources. Some people estimate that the entire computing power, for Bitcoin blockchain will be 20 times that of Google in the coming years. The miner will authenticate the transaction as soon as possible as they are motivated to do so. The motivation is that as they approve the transaction and solve a complex mathematical problem, they get paid, in “Bitcoins”. This allows to solve the problem of double-spending.
In case, Alice tries to double spend that coin, she will have to hack that ten-minute block (or the time in which the ledger page will be filled). And this is practically impossible. This is how blockchain is essentially decentralised as it is running on countless number of computers across the globe. But Alice even if she hacks, can’t change the transactions that happened before even and change the transaction done by her before it is approved.
The challenges that can be experienced are that the transactions are made anonymously and thus have become a means of cash hoarding and illegal investment. The security is also a big concern while using Bitcoin. The collapse of Mt. Gox with the presumed theft of 744,000 bitcoins (6% of all the total coins in circulation) came as a big blow to the Bitcoin market. There is still a long way to go in terms of security. “Bitcoin 2.0 needs military-grade security” as stated by some of the technical enthusiasts.
The main problem of centralization is also solved as even the creator of Bitcoin is anonymous. Satoshi, the claimed founder of Bitcoin has kept his or her identity secret, though many people have claimed to be Satoshi, including Craig Wright, a famous Australian entrepreneur (There are a lot of conspiracy theories regarding this, make sure to have fun reading them).
Though there is very optimism related to Bitcoin technology. But it has some promising issues and has the power to change the way transactions take place in the world.