blockchain-diagram-image
centralised vs decentralised network diagram

The Blockchain Explained

by Robyn Everingham

How do you explain a technology set to change lives so significantly in the not too distant future? Finding the pathway from our current worldview to the world we are fast approaching is a challenge.

Think back to life before the internet. Could we have imagined life as we know it today? How could our 1995 selves have explained the web of 2020?

Blockchain technology is creating a similar revolution even as we navigate COVID lockdown 2020.

The blockchain space is filled with enough new terminology and acronyms to fry a brain! While definitions are essential to understanding a new subject, sometimes even the experts slightly disagree. So, let’s ease into it.

This article attempts to explain Blockchain in layman’s terms. To do that, Blockchain will need some context; a little history of how we arrived at this point in its development.

blockchain-diagram-image

What is Blockchain?

At its simplest, Blockchain is a technologically new way to manage a ledger.

Ledgers have recorded commerce transactions for thousands of years. Ledgers might be mentally associated with accounting, but they could also be considered a storage place for data.

In the last 30 years of the 20th century, accounting ledgers became increasingly digitized with the evolution of computer technology. The 1990s saw the rise of the Oracle database allowing large organizations to centralize their accounting function and incorporate non-accounting functions, like inventory, purchasing and Human Resources into the database providing an almost real-time view of the business and revolutionizing a monthly accounting cycle from weeks to days.

This centralized database model provided access to business information data not possible before.

Indeed, during the 2000s, applications not considered to be true accounting/ledger applications also began storing data in a centralized way (e.g. Google).

While this new technology came with many advantages, central databases have started to leak integrity and trust at an unacceptable level.

centralised vs decentralised network diagram

Decentralization is the process of moving away from a centralized model. A decentralized network (see diagram) retains some form of central control. E.g. Banks might work together to manage their interbank settlement process, each bank being a hub of the decentralized network. No one authority controls the network, but decisions are semi-central. It may be a valid model for this business requirement, but it is not a true distributed, transparent system.

How Does Blockchain Work?

 Blockchain is fully decentralized; a ‘distributed ledger’. Instead of data kept on a centralized database, controlled by a central authority or intermediary (e.g. your bank or government, Google), the full ledger/data is stored on each of many computers in a distributed peer to peer network.

The central authority is eliminated. Transactions are processed according to pre-set rules (algorithms, smart contracts) (Security).

People (peers) who run Nodes of the network are incentivized to verify the transactions. Once verified, transactions are added to a ‘block’ of data, ‘chained’ to the previous block in such a way as to be unchangeable (Immutability).Anyone can view the transactions back to the original block – a perfect audit trail (Transparency)

The blockchain promise is a revolution of better security, transparency, efficiency, lower cost for all – a decentralized web that gives power back to the people!

To understand the need for blockchain applications, it is essential to take a journey back to the start of the internet and trace its development.

A History Lesson…

There are two vectors to consider here, and they occurred in parallel.

The development of the internet and the development of blockchain technology are now merging into a revolution of change.

The History of the Internet

Tim Berners-Lee originally created the web as a truly decentralized medium so that everybody could participate by having their own domain and their own webserver.

 ‘The individual was incredibly empowered. It was all based on there being no central authority that you had to go to ask permission.’

 It was an exciting, level playing field.

What happened to this altruistic idea of the web?

As the dot-com bubble burst, there was a realization that monetization of cyberspace was possible. The centralization and monetization process began.

In the intervening years, Google and Facebook began the push to provide services that looked free for a while. Today, a small number of companies control the internet. Known as the FAANGs (Facebook, Apple, Amazon, Netflix and Google) and, together with Microsoft and Twitter form an oligopoly to practically control the internet.

To be fair, these companies created attractive and user-friendly technology, easy to use platforms, which encouraged more and more people to use the services that came to power our lives, however…

There is a hidden cost…

These companies account for a large share of users’ attention. Daily, billions of pieces of personal data are handed over and stored on a few supercomputers around the world. Effectively, they control this valuable personal data, which in turn, they sold to market researchers and advertisers.

Also, this growth in size and corresponding power makes it harder for competitors to get a foothold in the same market. The oligopoly has amassed an almost-exclusive share of their respective markets. This monopolistic power seems unassailable.

Microsoft faced court in 2001, charged with illegally maintaining its monopoly position in the PC market.

Dina Srinivasan, author of a 2019 Berkeley Business Law Journal article, notes “Colloquially, and in the press, Facebook is a monopoly. Members of Congress, reporters, academics, and even initial founders of Facebook are speaking of Facebook’s monopoly power and questioning the need for regulation.”

How Secure is Our Data?

The Facebook-Cambridge Analytica scandal of 2018 saw Mark Zuckerberg grilled by Congress.

Millions of Facebook users’ private data had been harvested and used for political advertising. The data collection extended far beyond the original Facebook account to their friends without knowledge or consent. Legislation has recently been enacted in Europe (GDPR 2018) and subsequently the California Consumer Privacy Act to protect private data.

Even since this legislation, Google has been caught out! Users of alternative internet browser Brave, uncovered ways Google was circumventing GDPR legislation. In 2019, Google was fined $57 million for the breach on the grounds it lacked transparency and clarity about the way it handled personal data.

These large players also have enormous influence over the sources and content we consume, including news. A recent study of every new story ever on Twitter finds ‘Fake news and false rumors reach more people, penetrate deeper into the social network and spread much faster than accurate stories’.

Government agencies also control centralized data opening up the possibility of online surveillance or censorship. USA Today reports

‘The federal government censored, withheld or said it couldn’t find records sought by citizens, journalists and others more often last year than at any point in the past decade, according to an Associated Press analysis of new data.’

Besides, if any of these centralized entities shut down, data and connections could be lost forever.

The benefits of centralized data storage were so promising in the beginning. We’d always trusted our banks!! We turned to Facebook in droves, embraced Instagram, turned Google into a verb and were seduced into putting all our personal information in the cloud.

Ever been browsing a magazine in a store and the next day ads for the item you were looking at in the magazine start appearing in your social media feed! 

The inklings of doubt are becoming roars. 

It feels like Big Data knows way too much and may not use it in our best interests.

In the words of Tim Berners-Lee: ‘It hasn’t worked out. Instead, we’ve got the situation where individual personal data has been locked up in these silos. […] 

That feeling of individual control, that empowerment, is something we’ve lost. The proposal is, then, to bring back the idea of a decentralized web. 

To bring back power to people. We are thinking we are going to make a social revolution by just tweaking: we’re going to use web technology, but we’re going to use it in such a way that we separate the apps that you use from the data that you use.’

Blockchain technology is shaping up as the way we ‘separate the apps that you use from the data that you use’

It is potentially the most significant innovation of the 21st century and, its effects are already rippling through finance, manufacturing and education.

History of Blockchain

In the early 1990s, Stuart Haber and W. Scott Stornetta envisioned what many people have come to know as Blockchain. Their first work involved working on a cryptographically secured chain of blocks whereby no one could tamper with timestamps of documents.

On the back of the Global Financial Crisis in 2018, Blockchain 1.0 was born with the emergence of the Bitcoin application. The digital currency experiment was a concept of a blockchain, first fully actualized in Satoshi Nakamoto’s Bitcoin white paper.

Subsequently, Blockchain was made opensource, allowing interested parties to build on the existing code. In the ensuing years, many ‘altcoins’ seeking to improve on Bitcoin were released onto the marketplace. Litecoin and Namecoin were early adopters.

Today, there are approximately 5,392 cryptocurrencies being traded with a total market capitalisation of $201bn (as of April 22, 2020)

In these early years, Bitcoin and Blockchain were considered the same thing. A realization that the underlying Blockchain could be separated from Bitcoin and used for other applications stimulated R&D investment.

In 2013, Vitalik Buterin founded Ethereum. While developing the Cryptocurrency Ethereum, he also wanted to build other applications using blockchain technology. He created a feature known as a ‘smart contract’ which paved the way to allow blockchain technology to be used for any application involving the exchange anything of value directly, i.e. without a middleman or intermediary (disintermediation)

Historically, this era is known as Blockchain 2.0 and could be referred to as the birth of Blockchain as we are about to experience it.

The Future of Blockchain

From 2018, we entered the era of Blockchain 3.0 where one of the main issues to be resolved is the scalability of the technology. The requirement for transactions to be processed at all network nodes effectively produces the security we need, but transaction speed can be a problem. A solution is undoubtedly required for the large-scale systems currently envisaged.

With that background, let’s reconsider the question…

Why do we need Blockchain?

The Blockchain does one thing: It replaces third-party trust with mathematical proof that something happened.”

– Adam Draper

Blockchain technology is a solution to the problems that have arisen with the advent of centralized data; the problems that are affecting everyone.

It offers a way of taking back control of our data. It enables us to transact safely with unknown people of unknown reliability or trustworthiness without a central intermediary. The technology creates a way of maintaining transactional integrity, enabling people to trust the transactions rather than having to trust the people with whom they will be dealing.

For example, currently, your bank acts as your trusted financial intermediary to keep your assets safe. They supervise transactional processing according to customer instructions.  However, this also means they control personal data; they set the rules, time schedules, transaction and account keeping fees.

In the new world of FinTech (financial technology), simple financial transactions now taking days to complete and incurring high fees will be instant and close to zero cost. An intermediary, such as a bank, won’t be necessary. Individuals will transfer money or pay for goods and services, peer to peer without intermediary oversight (think PayPal, Amazon, Uber, AirB&B).

Benefits of Blockchain Technology

Blockchain systems are opensource; software for which the original code is freely available to be redistributed or modified. Opensource applications often attract a community of programmers who fix bugs, improve or adapt the software. The software is not owned and controlled by any specific entity. Wikipedia and WordPress are examples of open-source software. This contributes to better security, lower costs, reliability and transparency of the ongoing system structure before we even start transacting.

A distributed system offers protection from a cyber-attack to a single central database. The full ledger is kept on each node in the network so, even if one node is attacked, the ledger is intact on all other nodes and can be restored. Even if only a single node exists, the data is still intact and can be restored to all rebuilt network nodes. (security)

Participant trust is generated in 2 main ways:

  1. The participant can maintain anonymity by using an encrypted address to transact publicly while keeping their identity private. They access this address like a mailbox with a cryptographic key – providing full control over personal data.
  1. The method for processing transactions using cryptographic technology and securely linking blocks of transactions together ensures transactional integrity.

Since all transactions can be viewed in real-time, full transparency of the ledger exists back to the original block (genesis block).

Fully verified, reconciled, and immutable transactions provide an audit trail. Fraud is all but eliminated as finalized transactions cannot be changed.

The Blockchain offers ease of transacting, efficient processing of low-cost transactions without the hidden fees currently charged by intermediaries.

What’s not to like?

What is Blockchain used for?

The first real attempt at a decentralized system was Napster. It was a way of sharing music files and circumventing the record company intermediary. While it didn’t go so well for Napster, it did push the technology envelope.

This system, what’s most interesting about it is, you’re interacting with peers, you’re exchanging information with a person down the street’

– Shawn Fanning, cofounder Napster

We may not be into Bitcoin or Cryptocurrencies to date, but we will be affected by new applications of blockchain software. We might even have to come to terms with digital or cryptocurrency!

Over the past five years, the technology has developed to a point where many new applications are envisaged.

Finance seems like the easiest place to start processing simple transactions using blockchain applications. FinTech (financial technology) has become a phenomenon. The technology will impact everything from personal use – banking, electronic payments, personal finance, loans, insurance to the venture capital and wealth management sectors. The sector is expected to be worth $26.5 trillion in 2022, with a 6% compound annual growth rate.

Government applications of Blockchain are expected to enhance the protection of sensitive data. The 2017 Equifax database breach exposed the personal details of 143 million American citizens, two years after nearly 20 million records of government employees were stolen.

Blockchain applications could allow for independent verification and transparency of data, potentially rebuilding trust with citizens.

Most importantly, it has the potential to streamline operations. Under COVID lockdown, the US government is attempting to get payments to citizens. Many do not have tax records so are invisible; many do not have an address to send a cheque. Blockchain could speed issue of welfare payments directly to mobile phone accounts.

In the Healthcare sector, blockchain technology could facilitate the secure storage and transfer of patient medical records with a level of security and patient privacy not seen before.

Education is set for a transformation using blockchain technology to secure student records and other documentation.

 Blockchain is in Business!

Managing Supply Chains

  • John West has implemented a blockchain system to track produce from boat to can on supermarket shelves.
  • Walmart is testing with a project to track lettuces from farm to store
 

Managing Community Electricity

  • Transactive grid is assisting communities in creating local electricity grids using blockchain technology
 

 Empowering the Arts

  • Mycelia is a community for musicians to securely share their music online and be paid for it.
  • Systems are being developed for recording and selling digitized and copyrighted photographs
 

Transforming the Not-For-Profit Sector

  • BitGive is using blockchain technology to harness transparency, immediacy and efficiency of crypto-philanthropy
 

Opening New Marketplaces

  • Peer to peer market OpenBazaar allows for goods and services to be traded with no overhead fees like Amazon or eBay.
 

Conclusion

Blockchain technology has started to transform the world as we know it in the same way the internet did. 

Further, it has the potential to integrate millions of people currently locked out of the global economy. Two billion people in the world are unable to access a bank account. Even in the US, 25% of the population may be ‘unbanked’ or ‘underbanked’. However, many have a mobile phone and, with the advent of digital currencies linked to (transferrable to and from) the US dollar, access to the financial markets via a mobile phone will be the norm.

Blockchain technology is potentially moving the world towards a more financially inclusive future for all.