As our world pushes closer and closer to a unified global economy, there have been noticeable problems starting to arise with traditional or legacy financial instruments. With hundreds of different national currencies, different banking structures, different regulatory bodies and different exchange rates, it is becoming increasingly difficult to handle international commerce without absorbing a large price tag.
Adding to that difficulty is the fact that a global economy is only as strong as the participating parties. International dependence means that if certain events take place across the world, it can affect your local economy directly. Through the global financial crisis in the early 2000’s, a new technology was born that is changing the face of our infrastructure globally. Not just financial infrastructure but also data management, software development, analytics, logistics and supply chain management and many more sectors. The new technology was Blockchain (being launched with the cryptocurrency Bitcoin via a white paper from Satoshi Nakamoto – more on this later). Below we go into a very high level overview of what Blockchain technology actually is.
What is Blockchain?
As the term Blockchain implies, a Blockchain is made up of “blocks” of data that are strung together in a “chain”. At a base level think of the blocks as bits of information (can be transactional data, images, phrases, applications, etc.) and the chain as the database where those bits of information are being stored.
A traditional database storing information (or blocks) is a centralized system hosted and managed by a single entity. That central entity has the ability to back up, store, delete or modify that database. Being a central database can also lend itself to malicious attackers who can hijack or hack that database for their own purposes. Blockchain can help fight against these types of attacks because the information or blocks in the Blockchain are distributed across multiple nodes across the world. Each node maintains a copy of the database and assists in verifying every new block of information that is seeking to be added to the database. If an actor is trying to add false information to the database, the distributed ledger can prune that block from the system to maintain overall legitimacy.
An example would be if someone was trying to spend money they didn’t have in their account or try to spend the same money at two different places at the same time. The nodes in the Blockchain audit those transactions against the most recent copy of their ledger to determine if it is valid or not. This auditing and verification process can take place in several forms but most common would be proof-of-work or proof-of-stake which are both consensus algorithms. We will dive into the different types of consensus algos in the future.
Each valid block that is added to the Blockchain contains what is called a “hash” which is essentially a unique code that differentiates every block from others in the chain. Public Blockchains make all data available for anyone to see via what is called a block explorer. With the ability to look back in history at any point in time of the Blockchain, it adds visibility and accountability to the actors who are operating on the system. Our current financial structure doesn’t allow for that type of visibility for the general public. There are also private Blockchains now but we will save those for a later post.
There are three common factors that are considered the pillars of why Blockchain is a valuable technology.
Decentralized – by decentralizing data across nodes all over the world, it becomes hard to comprise that system and allow malicious actors to make changes.
Transparent – Often times there is a debate about how transparent a Blockchain is. Blockchains can conceal personal data like names, addresses, social security numbers, etc. while also allowing access to a record of data as to what took place. There are now forensic Blockchain services that can trace information through the Blockchain to make searching for information easier. This type of transparency is not currently available to the general public within our banking system for example. The lack of transparency lends itself to bad actors in the traditional banking system as we have seen several times throughout history.
Immutable – Immutability on the Blockchain means that once a block of data has been verified and added to the chain, it cannot be changed. Being immutable means you cannot go back and change things that occurred for personal or commercial reasons. Immutability in a traditional banking/accounting standpoint means that operators could not effectively “cook the books” because items that occurred and were accepted could not be changed.