What is blockchain? Great question.
As the framework for breakthrough cryptocurrency Bitcoin, blockchain first seriously moved into the public lexicon during the crypto market’s Q4 2017 mania. The trading price of Bitcoin reached nearly U.S. $20,000 in December of that year. Investors hailed Bitcoin as the best investment of all time. Not even the world’s highest-priced stock, Berkshire Hathaway Class A shares, gave investors a better ROI from IPO to an all-time high.
However, this explains the result of a blockchain application — it’s just something blockchain can do. So what exactly is blockchain? We’ll answer that question below.
Blockchain: Simply Put
A blockchain is a group of connected blocks.
A block is a diary.
In a diary, later thoughts rely upon the thoughts before it to make sense. Each word in each sentence relies upon the word before it to bring context.
“I argued with my friend. I hate my friend.” That makes sense.
“I hate my friend.” That’s still a grammatically correct sentence, but it makes less sense because we don’t know why.
“…my friend.” This makes no logical sense.
Think of the block as the diary that makes sense. Later entries in the block are inseparable from the former entries in the block. Like a diary, the block tells a story.
The block is just a story of transactions instead of thoughts. Each new entry (hash) refers to the hashes before it. This creates a unique chain of events that cannot be faked or duplicated.
How Does Blockchain Work?
Hashes in a block translate actions into a long code string. So “I argued with my friend. I hate my friend” becomes fj9e8aTpA(TV*AR3o0RNB*Aoj.
If your next entry the following day is “I made up with my friend,” the hash code is not only contingent on you writing “I made up with my friend,” but also the information “I argued with my friend. I hate my friend” as well. Let’s say that hash turns out to be vn”(vr&BENTsM]TVES*M(VT/e9b.
If you try to change a previous entry so the chain reads “I argued with her friend. I hate my friend,” the first hash will have to change completely. Instead of fj9e8aTpA(TV*AR3o0RNB*Aoj, this generates [email protected]((@VN29b28dn.
When you add the “I made up with my friend” entry, [email protected]((@VN29b28dn generates a completely new second hash [email protected])%2([email protected]#B8wvN. Now consider a ledger of 10,000 entries. This is difficult for humans to fake. More importantly, it’s nearly impossible for computers to keep up with. This protects the legitimacy of a block.
Now imagine that you copied your diary and gave it to 5,000 people. All of these people know that your diary reads “I argued with my friend. I hate my friend. I made up with my friend.”
If you change your block to read “I argued with her friend,” 5,000 people have the original copy. They will know you changed something. In the world of blocks, these 5,000 people are 5,000 computers, all checking hashes for any changes. If any of these 5,000 computers find a change, they report it to all the other computers.
This is the structure that gives the block its strength.
If your diary is a block, then all the diaries at your school — that is the blockchain.
What is Blockchain Used for?
Fraud-proof record-keeping has implications for everything. Even in its relative infancy, blockchain technology is used in currency transfer, distributed cloud storage, identity authentication, autonomous networking and smart contracts, among many other functions.
Some of the world’s biggest companies are using blockchain tech. Here are just a few of the most prominent:
- IBM: Currently the largest company that is fully embracing blockchain, with more than 220 applications developed on blockchain and counting, including the IBM Food Trust initiative with Walmart.
- Robinhood: An immensely popular trading platform that allows users to trade cryptocurrency as well as more traditional investments like stocks and ETFs.
- Alibaba: Has over 90 blockchain patents and is developing blockchain solutions for healthcare.
- Fujitsu: Recently funded the Blockchain Innovation Center located in Brussels and is developing a Proof of Business fast-track consulting service.
- Mastercard: Developing more efficient operations to reduce transaction costs and increase fraud protection for users.
Other notable companies either using blockchain or researching the technology include Amazon, Facebook, ING Group, Cisco and Tesla.
What is a Blockchain Example?
Bitcoin is just a single function that is built on top of blockchain technology. Take the example of De Beers, the famous diamond company. The process of mining, transporting, cleaning, testing, producing and selling a diamond product is one that stretches over continents and countless people. Imagine the opportunities for fraud.
Now imagine how much more profitable that company might be if it could keep perfect records of its diamonds from the mine to the showroom. The executives in the company must have thought the same thing, as they are planning the implementation of a blockchain ledger to trace cargo from start to finish across the entire diamond industry.
The platform they implemented is called Tracr. Tracr can ideally track the origin of a diamond, verify its authenticity at any point in the supply chain and trace that supply chain back to the mine a diamond came from. Other industry stalwarts have signed onto the pilot, including Diarough, Diacore, Signet Jewelers, Venus Jewel, Rosy Blue, Alrosa and Chow Tai Fook.
It remains to be seen whether De Beers will pass these savings along to its customers once it perfects Tracr.
Can Blockchain be Hacked?
Although generating a new hash for each transaction on a blockchain would take a ridiculous amount of time to accomplish, a blockchain can technically be hacked. According to research from Cornell University and MIT, there are ways to cheat the blockchain even if it cannot be directly attacked.
For example, Emin Gun Sirer of Cornell, et al. found that he could distract other nodes (computer editors) in a blockchain with useless problems. Techniques like this have allowed hackers to break into what should be anonymous and secure digital wallets and steal cryptocurrency. Coincheck, a crypto exchange based out of Japan, was robbed of $500 million, and that’s not the only example of blockchain theft.
Honest actors can fight this kind of fraud through a hard fork. Hard forks basically roll back time to create a previous version of blockchain history where the fraud was never executed. This is a controversial technique, but many currencies have actually implemented scheduled hard forks because of differences of opinion in a technical matter.
There is also the matter of natural consolidation. In a vacuum, a blockchain system is supposed to function as a decentralized network. The 5,000 diaries you passed out to 5,000 computers (nodes) each have equal rights to add a hash to the blockchain or call out fraud. In the real world, some nodes will collect more diaries than others. Studies tell us that 1,000 Bitcoin wallets hold over 40% of the market. If those nodes were successfully attacked, it could bring havoc to the entire market.
In short, there will always be a weakness in human-created projects. Blockchain may be much more difficult to hack than traditional security measures, but not impossible.
A New Frontier
The story of blockchain is just beginning. The World Economic Forum predicts that blockchain will store more than 10% of the world’s GDP within 10 years. With implementation increasing across many industries, it’s only a matter of time before blockchain affects your life indirectly or directly.
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