The meteoric rise (and fall) of Bitcoin has peaked the world's interest in the technology behind it - blockchain. But the implications and applications for blockchain technology go way beyond cryptocurrencies...
What is Blockchain?
For once, the word "blockchain" actually describes this technology quite well.
A "block" is simply a record of new transactions. This could be a record of a cryptocurrency purchase or medical records or any chunk of data.
Once a transaction is completed, the "block" is encrypted and added to a "chain".
The encryption process is known as "hashing" and it's carried out by lots of computers. If they all agree on the answer, each block gets a unique digital signature.
This creates a chain of encrypted blocks.
Or, a blockchain.
Each block is stored chronologically and the chain cannot be altered or tampered with, only added to. And, when a change does happen, the blockchain is updated for everyone in the network at the same time.
You can only make a change if you have a private key (aka password) to access the block.
A popular analogy is to think of blockchain as a Google doc and traditional data storage as an old-school Microsoft Word doc.
The Google doc can be simultaneously viewed and edited by everyone with access to that document.
With a Word doc, you have to send the document to one person at a time, ask them to make a change and then send it back before you send it to the next person.
Blockchain is a public ledger
Blockchain is a completely different way to store data, compared to the traditional process of storing your data in a big central database.
Using blockchain, data is distributed across a network of computers and not in one place. Here’s another useful explanation from online forum Bitcoin Talk:
Imagine there are a bunch of safes lined up in a giant room somewhere. Each safe has a number on it identifying it, and each safe has a slot that allows people to drop money into it. The safes are all made of bulletproof glass, so anybody can see how much is in any given safe, and anybody can put money in any safe. When you open a bitcoin account, you are given an empty safe and the key to that safe. You take note of which number is on your safe, and when somebody wants to send you money, you tell them which safe is yours, and they can go drop money in the slot.
Blockchain is basically giving two people a safe way to exchange data, without the need for a third party (such as a bank) to verify the transaction.
If you think about traditional transactions, there are three parties involved: the owner (who holds an asset), the market (everyone who is interested and/or able to buy that asset) and the regulator (who makes sure the owner and market follow the rules when a transaction happens).
With blockchain, we don't need a regulator as the network of computers validates a transaction.
This could have wide-reaching implications for banks - and a wealth of other industries too.
While blockchain is synonymous with Bitcoin and other cryptocurrencies at the moment, there are many different ways it could be used.
A recent UK government report on blockchain technologies provides a good overview and examples of the use of blockchain, as does this article from The Conversation.
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