You might have heard of a little thing called bitcoin, one of the many cryptocurrencies that have taken the world by storm. In 2017 alone, the price of one bitcoin fluctuated from $1,017 in January to $14,600 by December. In 2018, volatility continued but not quite at the same rate with a low of under $6,000 in February and into today’s market price of around $7,600.
The advent of digital currencies, however, is only one side of a story that goes much deeper once you unpack the innovative technology they are based on. The underlying system, the blockchain, is the real technological breakthrough that will enable businesses and consumers to do things far beyond spending digital money.
How exactly does the blockchain work? Let’s take a look.
What Is Blockchain?
In short, blockchain is a decentralized system for storing and transferring vast amounts of information online and in a more secure environment than any traditional data storage platform has ever been able to provide.
The name “blockchain” actually points to the two key components that makes this system work: blocks and chains.
A “block” represents one unit that stores a certain amount of information or data. Once the block size limit has been reached, a new block is created in which more data will be stored. The new block will then be attached to the previously built block and — with the addition of other blocks coming into existence at a later point in time — together end up forming a chronological chain of blocks, or “blockchain”.
High level, that’s really all the blockchain is — a decentralized public ledger. However, it is the defining characteristics that make the blockchain so unique and powerful.
Defining Characteristics Of The Blockchain
It’s Decentralized And Democratic
As mentioned, blockchains are built upon a decentralized architecture. That’s because the data they contain is not stored on one server or in one place; rather, it’s distributed across a global network of personal computers (or “nodes”).
In other words, no centralized company, government, or person has the ability to manage or manipulate the system. Managing the blockchain is a crowdsourced, decentralized effort by thousands of computer owners and developers around the world, who hold bundles of records submitted by others on their hardware.
It Uses Cryptography To Replicate Key Data
Another defining characteristic, which makes the blockchain such a stable and secure system, is the information — such as timestamps and transaction data — that each block contains, including replicated data of the block that preceded it.
This replication data is called “cryptographic hash”. The name stems from a form of math called “cryptography,” which is used to transcribe information into secret codes (or, in this case, “hash”).
This means that older legacy data can’t just disappear. In fact, every time a new block is built, all the previous blocks are audited again, making the blockchain naturally more resistant to modification of records. Encrypting this “hash” data also ensures that it’s less prone to hacks or other cybersecurity breaches.
It’s Secure Because It’s Transparent
The most defining and arguably most important aspect of the blockchain is its unique solution to maintaining security.
The decentralized nature of blockchains is what makes them immune to takeovers or corruption by centralized entities like banks and governments, but it goes one step further. Distributing the bundles of stored data across a network of unrelated computers also means that the blockchain’s ledger of information is publicly available for anyone to see.
As result, anyone who has access to the Internet can audit and verify data and transactions that are stored in the blockchain. To put this another way: Instead of one centralized organization trying to make sure data is secured and accurate, due to the blockchain’s publicly accessible and fully transparent ledger, millions of people can double-check that no illegitimate editing of records is taking place.
All of these components defining the blockchain’s key characteristics are the reason why this breakthrough technology results in some groundbreaking use cases.
Use Cases Of Blockchain
The most popular application of blockchain technology are cryptocurrencies like bitcoin, litecoin, and ethereum. These “cryptos” are a form of digital money that allows users to transfer money between each other without having to go through or adhering to the rules of a middleman, e.g. a banking institution.
In the case of cryptocurrencies, the people who store data on their computer systems and audit crypto transactions are called “miners”. For every transaction they successfully confirm, miners are paid a small commission fee — mostly a percentage of the transaction.
Miners and the technologically complex blocks they build are the reason bitcoin was the first digital currency to solve the double spending problem: the same single digital token cannot be spent twice, thus, preventing fraud.
Two of the key areas in which blockchains can revolutionize healthcare are 1) supply chain management and medication monitoring, and 2) public health surveillance and population health management.
In the first case, Healthcare Analytics reports, “Blockchain could offer providers a way to reduce waste and fraud as they order consumable supplies, including high-value medications and addictive opioids,” adding that, “a decentralized asset management system could create a ‘single source of truth’ surrounding the movement of goods.”
The same report says that in the second area, “Blockchain could reduce barriers involved in complex data sharing agreements between hospitals, physician providers, public health departments, and the CDC, Nasr envisions, while making sure that data gathered in a confusing and rapidly developing epidemic environment is reliable and current across all parties.”
Another interesting and somewhat surprising use case for blockchain is in the area of charities. One of the most common complaints in this space is that donors can’t always be sure if their money is actually reaching those for whom it was intended.
Using blockchain technology would not only track donations and make sure every dollar is accounted for, but it would also make the overall system more efficient and transparent, which would especially benefit those in need of the donated funds.
The BitGive Foundation, for example, vows to “vastly improve philanthropic impact with blockchain technology.” The organization has raised funds for the likes of Save the Children, The Water Project, TECHO, and Medic Mobile.
An area that is overdue for disruption is energy management. Until now, the energy industry has been very centralized as consumers cannot buy directly from energy producers. Instead, they have to go through public grids or trusted private intermediaries.
With emerging alternative energies like solar and wind power, however, every home and building that has energy–producing technologies installed can act as an energy provider or seller, which would not only help in saving the environment, but also reduce energy costs overall.
One of the companies active in energy management is Transactive Grid, a start-up using Ethereum blockchain technology to allow customers to buy and sell energy directly from each other.
As you can see, blockchain is so much more than just the foundation for cryptocurrencies. It has the potential to revolutionize and improve a vast number of industries that have a significant impact on our daily lives.
While there are still a number of hurdles to overcome for blockchain technology to go mainstream — including financial regulations, as well as its still very complex implementation techniques only a few technologically skilled developers are capable of handling — the potential this decentralized technology holds for the future is immense.
It’s safe to say that blockchain technology has all of the ingredients to change our lives; and if the rapid growth of cryptocurrency is any indicator, it will happen sooner rather than later.