So, how does blockchain technology work?
Whenever there is a new transaction in a blockchain, the first thing that happens is encryption. The transaction is encrypted and then added to a group of new transactions to form a block. This block is broadcast across the entire network of computers within the blockchain. Verification of the transaction takes place within each node, after which a record of the verified group of transactions can be added to everybody’s computer at the bottom of the ledger, further elongating this chain of records.
Many books have been written in the last decade or so to explain the workings of blockchain technology. A recurrent theme in all “blockchain technology for dummies” type of books is the fact that the technology, when used in to facilitate financial transactions eliminates financial institutions like banks and credit card companies. This brings up the question: how is blockchain technology able to eliminate these third parties and retain trust in the integrity of each transaction?
Ownership control and double spending prevention
It accomplishes this by providing strong ownership control and double spending prevention. To provide strong ownership control, blockchain technology uses digital signatures. Similar to the approach used in signed PDFs and secure emails, digital signatures are considered secure and robust. A user in the blockchain creates two different cryptography keys, keeps one key private and the other public. He uses the private key to sign his transactions. The public uses the second key to verify this transaction.
In double-spending prevention, the blockchain technology makes it virtually impossible for users to spend their digital cash more than once. To do this, it makes every transaction that takes place within the blockchain irreversible. Every new transaction entry is linked (chained) to those that came before it as recorded in the ledger. This is done using complex math calculations that while difficult to repeat are quite easy to validate.
Once there’s a new transaction added to the blockchain, undoing it would require an inordinate volume of computer resources to alter, essentially making that transaction permanent. As the ledger adds up more transactions, it becomes almost certainly impossible to change older transactions.
The potential and modern uses of blockchain technology
For most of us, any mention of blockchain immediately takes our minds to cryptocurrencies. While cryptocurrencies make up for the majority uses of blockchain technology, there are other areas where blockchain can be applied. Top among these other applications is the Ethereum network. First described by Vitalik Buterin in a 2013 white paper, the Ethereum network uses a Turing-complete language of computer programming that has the capacity to support all the essential operations needed to implement a particular algorithm. This makes it possible to manipulate that Ethereum blockchain with ease.
Nevertheless, the use of blockchain is not limited to the Ethereum network. The following are other major uses and underlying potential of the blockchain as an innovative technology with the potential to disrupt the existing world system in many different industries.
Payment systems and digital currencies
Bitcoin leads the way in this front and there is every indication that the next few years will still see more use of the blockchain in payment systems and digital currencies. The introduction of Ethereum and such other better blockchains will boost the uptake of the technology as digital payments become faster, cheaper and easier. Using the blockchain, businesses will be in a position to eliminate transaction fees, which often eat into their profit margins as well as force them to sell their products a little more than they would if there were no transaction fees.
Online privacy
One big 21st century problem is online privacy concerns. This problem is so devastating and has contributed immensely to the slow adoption of new technology. This is because individuals and businesses fear passing on too much control to third parties that they have very little or no control over. By embracing the blockchain, people can comfortably and confidently use new technologies like cloud storage of personal information without fear that hackers or governments will get access to this information.