The cryptocurrency Bitcoin has been highly publicized recently for its record high price, but Bitcoin is more than a currency, it’s an ideological, operational revolution born through blockchain technology. Blockchain technology has the ability to change how our entire world operates, and for the better. Understanding blockchain technology is the key to understanding the future.
Ultimately, Bitcoin and its blockchain technology arose from a lack of trust in financial institutions. Distrust in these institutions had existed since Black Thursday, the fateful day in 1929 when the stock market crashed and sparked the Great Depression. More recent near catastrophic failures by financial institutions— the Enron scandal, Lehman Brothers collapse, Madoff Ponzi Scheme, and the housing bubble contributed to an atmosphere of uncertainty that led to the conception of Bitcoin.
The financial distrust also stems from consumer data breaches that are often less publicized. These breaches occur when a hacker gains access to consumer information such as names, addresses, email addresses, credit card information, passwords, etc. via an institution’s database. 15 of the most significant consumer data breaches in the last decade have resulted in almost 1.5 billion compromised consumer accounts. As the failures and distrust grew, so did the demand for a more secure and trusted system.
The system required to meet such a demand had to allow payments to be sent directly and securely between two people electronically without the assistance of a third party or financial institution such as a bank, brokerage company, payment processing company, etc. Ultimately, the theory was that removing the third-party component would remove security vulnerabilities, financial manipulation, and failures.
For years, cypherpunks (activists who advocate change through writing in code) had been attempting to develop that very system. It wasn’t until the release of a whitepaper in 2008, entitled “Bitcoin: A Peer-to-Peer Electronic Cash System” that a viable option began to come to fruition. The whitepaper proposed using blockchain technology to eliminate the necessity of a third party when conducting transactions.Blockchain technology was the crucial piece the cypherpunks had been missing.
The blockchain itself is a fully automated system spread out over multiple computers located in various locations that record transactions. It’s fundamentally a high-tech ledger resembling an Excel database in in which computers, not humans input the data. The ledger is write-only which doesn’t allow computers to edit or delete exisiting data. When a transaction occurs, one of the many computers records the transaction creating a timestamp and transaction data.The computer then places the information into what is known as a “block.”A block is simply a record of transactions equating to that of a worksheet in an Excel spreadsheet. The network then places new blocks at the bottom of the “chain.” A complex algorithm that is known as a “hash function” assigns a unique “hash value” to each block based on the contents of the previous block in the chain. Thus, the hash values connect each block to one another creating a chain.
The nontraditional mechanics of the blockchain are what makes the data it houses extraordinarly immutable and reliable. First, the system is virtual and operates on multiple computers over multiple locations. Therefore, there is no central location or single point of entry. In the case of the Bitcoin, the blockchain is spread out over thousands of computers all over the world which makes it next to impossible for hackers to breach the system.
Secondly, the blocks connect to one another via the hash values which means that if block editing occurs, it will set off a chain reaction that will immediately draw a red flag.In the case of Bitcoin, if someone were to try to manipulate the amount of a recorded transfer, it would be instantaneously noticeable because it would affect the entire blockchain.
Third, blockchains can be made public. In the case of Bitcoin, the blockchain is enitrely open and available to anyone with access to the internet. Outside of personal identifiers that are encrypted, all transfer data since the blockchain’s inception is available. The public availability of data creates an entirely transparent financial system that allows for an accurate account of all Bitcoins at any given moment.
Fourth, the system runs on multiple high-level algorithms running simultaneously across the computers that continually audit and reconcile the data creating a self-auditing ecosystem. It would be next to impossible to corrupt the Bitcoin blockchain because of the incessant reconciliation process occurring across thousands of computers due to the enormous amount of computer processing power required to override the entire system. The extensive self-auditing ecoystem creates yet another layer of defense to the already very resilient blockchain.
Although, the blockchain technology was initially developed to create cryptocurrency, its ability to provide the purest data in an environment that is immune to corruption and disruption can change how the world operates. Blockchain technology doesn’t just provide a new protocol for creating and securing data but the exact means in which to do so. While some investors may believe that Bitcoin is reaching its limit, the potential applications for blockchain technology are limitless. This new structure cannot only fix existing security issues in society but alter how society works. “Blockchain is the tech. Bitcoin is merely the first mainstream manifestation of its potential.”