Before we get into the details of blockchain and why it is revolutionary, it is essential that we understand what a ledger is.
A ‘ledger’ is a tool that records, and thereby helps us keep a track of transactions. This simple recording process has been employed by current systems, to allow the entities within it, individuals and organisations, to store their transactions with each other. It does this by ensuring that in each transaction the party liable has fulfilled or is able to fulfill their promises; monetary, service or commodity wise.
Traditionally, due to previous limitations in technology, such a ledger system needed to be centrally aggregated and overlooked by third party governing bodies to ensure that it was not cheated or tampered with.
Blockchain technologies are all the buzz because of the potential they have to optimize and revolutionize this recording of transactions; that is the ledger systems we have been using so far.
Simply put, a blockchain is a data structure for storing data. A commonly used data structure is a simple table. A blockchain, like the name suggests, is a chain of blocks connected to each other in the sequence they are validated.(1)
A ‘block’ in a blockchain holds records of multiple transactions. Additionally each block has a header which contains the identifier of the previous block in the chain, so transactions can be traced back or “chained” from the most recent block (or set of transactions) to the first block recorded in the ledger.
The security of the transactions, and the anonymity of the entities transacting, are at the heart of blockchain technologies. Understanding how blockchain fulfills both of these requirements is the key to understanding how it works as well as why it is considered a revolutionary technology.
Cryptography is the process of converting information into unintelligible text (P2)
Cryptography and the origin of Blockchain
Cryptography is a mathematical process of converting information into an unintelligible text such that it can be stored and transmitted without being read by those that are un-authorised to have access to it. One cryptography method in particular, called ‘hashing’, is important to understand for the purposes of this article.
Hashing is a cryptographic method which computes a unique fixed-length “hash value” from the data you want to record, which can be any size. Hashing makes it impossible for the contents of the data to be recovered.(2)And since each hash is unique any alterations to the the data being recorded will generate a different ‘hash value’ and thus indicate to a genuine user that the data has been edited.
To understand how you go from having a hash function to an implementable blockchain framework we need to go back to 1992. It was in the latter part of this year when University of California, Berkeley mathematician Eric Hughes, former Intel employee Tim May, and computer scientist John Gilmore created a group with twenty of their closest friends to discuss some very difficult programming and cryptographic issues.
As the group grew into the hundreds, with members exchanging ideas and theories daily, they set up a mailing list and called themselves, now hundreds-strong, “Cypherpunks”. The Cypherpunks’ manifesto, written by Hughes in 1993, laid out the basic principles behind the movement. It combined the ideas of individualism in cyberspace with the use of strong encryption and complex cryptography to preserve anonymity.(3) An application of this being systems that enable individuals to have safe and private transactions without 3rd party oversight or governance. (4)
“Blockchain is a foundational technology. It has the potential to create new foundations for our economic and social systems.” (P3)
Distributed Ledgers and Blockchain
One way to safely carry out private transactions is through a “distributed ledger system”. A ‘distributed ledger’ is a ledger that is shared amongst all participating entities. This ledger keeps a record of all activities regarding the assets connected to it. All copies of the ledger update themselves to reflect any changes or transactions that occur to or with those assets, almost instantaneously.(5) Therefore, by its very nature, a distributed ledger is very difficult to destroy or manipulate because all entities in the system own a copy.
A blockchain is a type of distributed ledger that uses ‘chains of blocks to provide a secure and valid distributed ledger’ ; it is only one of multiple data structures that can be considered a distributed ledger.
In a blockchain each participating member has a distributed ledger of all the transactions that have occured between all the entities in the system.
As hash keys, the cryptographic method applied in blockchains, are unique to the information being “hashed” it makes it impossible for one of the participants to alter the historical records without getting a different hash key. This means that participants cannot cheat the ledger without it being noticed by everyone else. It also prevents false promises, for example an entity within the system cannot sell the same asset twice, or promise anything that the ledger reflects it doesn’t have.(6) Practically, such a system being public while preserving anonymity wouldn't be feasible without hash key cryptography.
The first attempt at such a system was in 1997 when Dr. Adam Back, a Cypherpunk member, created Hashcash. But the real shift came in 2008 when a pseudonymous person or group named “Satoshi Nakamoto” sent the Cypherpunks a paper they wrote entitled “Bitcoin: A Peer-to-Peer Electronic Cash System”, which resulted in the boom of blockchain technology, and its first implementation;Bitcoin.(7)
The words “Bitcoin” and “blockchain” are sometimes used interchangeably but clearly this is inaccurate. Bitcoin is just an implementation of a blockchain or cryptographed distributed ledger.
The potential of this is extremely exciting and as the Harvard Business Review puts it; “blockchain is not a ‘disruptive’ technology, which can attack a traditional business model with a lower-cost solution and overtake incumbent firms quickly. Blockchain is a foundational technology. It has the potential to create new foundations for our economic and social systems.” (8)