As Bitcoin spreads further and further throughout the world, many people are interested to know about the technology behind it and how it works. Bitcoin uses something called blockchain technology, so what is blockchain?
Originally designed by the Bitcoin creator Satoshi Nakamoto for the sole purpose of Bitcoin transactions, it is effectively an electronic ledger which keeps a record of transactions called a block, which is completely unforgeable. Each one is linked to the previous one, as well as time stamped. Whilst blockchain was the brainchild of Satoshi Nakamoto with cryptocurrency in mind, it is also being used for a number of other different purposes now as well.
How does blockchain work with Bitcoin?
How does blockchain work with Bitcoin then? As you surely already know by now, the main appeal of Bitcoin is that there is no third party required for any financial transactions made with it. By third party we mean bank or credit card company etc. So instead of this, blockchain is a distributed ledger with replicated, synchronised databases in a network. These databases are visible to anyone on the network. So if a transaction is made, it is sent to a block along with transactions which have been made at around the same time. It is then sent out to the entire network for validation.
So how is it validated once it has been sent to the network? This is done by ‘miners’, which are computers that solve complex maths problems in return for a reward of Bitcoins. So this explains the block part of blockchain, so what about the chain part?
The chain part comes from the fact that when all the transactions in a particular block have been validated, they are then timestamped before being linked to other blocks containing transactions, so in effect a chain is created as newer blocks are then added which means that every transaction in the chain is visible.
Bitcoin is pretty much impossible to hack, and this is down to the chain element of the technology. Data from transactions is stored across the network, so there is no central point which is vulnerable to be hacked. If somebody wanted to hack a particular transaction on the blockchain then they would have to hack every block which the transaction was chained to, as well as having to do it to every ledger on the network. This would mean hacking literally millions at the same time.
As mentioned previously, as well as being used for Bitcoin and other cryptocurrencies, blockchain technology is being used for more and more different purposes as people begin to realise just how valuable it is.
Blockchain and smart contracts
One of the other main uses is for something called smart contracts, which have the same principles as Bitcoin and cryptocurrencies; cutting out any third parties, which in the case of something like a contract, will save you both time and money, as well as being more secure than other more traditional systems.
How does a smart contract work in practice then? An example we can look at is how it can be used for home insurance policies. A current issue or complaint customers generally have have of their insurance policies is that payouts take a long time, due to their being a lot of human action required if you ever need to make a claim. As well as being time consuming, this can also drive costs up as higher admin costs are often passed onto the customers as they are charged higher premiums.
If a policy for home insurance for example, were to be implemented through a smart contract then everything would be a lot simpler. From the start of the policy the terms would be hard coded into the contract and then entered into the blockchain. This of course means that they can’t be changed without everyone who is involved finding out. So if it came to a situation where a payout was required, in this case we can say a hurricane, then the event details (location, speed of the wind etc.) would be entered into the blockchain. If these details go over the levels which were agreed at the beginning of the policy, then a payout can be made immediately, which means there is no need for any human interaction..
The big difference between this situation being performed on a blockchain, as opposed to another traditional server application is because of the technology involved with blockchain you don’t need to trust any cloud providers or server providers meaning nothing can stop your logic from being executed.
As well as this there are a number of other uses for the technology as financial businesses in particular look to make the most of it. It can also help people in developing nations for example, with blockchain based app BitPesa giving users there the chance to complete financial transactions as it contains a built in b2b payment system,as well as a foreign exchange feature. It is hoped that this will help Africa move away from their reliance on trading in cash.
It is not only the financial world that is benefitting as well, with supply chain also beginning to benefit from the features of blockchain. Using automation and digital signatures, a company called Chronicled is using the technology to create a digital identity that is unique for both digital documents and physical ones. The benefits of this are that it creates better control of the supply chain, as well as improving protection against fraud.
The future of blockchain
So as you can see more and more companies and industries are looking into, and adopting blockchain. But what does the future hold? There have been many exciting potential uses mentioned, such as car rental companies using it to automate rentals once a payment is received, with insurance being confirmed through blockchain. And it has even been sounded out that it could be used on a physical object such as a fridge, linking up with a sensor to order and pay for food by using automated interactions, and also for things like checking the status of its warranty!