What is Blockchain?

“If you cannot understand it without an explanation, you cannot understand it with an explanation.” – Haruki Murakami

In his book “The Business Blockchain: Promise, Practice, and Application of the Next Internet Technology” [1], a book I recommend that you read, William Mougayar, a leading cryptocurrency expert, wrote: “Understanding blockchain is tricky. You need to understand their message before you can appreciate their potential.”

So what is the message behind the blockchain? In order to answer this question, we have to visit Satoshi Nakamoto’s white paper “Bitcoin: A Peer-to-Peer Electronic Cash System”. In his paper, Satoshi describes that what is needed in the future is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party. Transactions that are computationally impractical to reverse would protect sellers from fraud, and routine escrow mechanisms could easily be implemented to protect buyers [2]. Consequently, blockchain technology liberates the trust function from outside existing boundaries. It transfers trust from central entities, such as banks, policy makers, large corporations and even governments, to peers. It is a conversion of the conventional centralized business model into a decentralized form where all involved parties are in control of the system. In his book, William Mougayar used the way medieval institutions were forced to cede control of printing to create an analogy for the blockchain transition.

The blockchain technology is not a software or an application but rather a new methodology or even a philosophy for sharing, validating, documenting and storing data on the internet. It is an additional layer of technology on top of the internet and is defined as the internet of things in contrast to the World Wide Web being the internet of information. There are many definitions for the blockchain, but my favorite is the following: Blockchain is a distributed chronological ledger that is hosted, updated, and validated by several peer nodes, rather than by a single centralized authority. Nevertheless, it is deceptive to view the blockchain primarily as a distributed ledger, because it represents only one of its many dimensions. In the same way, and although the blockchain’s reputation was based on top of the Bitcoin revolution, it is delusive to consider this technology for just moving tokens around, because it is only one of its many applications. The blockchain has the potential to innovate and transform a wide range of applications in different sectors, including but not limited to banking, insurance, supply chain, industry, healthcare, education, retail, media, travel and tourism, telecom and energy. The blockchain can have a profound social and economic impact on the existing traditional models. It might offer an alternative to the way people transact, share value, store data and do business.

Blockchain owes its name to the way it stores data. Transaction is the basic element of the blockchain. One or several transactions form a block. A block is composed of several components that can be differentiated into the block header and the block body. Many blocks form a chain through a digital data link. The information included in a block is encoded using a mathematical function that takes this digital information and generates a string of letters and numbers called the hash code. The hash of a block also contains the hash of the previous block in the chain. No matter what the size of the original file, a hash function will always generate a code of the same length. Blocks go through a consensus process, to select the next block that will be added to the chain. Chosen block is verified, and added to the current chain. Validation and consensus process are carried out by special peer nodes called miners. Chaining blocks together makes the chain immutable which means that the block data can never be changed again and it will be publicly transparent to any node of the network via a distributed ledger of records. Since the hash is generated from the information stored in the block, it means that any modification of the information will lead to a different hash thus breaking the original chain.

Now what are the advantages of this technology?

First of all being a distributed ledger, rather than storing the data in a central location or server as it is done in traditional networks, multiple copies of the same data are stored in different locations on the network. Therefore, blockchain offers the advantage of not presenting a single point of failure. On the other hand, blockchain is a peer-to-peer network which means that no intermediary is involved. Blockchain empowers users, rather than central entities, by giving users the control over their information and transactions. The elimination of intermediaries allows to have faster transactions and a lower transaction cost. A third major attribute of blockchain is its transparency.  The transparency of a blockchain is revealed in the fact that time stamped transactions of each public address are open to viewing via the distributed ledger. However, it is very important not to confuse transparency with privacy. Blockchain is a valid example that the two concepts can effectively co-exist. More details on this subject will be elaborated in my future posts.

Today, everyone should recognize the importance of blockchain and should consider the multiple advantages and opportunities this technology can bring to people’s life, businesses and activities. Besides its technological power, the blockchain offers an ideological concept where power and trust are shifted from a central entity of control to all participants. If people are willing to embrace the change, blockchain will soon affect all sectors of our economy. However, blockchain based solutions are not a panacea for all problems. In my next post, I will try to identify the criteria that should be considered in order to assess the true potential of blockchain for your case business model.

References                                                                                                                          

[1]          Mougayar, W. The Business Blockchain: Promise, Practice, and Application of the Next Internet Technology. New Jersey: John Wiley and Sons

[2]          Nakamto, S. Bitcoin: A Peer-to-Peer Electronic Cash System. satoshin@gmx.com http://www.bitcoin.org

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