In 1991, one of the most disruptive technologies of the moment and the safest to date was created. Blockchain gained fame in 2018, when it began to be used in the Bitcoin cryptocurrency, but its use goes beyond buying and selling virtual currencies, including applications ranging from documentation validation to transactions between governments.
See what Blockchain is, how it works and what its main uses are in the world.
What is it?
Blockchain means, quite literally, a chain of blocks. Each of these blocks contains information about an event. The blocks are connected in chronological order, forming a chain. To explain how Blockchain works, let’s use Google Docs as an analogy.
When user A creates a document in the Google tool, an initial link (or block) is generated. For each new change made in the document, a new link is created and connected to the previous one, thus, generating a chain of actions.
Once a link is created, it can’t be deleted or edited. Changes can only be made by creating another link, which records these changes. This analogy helps to illustrate what it would be like to create a chain. Now that you have understood how each link is created and forms the chain, let’s go to the explanation about decentralization.
Following the example above, if the document is accessed by other users B and C, they must receive the chain from user A, so that they can continue editing the document. That is, the entire history is kept in sync between users, without a central copy.
Thus, if user A, for example, sends this document to an advertising agency without the approval of others, this action will be recorded as a link in the document chain, which, when synchronized between all of the users, will make clear who sent the document without the final approval of the users involved.
Well, now, enough of the analogy and let’s get to the technical part.
Principles of Blockchain
Blockchain technology is based on five points: data decentralization, peer-to-peer transaction, pseudonym transparency, irreversible history, and processing power. I’ll explain each of them:
Decentralisation of data
Each computer that is part of a Blockchain network has a copy of the chain and, therefore, has a record of all the actions of all users. A very well-known example is the cryptocurrency Bitcoin. All users with Bitcoin wallet have access to the history of all transactions performed by anyone within that network.
Peer to peer transaction
In a Blockchain, there is no intermediary in the transactions between people or institutions, thus the use of “peer-to-peer”. Actions are made from one peer to another, without any third-party contact for validation or approval, but, of course, keeping the confidentiality of people’s data, which brings us to the third point.
Transparency with pseudonym
Although one of the slogans of Blockchain technology is about its transparency, in transactions and records, no user is aware of other users’ personal information. Each person registered on a Blockchain receives a unique and encrypted code, making it impossible for users to know anyone’s sensitive information. That is, it is possible to check the registration of a user/code, but you will not know the name, Social Security Number or address of that user.
As previously mentioned, after an action is recorded in the history of a Blockchain, it cannot be deleted or edited, only a new action can “fix” a previous action. This means that the history cannot be modified in any way, making it impossible for previous actions to be falsified and affect something in the present.
That point is what makes Blockchain technology almost impossible to hack (we’ll talk about it more later). As stated earlier, all actions of a user are recorded in a transaction history. In addition, this history is recorded on all the computers of users of that Blockchain. For a future action to be validated, all actions in that user’s history must match on more than 51% of the computers connected in that Blockchain.
In practice, for a block to be added to the chain, it is necessary to make the calculation of a single key of the block, which will be pointed by the subsequent block as the link that unites the blocks of the chain. This calculation is called mining, an activity that requires a lot of computational effort.
If a malicious user wanted to change the contents of one of the blocks in the chain, it would be necessary to recalculate, in addition to the key of the changed block, the key of all previous blocks. If the network has many computers connected to it, it becomes very unlikely that a user will have the processing power to do the calculations and reach consensus with the other users. It is this feature that makes Blockchain such a secure technology.
To encourage this crucial activity for the functioning of Blockchain, at Bitcoin, users who make themselves available as miners earn rewards if they can discover a unique key.
A very important feature of Blockchain is its security. Its main advertisement is that it is unlikely, or even impossible, to hack a Blockchain. As mentioned before, Blockchain technology is decentralized, i.e. the data of a Blockchain is not stored on a single location or machine, but on all machines that want to participate in the system as data miners.
Both for information to be validated or be hacked, it needs to be the same on more than 51% of the computers that are mining that data. That is, if we think about the case of the Bitcoin currency, hundreds of thousands of computers would need to be hacked at the same time in order for a change to be made on all connected computers and accepted as something true.
On the other hand, however, let’s imagine that a small company decides to develop a Blockchain with information from the company itself, but the data is being mined on only three computers. In order for someone to hack more than 51% of the machines, in this case, they only need to hack two at the same time. Difficult, but not impossible.
What has already been reported out there are people who manage to decrypt codes and passwords that are used as a person’s login to a given Blockchain and end up stealing what the person has. It would be as if your credit card was cloned and someone would go into your bank account and transfer all your money out of it. The person hacked your information, but not the bank’s system. It is a true action, but done by someone else, not by you.
Public and private
Well, now that you understand what a Blockchain is and its main features, I will talk about the difference between public and private Blockchain systems.
In the public Blockchain, the network is open to the public, that is, to any computer that wants to be part of the network. An example is Bitcoin: anyone who has an interest can be part of this network, be it as a bitcoin trader or as a miner.
On the other hand, the private Blockchain is controlled by an entity and only users within this network can manipulate it. An example of using this type of network would be the control of production processes within an industry.
As already said, Blockchain has many applications. Although the most famous is probably Bitcoin, Blockchain is already used in several industries.
Imagine that you just bought a property. For the contract to be made, it is necessary to search for several documents relating to the property and the owner of the property — if it have had more than one, documents of the owners. Deed, Social Security Number, debts, among other documentation, are required analysis to later make the contract. Now, imagine all the documentation registered on a public Blockchain. All documents would be in the same location and already validated by more than 51% of computers, with the least chance of forgery. Fast, practical, safe and economical.
As stated earlier, an example of Blockchain use in the industry would be the record of every step a product has gone through, from its raw material to the store in which it was sold. This history has already been applied to some food products, such as fruits and vegetables, but without the security of Blockchain.
Another example would be Income Taxes. Every year, we have to set aside a period to declare our income tax. Time, stress and money are spent on this process and, sometimes, the result is not very good. Blockchain technology can be used in this process, cutting down the citizen’s action or even completely withdrawing the existence of Income Tax, since all actions made by a citizen will be registered on a Blockchain (purchases and sells of real estate, cars, medical procedure costs, scholarships etc.).
Blockchain technology can be used in many business areas. All of the principles that have been addressed in the article reiterate the security of Blockchain. It was built so that, even with the confidentiality of the peers involved, there is transparency of the its history. People and institutions that would be on the Blockchain don’t need to rely on the other peer in the transaction, but on the system developed with Blockchain.
Thus, its transparency and security are two main points that make many companies invest in their own Blockchain systems, whether it is for financial transactions, documentation, products or even personal information.