Unpacking blockchain technology

These days the digital world is abuzz with words like “cryptocurrency”, “Bitcoin”, and “blockchain”. These words have slipped into everyday lingo, but how many of us can say we really understand what they mean and how they work? If you’re confused, then you’re certainly not alone.

What is cryptocurrency?

Cryptocurrency is basically virtual money “that uses cryptography to secure its transactions, to control the creation of additional units, and to verify the transfer of assets.” Bitcoin is the most famous example of a cryptocurrency. There is a limit of 21 million Bitcoins in circulation. One of the most notable characteristics of Bitcoin is the fact that it operates without a central bank or single administrator. Instead it relies on a peer-to-peer network. Think of it as banking with the bank taken out of the equation.

How does cryptocurrency work?

It’s tempting to think of cryptocurrency as completely groundbreaking, and in some ways it is - particularly with regards to the tools we’re currently using to create and manage it. That being said, the fundamental concept behind a system like Bitcoin goes way back. 

On the Micronesian island of Yap, rai, or stone money, has been used for hundreds, if not thousands of years. The way the Yapese have used enormous carved stones as currency is very similar to the basic principle behind Bitcoin. Since the circular stones are far too big to move, buying something “simply involves agreeing that the ownership has changed. As long as the transaction is recorded in the oral history, it will now be owned by the person it is passed on to and no physical movement of the stone is required.” In the same way that these immovable stones rely on a commonly agreed upon oral history - a kind of decentralised ledger - intangible cryptocurrency relies on, not an oral history, but a commonly agreed upon list of transactions. While everyone on the island of Yap would have to acknowledge and agree to the transfer of ownership of a rai stone, it is the job of individuals called “network nodes” to verify and record transactions in a public distributed ledger called a blockchain.

How does a blockchain work?

While trading virtual currency isn’t so different in concept from some of our earliest systems, what makes it truly innovative is the blockchain technology we’re using to run it. 

Blockchain was developed in 2008 by an unknown person or group of people under the name Satoshi Nakamoto. Basically, blockchain is a continuously growing list of records, called blocks. Each block contains three things: a cryptographic hash of the previous block, a timestamp, and transaction data. All three are essential to ensuring the security of the transaction. “By design, a blockchain is inherently resistant to modification of the data.” While oral histories can be forgotten or retold, it is next to impossible to alter the data in any given block in the blockchain. First of all, if a hacker were to modify a block, then the next block’s previous hash wouldn’t match up. Secondly, there’s the fact that cryptocurrency like Bitcoin is managed by a peer-to-peer network. When a transaction is made, everyone receives a new block in the blockchain. If all the network nodes agree that this block is valid, then it’s added to the chain. If not, then it gets rejected. For a hacker to hack this process, they’d have to own more than 50% of the network!

How else can blockchain be used?

Blockchain isn’t just for cryptocurrency, “it has the potential to create new foundations for global economic and social systems.” The immutable and efficient nature of blockchains promises to largely eliminate errors and prevent fraud in all kinds of spheres. For example, by using smart contracts (“contracts that can be partially or fully executed or enforced without human interaction”), something like Kickstarter could hold backers’ money in a blockchain. If the project were successful it would automatically pay out the creator, or, if it failed, would reimburse the backers. During that time, no one would be able to touch or hack the money. 

At its core, blockchain is a system for recording information. It could be applied to all kinds of things from recording ownership of land, to maintaining secure digital identities, to online voting, keeping healthcare records, or even collecting taxes. Most of these applications have yet to be fully developed, but one far less practical one has turned into the latest internet sensation:  Blockchain technology is currently being used to collect and breed digital cats! Cryptokitties “is one of the world’s first games to be built on blockchain technology.” Each kitty carries a unique number and a 256 bit genome which determines its attributes. The virtual pet’s “cattributes” can be passed on to its offspring. These collectibles can be bought, sold, traded and bred “secure in the knowledge that blockchain will track ownership securely.”

Only time will tell how many different applications we will find for blockchain technology, but considering its vast potential, it’s safe to say it will definitely feature in our future.