Research & Insights
A Brief Introduction to Blockchain Technology
The first known example of blockchain technology was outlined in a November 2008 whitepaper titled ‘Bitcoin: A Peer to Peer Electronic Cash System‘ written by an anonymous individual – or group of individuals – operating under the pseudonym Satoshi Nakamoto. While very little is known about its author, Nakamoto’s whitepaper would go on to form the foundations of the Bitcoin peer-to-peer digital currency, launched several weeks later as an open source project in January 2009. Bitcoin was unique in that it enabled individuals to transact directly with one another, without the need for a trusted third-party intermediary (like a bank or clearing house) to facilitate their transactions.
It may not seem immediately obvious to most, however prior to the advent of Bitcoin, transacting digitally was incredibly complex. For example if I were to receive a digital dollar, what is to stop me from simply duplicating said dollar 50,000 times and purchasing a luxury writstwatch? For this reason, we have traditionally relied on trusted third-party intermediaries to facilitate & monitor the flow of digital currency, reconcile balances, and store the results on a central ledger (or database). However, this process requires a great deal of trust; consumers must be able to trust that the entity holding their funds will not unjustly distribute, freeze, or subtract value from their holdings; they must be able to trust that information is consistent across the entire system, particularly during circumstances involving global commerce; they must be able to trust that the system is protected against the threat of cyber-attacks; and finally, there must be trust that the entity who controls the supply and circulation of money does not drastically reduce the value of money through over-issuance, or suddenly deem the money as invalid, as we have recently seen in India and Venezuela. Unfortunately, as the world saw in 2008, these intermediaries do not always manage our funds responsibly; and keeping these records held on a central ledger provides a target for cyber-criminals, as demonstrated by the recent hacks on the SWIFT banking network.
This reliance on trust and lack of efficiency within the traditional value exchange systems has led to a dramatic rise in the popularity of peer-to-peer digital currencies such as Bitcoin. However, while Bitcoin has played a formative role in the development of Blockchain technology, it is important to note that the term ‘Blockchain’ itself describes a class of technology which extends far beyond Bitcoin, and peer-to-peer digital currencies for that matter. At its core, a Blockchain is simply a form of distributed ledger (or database) – a complete list of records/transactions which is shared amongst many (or all) participants in a network. Blockchain derives its name due to the way it groups records into ‘blocks’, and creates a cryptographic link between each block of records. If any attempt is made to alter, or remove a previous record, the cryptographic link, or seal, is broken, thus, all entries to the ledger are immutable (permanent). A network of watchful computers called ‘nodes’, each carrying a complete copy of the ledger, constantly monitor the network for new records, and collectively reject any node possessing a ledger which does not match their own. A complex computer algorithm termed a ‘consensus algorithm’ provides the set of rules used by the network in order to come to an agreement on the state of the ledger at any particular point in time; you could say that blockchain networks have replaced a trust in humans, with a trust in mathematics.
It is worth noting that Blockchain networks can be incredibly diverse both in terms their technical components and intended use-cases; it is also worth noting that a Blockchain is not a solution for all problems, no matter how badly individuals with hidden agendas would like to have you believe so. A Blockchain finds its value in circumstances where we need to assign and transfer digital ownership and/or access permissions, in a network where multiple parties require access to the same pool of data. As a result, we are seeing commendable efforts being made to apply the technology to a plethora of use-cases including (but not limited to) cross-border payments, medical records, supply chain management, trade finance, copyrights, and property rights.
Arguably the most fascinating of all Blockchain use-cases, is the ‘smart contract’; an immutable, self-executing set of instructions in the form of computer-readable code, capable of automatically executing the terms of the ‘contract’ without the need for third-party intermediation or human interference. The concept was first introduced by cryptographer Nick Szabo in the mid-1990s, however at the time smart contracts were largely disregarded due to the fact there was no platform to enforce them. A number of emerging Blockchain platforms such as Ethereum have recently popularized smart contracts by placing them at the core of their functionality. Today, smart contacts are being deployed to enforce the contents of a will, escrow funds, and for the automatic payment of dividends, to name a few.
However, for the sake of brevity, we will not explore these in detail just yet. If you did find this post intriguing, we do intend to explore the topic of Blockchain technology, its use-cases, technical components, and related concepts in further detail in the coming months through a series of follow-up blog posts, webinars and workshops.