Bitcoin gets headlines. I see them too. I admit it grabs attention, but the substance is blockchain technology. That’s why it’s critical to get familiar with blockchain technology.
Blockchain is a public distributed ledger. Throughout most of history, we’ve been living in a centralized world. We have governments, financial institutions, big tech companies, and credit bureaus as ‘trusted’ third parties enabling us to transact and interact. These intermediaries control and have access to our money and data and are occasionally hacked. Blockchain technology allows for decentralization. It is essentially a database managed by a peer-to-peer network of computers. Blockchain facilitates the transfer and payment of digital money without the need for a trusted entity, such as a bank. The data it holds is public and immutable.
Blockchain is not bitcoin. Bitcoin is digital money, a virtual currency that was the first successful blockchain product. Blockchain is the technology that enables cryptocurrency like bitcoin. While they go hand-in-hand, there are other use cases for blockchain besides bitcoin. Blockchain can ensure that the terms of programmable autonomous contracts, known as smart contracts, are met. It can be used for online voting to address voter fraud. It can be used to secure identity and many other situations where transparency and security is lacking.
There is a consensus mechanism. Establishing consensus is the basis of blockchain technology. Different blockchains have different protocols for establishing consensus. With blockchain, an organization will not be confirming transactions or data. The public verifies and time stamps transactions. The public essentially is thousands of globally dispersed computers or nodes, which are mostly anonymous. Once the data is validated by participating nodes in the network, the transaction is added to a block. The new block is then permanently added to the blockchain and distributed to the entire network. The added block is chained to the previous block via cryptography, hence the name blockchain. The block is then broadcast to the entire network so that there is consensus, meaning every node’s copy of the blockchain is identical.
Blockchain is secure and safe. Security is a big topic and one everyone should fully understand. Maybe you’ve heard about hacks of centralized exchanges. And you’ve probably heard about a person going ‘dumpster diving’ to find an old hard drive because their private key was stored there. It’s important to know that virtually all the losses were due to hacking of centralized exchanges, losing private key information and gaining control of private keys by bad actors, and not some security vulnerability in bitcoin technology.
Blockchains, like Bitcoin and Ethereum have not yet been hacked. They are considered to be very secure. It is very challenging, almost impossible, to change any transaction information once it is validated and becomes part of a block. Bitcoin is commonly referred to as digital gold. Referring to bitcoin as insecure or unsafe is like calling gold insecure or unsafe.
Blockchain allows for pseudonymity. The blockchain is public where transactions are recorded and visible to everyone, therefore it is not purely anonymous. But it does provide pseudonymity. For example, digital wallets are identified via the wallet’s public address (aka public key). The public key is not connected to a person’s other personal information such as name or address. This allows participants to transact privately and reputably with data remaining secure.
Blockchain technology has been referred to as the next revolution and although it’s only in the early stages it is here to stay.