The meteoric rise of Bitcoin has really shaken up the world of finance and banking. The decentralised, digital currency is on the verge of going mainstream but if you’ve yet to come across it, don’t worry, at present the majority of users are early investors, hobbyists and a collection of people that would rather their financial dealings were not put through a centralised system controlled by a small number of large, multinationals. But this article isn’t about Bitcoin at all, it’s about the underlying technology that powers it. Bitcoin may or may not change the world, but the Blockchain certainly will.
Let’s put aside the technicalities of Blockchain, firstly because it involves quite a lot of advanced mathematics and secondly, it hardly makes for a compelling read, and look instead at its core principals and why they are important. Don’t let all the complexity scare you off, the blockchain is a simple concept when you break it down. Essentially, its a way of storing information, specifically a list of transactions. A transaction can represent anything, a token for a digital currency, an object, a house, a contract, literally anything that may pass from one place to another. When a transfer is done, it must be signed by the owner’s digital signature and sent to the recipient’s valid digital address. Then a large network of independent computers validate the transaction by looking at various important details, such as, ‘does the sender actually own the item?’ and ‘is the recipient valid?’. Once enough of the network has checked and confirmed the transaction, it is added to a “block” which is sealed once it has been filled with transactions, then the block is taken and stored at the end of a chain of previous blocks, creating public ledger that anyone can look through and check at any time.
If you imagine that these blocks are like bricks in a wall, they stack up on top of each other and connect to the blocks that have gone before. This means that to change the contents of a block (e.g. to fraudulently alter the total amount of money that changed hands in a transaction) you must remove all the other blocks above it and rebuild them all before another block is added. This is the core principle that makes the blockchain an extremely secure way of storing information. It is effectively impossible for someone tamper with the information and critically, the system does this without relying on any one person or organisation to oversee it. The system polices itself.
This might not sound like a very revolutionary concept but, in practice, it opens up some pretty interesting opportunities that can, and in some cases already have, change the fundamental workings of many industries. Take art for example. The art world is one in which pieces are collected and sold, specific artists are extremely sought after, it is sometimes the target of fraudsters and the value of the pieces can be extremely high. Typically, art is bought and sold together with a certificate of authenticity. But, as a buyer, how can you be sure that the certificate is genuine? Well, at the moment it all ultimately comes down to trust and this is where the blockchain really comes into its own.
Imagine that when an artist finished a piece of work, they created a digital record of it, including its name, the date it was completed and any other relevant details. They then sign the record digitally with their own “private key” and send it to a system built on top of a blockchain. This piece of art is now stored forever, unchangeable in a block, visible to anyone that wants to find it. The artist then decides to sell his piece of work to an auction house. To do this, he would simply transfer the digital record of the artwork from his own account, into the account owned by the auction house. This transfer must be signed by the “private key” of the owner and is validated by multiple computers across the network. Once the asset is transferred digitally, the physical transfer can take place as usual, including real money changing hands. A few interesting things have now been made possible, firstly, the collector is able to track their painting all the way back to the original artist. This can be done before any payment is made and crucially, can be used to prove the provenance of all the items in their collection and is visible for anyone to see.
This same principle and process can easily be applied to lots of different sectors, including property, stocks and shares, precious metals and gems, even event tickets, coffee and fine wine. Plus, the system isn’t exclusively for transferring goods. It can be used to track services too and it’s also a great way of saving legal documents and contracts. At this very early stage, the real scope for this technology is not yet known, but it’s an extremely flexible system that can be used in lots of different scenarios.
This might all sound like a utopian vision of the future, however blockchain technology has already started to infiltrate the mainstream. There are many companies that are already using it in real-world situations, including governments and multinational corporations who are looking at ways they can leverage its development. Because a well implemented and designed blockchain is potentially one of the most secure, trustworthy methods of storing data, indefinitely. But, like most things, it’s not without its grey areas. What will be interesting is when the first instance of a record on the blockchain being used in court as a proof of ownership. This could be a real watershed moment for this technology and usher in a brighter, more transparent future.