January 28, 2016
We explore block chains—the foundation of Bitcoin—and how this innovation might impact industries worldwide.
Bitcoin was open-sourced in 2009, but first started making waves in 2013 as an entirely decentralized and anonymous digital currency perfect for folks interested in buying/selling questionable goods on underground markets. Fast forward a few years and now many well-respected companies are accepting the currency. Arguably, Bitcoin is no longer considered a doomed technology experiment in digital currency. What makes Bitcoin such an attractive digital payment option is intrinsically linked to its underlying foundation built on what is called a “block chain.” These days we are seeing many established companies exploring the application of this block chain approach. From trading platforms to medical records repositories, there may be endless applications for this emerging technology. Before we can explore block chain as a potentially disruptive technology, we need to understand what makes a block chain unique.
What is a block chain?
A block chain is, at its core, a log of transactions. If you were to look at a block chain, it would simply appear to be a long, random string of letters and numbers. However, in practice it provides an encrypted, numbered, and immutable history of all data ever written to it. The numbered sections are referred to as “blocks.” It may be easier to think of a block chain as a distributed master ledger of ledgers (i.e., blocks). Each ledger with its own set of validated transactions that is replicated across a network of machines, and continuously checked to ensure all the machines have the same information.
A block can be thought of as a ledger with a set of transactions that have been verified and cleared to be appended to the master ledger (i.e., block chain). Once a block has been written to the master ledger, it can no longer be changed. The verification specifics applied to each transaction is outside the scope of this article. However, it’s important to mention that every transaction is checked to ensure:
- It has not been altered or created outside of the normal process
- Any parties involved are authorized to participate with appropriate permissions
- It is not in conflict with other transactions. (e.g., double-spent)
- It does not already exist in the block chain
What makes a block chain system unique?
What really makes a block chain application compelling is the idea of a consensus protocol that alleviates the need for a central party to mediate the transaction validation process, user authentication, and block chain maintenance. Through this consensus protocol, all members of the block chain network are involved with validating transactions and ensuring the block chain has not been modified out of normal means. It provides an immutable audit trail of whatever has been stored to the block chain.
In the case of Bitcoin, this consensus protocol is referred to as “Proof of Work.” Crucial to Bitcoin’s survival was the requirement that any block added to the block chain must first be validated by the Bitcoin network through solving an increasingly difficult mathematical computation. This results in a mountain of computational energy insurmountable for an outside actor wanting to re-write the block chain, thereby preserving the viability of the block chain.
How can this be used?
The combined power of the block chain and consensus protocol to provide a highly distributed, transparent, searchable, and immutable transaction store for the trading, sharing, or exchanging of any type of asset (e.g., records, currency, data) is very compelling in use cases where:
- There is low trust between transacting stakeholders/parties
- Critical assets could be compromised through human influence/corruption
- Centralized assets are vulnerable to hostile parties
- Critical processes are bottlenecked by centralized steps
The opportunities for leveraging this technology are wide and large with applications across many different industries especially in the global economy. Where do you see block chain potentially playing a critical role in the near future?
Sterett Seckman contributed to this post.