18 June 2020

    James Francis

    What is blockchain, and should you care about it?

    The good news about blockchain you don't have to use it directly to benefit from it. You might be using it already without knowing.

    Blockchain is an amazing technology that changes how we verify if a transaction is legitimate or not. You may have heard of cryptocurrencies such as Bitcoin, which are policed using blockchain. But there is much more that blockchain can do to make transactions faster and cheaper. The good news: you don’t have to use blockchain directly to benefit from it. You might be using it already without knowing.

    What is blockchain?

    Blockchain refers to a concept that changes how we can verify data. It’s not a specific type of software or machine, but more like a collection of techniques and technologies that create a blockchain service. The ‘blocks’ in blockchain are different records connected through various encrypted means, or the ‘chain’. The power of blockchain is that the records, collectively called a ledger, can be encrypted and stored on many independent machines. If someone wants to change a record in the ledger, all the other machines have to approve the change following steps dictated by the blockchain system. If someone tries to alter the record fraudulently, the blockchain system spots and reverses it. 

    How does blockchain work?

    Blockchain sounds very exotic. But in reality, it’s a clever new way to do something we use every day. Let’s take the example of buying a car. When a dealership sells a car, it registers those details with a third party database. That database now confirms who the new owner of the vehicle is. This arrangement exists so that the dealership or car owner can’t meddle with the information: by using a third party to confirm the change of ownership, everything is kept honest. But this is also a slow and inefficient way of doing things.

    Blockchain does away with the need for a central database. Instead, every dealership can have a copy of the database (the ledger), and they can each change it. But unless all the other copies of the databases agree to the change, it won’t happen. This stops someone from entering incorrect information or cooking the books. A ledger can contain any information - the point is that different parties independently verify the integrity of the ledger, and you can’t alter a ledger without all the copies being aware of it.

    What is the use of blockchain?

    A blockchain system can be used to verify any transaction without needing a third party doing that specific job. For example, if you apply for credit approval at a bank, your credit is usually checked with a third party that stores that data. But with blockchain, the bank can do so directly because it can access the ledger. But it can’t just change it as it pleases, which was the point of the third party - to verify and protect the information. Any transaction that would need a third party to approve it - property transfers, buying stocks, origins of goods, etc., can be vetted by a blockchain without needing the third party. Instead, the anonymous collective of systems that have copies of that ledger automatically vet the change. This won’t specifically stop people adding false information, but it does make it abundantly clear when and where the information was added. Thanks to blockchain, fraudsters can’t hide their tracks.

    What is the difference between blockchain and bitcoin?

    Bitcoin is a type of cryptocurrency, and cryptocurrencies are created using blockchain. Standard currency is regulated by central banks and state authorities. In contrast, cryptocurrencies are regulated by distributed ledgers - there is no central authority. Though this sounds less effective, it’s actually much better because of how hard it is to defraud the system. Though people sometimes confuse the different terms, blockchain is the technology concept that makes cryptocurrencies (Bitcoin, Ethereum and other such currencies) possible. But blockchain can be used to verify any type of transaction, not just money. For example, it is used in the diamond industry to spot and stop the trade of blood diamonds.

    Do I need to use blockchain?

    You’ll probably never directly use blockchain. But it’s likely already at work in systems behind the scenes. Many banks and other big companies have been working on blockchain systems to make their services faster and cheaper. If you own Bitcoin or any other cryptocurrency, you are relying on blockchain. Every day, we use more and more services powered by blockchain. But it’s not something most of us will use directly.

    Will blockchain help with online shopping?

    Some places let you transact using a cryptocurrency, but there isn’t a specific advantage to using something like Bitcoin over other payment choices, other than it’s a little more anonymous. The real benefit of a blockchain system for online shopping will be behind the scenes. A shop could use blockchain to improve its security, identity verification, and speed up transactions. But since many of these ideas are still in development, and they are only starting to appear inside online shops. Even if they are being used, a shopper is not likely to notice it except perhaps for cheaper transaction fees.

    So, what’s the big deal?

    Blockchain is a revolution because of how it decentralises the approval of transactions, be that an economic exchange, such as buying a car, verifying someone’s identity, or in many other ways. We’re only beginning to uncover and expand the real potential of blockchain. There is also still a lot of resistance against it: many companies take a fee for verifying a transaction, and blockchain cuts them out of the loop.

    But, overall, blockchain means more secure transactions that are also faster and cheaper. It has the potential of opening up economies to more people, not just those who can afford the service fees and middlemen. You’ll never deal with it directly, but blockchain will continue to improve things in the background.

    James Francis