Blockchain –It’s all about security & decentralization
We're right on the "blockchain revolution." No matter where you go, everyone is talking about "blockchain," "bitcoin" and "cryptocurrencies" and it seems we should be tuning into what all the buzz is about.
According to a report published on Transparency Market Research, the global blockchain market is expected to be worth $20 billion by 2024. Banks are especially interested in it because of the potential it has in lowering costs and speeding up transactions. But, the market possibilities are endless.
A lot of questions come up when engaging in conversations about the topic: what is it? Is it secure? What can I use it for? Let’s try to understand why so many are people talking about it and why blockchains can become such a disruptive technology.
Several aspects of our lives and our interactions with other persons are based on trust. Economic transactions, of course, but also contracts, insurances, and data protection systems. Yes, we’ve got laws and when someone breaks that trust, we can go to a lawyer and sue them –but that’s an expensive, slow and very inefficient system. What if we had a system that is so solid and secure that we wouldn’t need to rely upon “trust”? That’s what blockchain aims to. The key here lays in its security,
How does a blockchain work? Imagine a block containing three things: data, a hash, and the hash of the previous block. As one of the components is the hash of the previous block, all the block are linked like a chain –hence the name, a blockchain is a chain of blocks – a chain of data stored in blocks protected by hash numbers, that can act as a public ledger. But is a blockchain it really secure? Why?
Once a block is full of data, a hash number is assigned to it. Each block has a unique hash number –you may imagine the hash as a really long succession of characters that function as a kind of password. In a blockchain, each time that someone introduces a change in any of the data contained in the block, the hash number changes automatically. And, as we said before, each block also contains the hash of the previous one. This means that if someone changes something in a block its hash number will not coincide anymore with the hash number stored in the next block –which would raise every alarm and break the chain. If a hacker wants to change any data, he would need to change not only the block where it’s stored, but also the next one, and the next one… and all the following blocks. Which is not easy.
2. Proof of Work
However, now we have computers that can calculate and try thousands of very long hash numbers in a few seconds. Hacking all the blocks in a chain would be possible if a powerful computer is used to try thousands of hash numbers per second. Here comes something called “Proof of Work”. The Proof of Work is just a temporary delay –each time a hash changes, the system takes some minutes to check and validate or refuse a change –i.E., Bitcoin requires 10 minutes per change. So, it doesn’t matter if your computer can try thousands of hash numbers per second –if you want to hack Bitcoin, your computer will only be able to try one possibility every 10 minutes. This makes almost impossible to change any data.
When a new user begins to use a blockchain, the whole blockchain is downloaded into her system. A blockchain is not stored in a centralized server but in the computers of all the users. It’s a peer-to-peer system (P2P). Being a decentralized system, when a new block is linked to the chain, the majority of the users must validate the change before it becomes part of the chain –that’s what we call a “consensus”.
Now, imagine that someone managed to hack the hash number of a block. Also, they were patient and lucky enough to hack the hash numbers of all the next blocks –now they need to do it multiple times and repeat it over and over again in the majority of the computers where the blockchain is stored so that they can gain the consensus needed to validate your changes. It sounds impossible and is infeasible.
Ok, we have a system that is so secure that our relationship with others doesn’t rely on trust anymore. But, is that enough?
Security is a necessary condition, but what makes blockchain so powerful and disruptive is that it is a decentralized, P2P system. We are used to employing intermediaries in our transactions –you put your money in the bank and the bank pays your bills. Online payment systems like PayPal works like that too. Using a cryptocurrency, you don’t need a bank nor any other middleman –your money is data stored on a block of a decentralized blockchain. From the blockchain, you can transfer it directly to any other user of the chain –or the system can do it by itself following a set of rules known as “smart contracts”.
We can only let our imagination run on how disruptive blockchain-based technologies may be and how can they change banking systems and even the national currencies themselves. Even if we are used to identifying blockchain with cryptocurrencies and Bitcoin, the truth is that blockchains can be used in many fields –actually, in any aspect of our life where intermediaries and trust are needed. Let’s think about the transmission of personal data, medical records, all kind of insurances, college records and qualifications… you name it. Nowadays we are attending a boom of cryptocurrencies. In the next few years, we’ll probably see the rise of blockchains in almost every aspect of our lives.