A report published by the World Economic Forum in June stated that “blockchain technology could soon give rise to a new era of the Internet even more disruptive and transformative than the current one. Blockchain's ability to generate unprecedented opportunities to create and trade value in society will lead to a generational shift in the Internet's evolution, from an Internet of Information to a new generation Internet of Value.”

But what is blockchain technology, why is it so important and how does it work?

A quick overview

If we zoom right out, blockchain technology is simply a new era in computing where specialised software is running on a network of specialised computers. Details of this ‘special software’ first appeared in ‘Satoshi Nakamoto’s’ academic white paper “Bitcoin: A Peer-to-Peer Electronic Cash System” in 2008. This was the birth of not only Bitcoin but the Blockchain Industry as a whole, and extremely talented computer programmers from all over the world have been building upon this core technology ever since.

Strictly speaking this ‘special software’ is actually a protocol however for the ease of understanding I will refer to it as software.

This intelligent software was a breakthrough in computer science and has enabled us to use computers in a completely new way. We can now use computers to create valuable digital assets and exchange them all over the internet. Getting people to see value in these digital assets and exactly what that ‘value’ represents is still a very wide and open question. People in the blockchain industry have started to draw parallels between where the blockchain industry is today and where we were with the internet in the early 90’s. Back then we knew we could send ‘information’ to anyone on the internet theoretically, but had absolutely no idea how this would fundamentally transform the world in the way it has.

For example, I could own 100 of these digital assets and transfer 50 directly to you, you could then transfer 10 of those digital assets directly to someone else anywhere in the world. This is very similar to what we can achieve with digital cash, however with blockchain technology we can do this almost instantly, 1 to 1, without the need for any independent party to facilitate the transaction. Previously, if we wanted to transfer widgets to someone on the other side of the world (in the form of US Dollars) we would need to rely on a bank to facilitate that transaction. I would go to my bank and transfer my local currency in to USD. I would lose a bit of my time and a little bit of my money in transaction fees here. I would then need to trust the bank to transfer that money to another country. This transaction would need to take place during business hours, between Monday and Friday and not during any public holidays in either country. I would also lose a little more of my money in transaction fees here. The person receiving the transaction on the other end, would then need to wait for the funds to arrive in their account before the transaction is considered complete. With the blockchain we can remove this middleman and instead, I can transfer these widgets directly to you instantly via the internet.

How a blockchain works.

One way to think of a blockchain and how it works, is to think of a metal chain. It’s made up of many smaller links which, together, create a much longer chain. Each small link in a metal chain, represents a block on a blockchain. The blocks on a blockchain contain information and are linked to other blocks on the blockchain all the way back to the very first block.

A blockchain has a verifiable beginning and end. At any point in time, the block at the end is the only one which is open and recording transactions on the blockchain. All the blocks that came before it can never be altered and simply act as a store of previous transactions. They are locked off from being changed ever again.

The block recording transactions at the end of the chain will close after a certain amount of time (e.g. ten minutes). This block will then be saved ahead of the long chain of transactions which came before it and a new block will open.

By making sure that older blocks are locked off and can never be changed again gives us certainty of when transactions take place e.g. transaction 35,454 took place during block 732 at 08.45 on June 27, 2017. This transaction can not be changed which is one of the key attributes of a blockchain. Companies are using blockchain technology to record land titles in parts of Africa. If land is bought or sold, a new record of ownership is uploaded to the blockchain providing a record of when the transaction took place and what the transaction consisted of (e.g. price, land size, GPS co-ordinates etc).

Who is in charge of the blockchain?

A blockchain network consists of 3 key user-groups, end users, developers and miners. End users are the customers, those who are using the blockchain service for its intended purpose (registering land titles, exchanging digital cash etc). The developers are the ones who created and often continue to improve the software. Lastly, the miners own the hardware (or computers) which are required to run the blockchain’s software.

The name ‘miner’ comes from gold miners as they are the people doing the work to extract gold from the ground. These ‘miners’ are people from all over the world who have decided to purchase special high powered equipment to run the software on a blockchain and aim to ‘mine’ that blockchain at a profit.

These miners cover the setup cost of their mining equipment, ongoing expenses like power, rent and maintenance by collecting a small block reward for running the blockchain’s software. This block reward is paid out in the form of the digital asset or cryptocurrency they are mining. This is the blockchain’s way of saying “if you give me the computing power I need to run then I will give you some of my net worth for doing so”. The software continues to give out a portion of its net worth methodically over time to miners. Because of this, miners are incentivised to continue mining the blockchain and will continue to do so, so long as it remains profitable. If more users find value in the software over time, then its value should continue to increase.

All three user groups (users, developers and miners) are required for an application to be successful on a blockchain. The three user groups rely on one another in a type of codependency, meaning the ‘power’ or ‘authority’ over the network is spread out or decentralised. The developers rely on the miners to keep running the software, and they rely on end users to keep using the software. The end users rely on the miners to provide the computing power to run the software and end users rely on developers to keep improving the software. The miners also rely on the developers to keep improving the software so that end users keep using it and make the block reward they are mining profitable.

A blockchain does not care where in the world you are, if you provide the resources necessary it will happily consume them. As long as you can acquire the hardware necessary you only need access to power, a good internet connection and some technical knowledge to begin mining a blockchain. So long as there is demand in the market for mining facilities, people will continue to build them. They are popping up all over the world and it is highly likely that people are already mining in the country you are in.

How do these computers form a blockchain network?

Simply having a number of computers spread around the world running the same software is not unique or novel, we have phones running IOS or Android software everyday. Where the magic happens is in the way the miner’s computers link with each other to work together.

Earlier I mentioned that once a block is closed and added to the blockchain it can no longer be altered. Each individual computer has its own copy of transactions that have taken place previously on the blockchain saved to its database. The transaction exists on all of these computers distributed around the world and trying to change all of them at the same time would be incredibly difficult. This is one of the reasons that it cannot be changed.

When a new block is confirmed (the most recent block at the end of the chain that has been recording transactions closes), news of this is broadcast out to the rest of the network. At the same time, all the computers on the blockchain network update their records accordingly and move on to the next block. Think of it like multiple cogs in a machine turning at the same time, you can try to stop one, but the combined force of all the cogs turning together is too powerful to overcome.

To understand how a distributed database works in practice, imagine 10 people living on an island. Each of these 10 people have a record in their heads of who owns what land. When one of them sells a piece of land to another, news of this is announced to all 10 people on the island and each of them updates the record in their heads. This network of people has now updated their record of ownership.

This is very similar to how a blockchain network operates. When a transaction takes place, news of this transaction is broadcast out to the rest of the computers on the network and each one of the computers on the network updates its record.

An interesting point to help illustrate the strength of this decentralised database is what happens when one of the computers goes down (or one of the people on our island goes on vacation). If someone were to make a transaction when this was the case, the system still works. The message will be announced to the entire network of remaining computers (or people) and when the missing one rejoins the network, it will be updated with the new information. This enables computers to freely jump in and out of a blockchain network providing extra computing power when necessary.

I haven’t gone into the specifics of cryptography and how it’s used to keep the network secure. For now, understanding the basics of blockchain technology, who key user groups are, how it decentralises power, and how the database is distributed, should be enough to give you the fundamentals of how a blockchain works. Once you have an understanding of how it works, you can begin applying it to different industries and thinking about the impact of blockchain technology.

Like the internet before it, the blockchain industry is building an entirely new model and redefining what is possible. It’s forcing us to re-think basic things we never thought would change. The internet changed the way we consume and share information, the blockchain is unlocking new business models, changing the way we fund and invest in new business ventures and that is just the beginning. The blockchain is not an incremental improvement on something our society has seen in the past, it’s an entirely new chapter in human evolution just as the internet was.

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