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In 2008, an individual (or group of persons) using the name Satoshi Nakamoto published a concise white paper on a peer-to-peer electronic cash system named Bitcoin. What made Satoshi’s work compelling was the fact that unlike others before it, it was based on a bold claim: third parties or central intermediaries won’t be needed to facilitate transactions. This went against traditional wisdom. However, the stage was set for a new era.
Capitalizing on several decades of cryptographic advances, Bitcoin launched in 2009 as the world’s first peer-to-peer digital cash system that didn’t require the presence of a central intermediary. This breakthrough was made possible by a revolutionary technology: a distributed ledger that keeps records in the most authentic way possible called the blockchain. Blockchain technology first gained popularity as the technology cryptocurrencies derive their authenticity and credibility. As cryptocurrencies exploded, so as the popularity of the underlying technology they are based on.
Although blockchain sounds like a complicated concept, it is basically an authentic way of keeping records. Did you sigh a breath of relief? I understand. This definition is quite different from most of the definitions you’d find out there. Do the words “decentralized”, “distributed ledger”, and “digital database” ring a bell? It should, if you’ve ever read anything on blockchain in the past.
Although they are valid explanations of what blockchain stands for, they can be a little bit confusing. This is the major reason why most people do not understand what blockchain really is. So let’s take each of these words and attempt to break them down, then we’ll take an even closer look at how the blockchain system works.
First off, the decentralized nature of a blockchain neutralizes the relevance of central intermediaries or third parties to facilitate transactions. Decentralized meaning no central intermediaries. You can send money to your friend in Hawaii without any mortal knowing about it, talk less involved in facilitating the transaction. But if you were to use the traditional methods, say PayPal, Skrill or Payoneer, you’re already dealing with a third party. Get it? So the decentralized nature of blockchain means that transactions are carried out without the aid or involvement of third parties. Let’s look at the next word: “distributed ledger”.
Let’s consider the word distributed. The distributed nature of blockchain means the responsibility of maintaining trust, credibility and authenticity is spread amongst thousands (and potentially, millions of persons). Put another way, trust is distributed. In place of a central intermediary are thousands of miner accountants who ensure that a high standard of authenticity is maintained. For their work, miners earn incentives in the form of units of cryptocurrencies, which they can choose to hold or exchange for fiat money.
A Ledger is simply a record of economic transactions and is the basis of accounting. Putting the two together, a distributed ledger is a giant record maintained by thousands of persons. Again, since there’s no central intermediary or a third party, it is decentralized. The decentralized nature of blockchain also means the database is not stored in any particular location. With an authentic ledger based on algorithmic self-policing, we can make people more accountable than they would normally be. Now let’s consider the direct words used in naming the concept.
Block in the name blockchain refers to records while chain is a list of blocks linked together. Therefore, a blockchain is a list of records linked by cryptography. The primary role of the blockchain is to provide an error proof method of keeping records. The blockchain does this by distributing the responsibility of validating transactions amongst multiple computers on the internet. In essence forming a peer-to-peer network that collaborate to validate transactions before they are added to the blockchain. The distributed and decentralized nature of the network means that no single system can compromise the chain.
Because subsequent blocks are linked to prior blocks, it is almost impossible to compromise the blockchain without altering previous blocks. When a new record (block) is entered on a blockchain, it gets linked to the prior block via a hash. This ensures that records entered on a blockchain are indelible and cannot be altered.
Since blockchain is a way of keeping authentic records, you can expect to see more of its applications in sectors outside finance.
Abraham Jimoh is a tech enthusiast with an almost maniacal interest in emerging technologies with disruptive potential.