What is actually Blockchain technology and how does it work?
During the past year everyone everywhere went crazy about cryptocurrencies and in particular, the so-called crypto gold — Bitcoin. However, even though that your (grand)parents have probably heard about the digital currency, it’s likely that they haven’t got a single clue about the fascinating technology behind it called blockchain.
But what is it that makes blockchain technology so special that more and more businesses in various industries are now adopting it? That’s what I will try to explain to you.
When we think about technology, we assume the constant buzzing notifications from your smartphone and people walking on the streets, while staring at a smartphone screen. However, blockchain is the first technology, which will actually connect us instead of the opposite. It will change the way we make decisions and exchange value.
Our ancestors have traded by using violence and social repercussions. With time, society evolved and government institutions and other intermediaries took over the way we trade and exchange value. But in order to understand one of the many ways that blockchain is of advantage to our society, let us take a look at the banking system. If you want to make a transaction, the bank is the institution that sets the rules on how this transaction will be executed — how long will it take, how much will they charge you and so on. If this transaction is made on the blockchain, there is a set of computers that are participating in the network to validate this transaction. They basically help you operate this transaction one-to-one without the bank as an intermediary.
This fancy term blockchain actually means a block of data that has been recorded over a certain amount of time and is grouped and cryptographically linked to a previous set of data forming a chain of events.
These computers are agreeing upon what happened over a time period and then each of them represents that data instead of having one centralized entity, that is doing so. All of these events which occurred on the blockchain are recorded on a public ledger.
This is how the blockchain works by providing a way to track and transfer data that is transparent, safe, auditable, and resistant to outages. But how are those features beneficial to the way we make decisions and exchange value? The answer is: by providing an opportunity to trust each other and lower uncertainty to know more about one another.
The importance of digital trust
We want to know if you are who you say you are and if you are able to do what you are trying to do. This is especially valid when there is an exchange of value between two or more parties. Back in the days, people were able to trust each other upon a strong handshake and a set of personal qualities. Today this is not the case and trusting in a digital world is rather risky. It requires proving identity (authentication) and proving permissions (authorization).
With blockchain technology, those two requirements are fulfilled by possessing a cryptographic private key. It reveals a powerful tool that fulfills both authentication and ownership requirements. Also, it protects the individual from having to share more personal information than they need to for an exchange, leaving them exposed to hackers.
It is this difference that makes blockchain technology so useful — representing an innovation in registering and distributing information, that eliminates the need for a trusted party to facilitate those relationships.
Blockchain is not an app, nor a company. It is not the solution of every corrupted organization and it is possible that in a few years, when more people adopt it, to get manipulated. However, now authentication and authorization are vital to all digital transactions. They provide us with a set of rules that rebuilt the trust we used to have, thanks to technology. This way, by lowering our uncertainties, we transform our economics and almost every aspect of life in radical ways.
Bettina Warburg describes how the blockchain will eliminate the need for centralized institutions like banks or governments to facilitate trade, evolving age-old models of commerce and finance into something far more interesting: a distributed, transparent, autonomous system for exchanging value.