Unless you’ve been living under a rock, you probably know or must have heard about bitcoins. For the uninitiated, Bitcoin is a cryptocurrency that has its own payment system. In 2008, an unidentified person who went with the alias Satoshi Nakamoto presented a white paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System”. Based on a peer-to-peer network system and distributed timestamping server, it removes the necessity of a financial institution or a trusted authority to authorise payments. After releasing the first Bitcoin software in early 2009, Satoshi open-sourced the software later in the year. We won’t be going into detail about what Bitcoin or cryptocurrencies are, but rather focus on the technology behind Bitcoin – Blockchain.
What is a Blockchain?
Blockchain is fundamentally a database system with some differences. In a traditional database, the data is stored on a central server which is trusted to maintain the centralised database. Whereas in a blockchain, the database is decentralised so that the burden of trust isn’t upon one server, but instead on a network of systems. Such a model takes the help of numerous computers or nodes, each managing a copy of the same database.
How does a blockchain work?
A blockchain comprises of the database which keeps record of the history of transactions or data that has taken place. Being a shared or decentralised system, the database is shared among the nodes through a peer-to-peer network used by the same nodes to communicate and update the database whenever there’s a new transaction. In this way, any changes occurring in the database will be broadcasted to all the nodes participating in the network. As long as the network is online, the database will always be accessible to the other nodes, even if one or two of them leave the network. This is one of the biggest advantages over traditional centralised database systems since transactions would be delayed or denied in an event when the central server suffers downtime or gets compromised. This is how the peer-to-peer network operates ensuring that the database is never lost. Let’s move on to talk about how the database is maintained.
In its initial state, generally called the genesis state, the entire network is notified and nodes are initialised. Now, transactions are broadcasted to the network so that the database can be modified with the required entries. These new entries aren’t directly added but held up in a temporary state or pool consisting of one or more transactions. A finite collection of these pending transactions are called blocks. The transactions inside a block together generate a hash key or a digital signature unique to the particular block and set of transactions. With the Genesis state already existing, the new block should obviously denote the genesis state to be its previous state. The hash key exactly does the same by creating a link to the previous state. This linking is essential to the security of the transactions in the first block. The integrity of the first block is also maintained since if any changes were to be made to the transactions inside the block, the corresponding hash will change. This would result in a mismatch of the hash with the hash previously added in the previous state. Because of the nature of the network, everyone will be able to notice the mismatch in the hash values and flag it off as fraudulent. As more transactions are broadcasted, more blocks will be created to form a chain, hence known as a blockchain.
If an attacker with a malicious intent wanted to modify any of the older blocks high up in the chain, it will be a foolish effort. Why? Well, this is another amazing security feature of a blockchain. You already know that modifying the transactions in a block to change the hash signature. You also know that the blocks are linked to the previous block using the hash signatures. If someone modified a block in between, the hash value of that block will change and break its link to the previous block. This will render all the blocks following the newly modified block to become invalid. The nodes already store the database across the network and when the new block is broadcasted, a mismatch will be detected by the nodes. This is practically how a blockchain works.
Why do we need blockchain?
The simple answer is security. A distributed system is difficult to penetrate. For an intrusion attempt to be successful it’ll have to be launched on all nodes simultaneously. Another beauty of blockchain is that this technology can be used to record or store any kind of information on a public audit or ledger system. Now, that you have a rough idea about its mechanism and why is there a need of blockchain, we will explore how this technology is going to enable sectors in the near future apart from what it was originally intended for – cryptocurrency.
Another sector where the use of blockchain is widely being promoted and funded is banking. Banks already have massive databases. Once they move to blockchain, banks will be able to process payments faster and more accurately. According to a report by Accenture, investment banks will be able to cut $8 – $12 billion a year by 2025 by introducing blockchain technology in their infrastructure. ICICI Bank was the first bank in the country to execute a transaction using blockchain last year. They exchanged and authenticated remittance messages and original international trade documents on a custom-made blockchain.
Recently, the State Bank of India launched a blockchain finance consortium called Bankchain. They’ve partnered with several technology firms and local commercial banks with technical assistance provided by IBM and Microsoft.
The challenges faced by the music industry is the inefficiency tracking music ownership and payments worldwide. Due to the lacking process of ownership and rights, it becomes difficult to manage the distribution of payments to everyone concerned with the project – a process taking years at times. By creating a new blockchain codec, the content will be added along with the information to the blockchain ready to be broadcasted.
Every time a new song is created by artists or record labels, it will be encoded with a blockchain codec and pushed onto the global database. From then on, the digital service providers could tap into the codecs to make it accessible to their subscribers. UjoMusic is a startup exploring the same where they’re testing this open music industry standard. Imogen Heap, a British singer released her song Tiny Human on this platform, allowing users to purchase licenses to stream, remix and download through digital service providers. Heap will now be able to receive the payments directly from the users and then she can distribute the corresponding cut to her collaborators.
Even though social networks like Facebook, Reddit and Twitter are free to use, you already spend a lot of time on them scrolling endlessly through your feeds. What if you could get paid to visit and contribute to a social network? Steemit is one such network that’s trying to incentivise users for participating in their social media platform. The service works on blockchain so everything is transparent where the user’s Steemit wallet can be viewed by anyone. You can earn Steem Power (SP) in the platform by garnering upvotes in your posts while upvoting also earns you curation rewards. Currently, there are over 70,000 users registered and on signing up, you’ll receive $4 to get you started. Existing social networks are dependent on user-generated content which is used by the company to earn money through advertising while you’re given only the services on the platform. On Steemit, you have the opportunity to actually make money by contributing posts and blogging excellent content.
It’s amazing how blockchain can be scaled and modified to support just about any sector, even ridesharing. One of the problems faced by any Uber-like service is govt. intervention to protect the interests of existing cabs. By introducing a ridesharing service independent of any central authority, no government will be able to exert control over them. This can be possible by implementing the service over blockchain. La’Zooz has already established a ridesharing model based on blockchain. The advantage of a decentralised ridesharing system is the release of control over the distribution of funds. Community members participating will collectively decide the rules on contribution and how the rewards will be circulated.
La’Zooz also includes miners, called ride-miners. In order to mine “zooz” tokens, the internal currency of the system, drivers have to install the app, turn on the GPS and drive around at a minimum speed of 10 kph. Zooz tokens can also be acquired by contributing code to the project and inviting others.
Blockchain could make trading in securities more efficient. Private companies like t zero are trying to make digital trading secure and quicker. Based on blockchain, the ledger is fed with the existing market processes that reduces settlement time and cost. Another blockchain startup called Chain is working to work out a way of trading in private companies while working with NASDAQ.
The advantage of having a blockchain-based ID is the decentralised nature of establishing your identity independently, making it secure and efficient to manage and track. The blockchain manages the keys, devices and usernames securely in a way that whenever the user logins with apps, they are anonymous. Whereas their identity can be revealed and proven at any point of time.
Online voting can be implemented using a blockchain where the votes will be treated as transactions. The entire database or ledger of the votes will be stored distributed to all the nodes in the voting network whenever a new vote is cast. This way every node will have a backup or historical audit of the final count until a new vote is cast. Due to the blockchain approach of the database, votes can’t be tampered in between. Another advantage of blockchain based voting system would be identity verification of voters while still staying anonymous. Only when the voter is authorised, they will be able to vote. My Vote and BitCongress have already presented a robust online voting system based on blockchain technology. In 2014, a Danish political party – Liberal Alliance – conducted an internal voting at the party’s annual meeting using blockchain technology. It’s natural for voting to eventually move online and now, with an efficient technology already existing, we might witness this happening soon.
This article was first published in the March 2017 issue of Digit magazine. To read Digit’s articles first, subscribe here or download the Digit app for Android and iOS. You could also buy Digit’s previous issues here.