Crypto currency has been a hot topic in the news again with the rise in prices for Bitcoin, Ethereum and Dogecoin. We have also seen Non-fungible tokens or NFTs get a lot of attention in the press. Both items utilize the same underlying technology called blockchain. So, what is a blockchain and what value does it offer? I will try to explain blockchain technology in a simple manner.
Imagine that you and I want to enter into an agreement. I will give you $10. We write that on a little sticky note. I promise to give you $10. We generate a unique ID for that note and write it on the top of the note. We have a block of data representing a transaction. Now you decide to give $5 of that money to Mary. Again, we write that on a new sticky note. You promise to give Mary $5. But this time before we generate the unique ID for this note we use the first note that you and I created. The ID for the current block of data is now dependent on the previous block creating a chain of transactions. Now we have two sticky notes representing our blocks of data. They each have a unique ID that identifies them. They are linked together or chained together because the new ID is generated based on the value of the previous block’s ID creating a blockchain of transactional data.
What happens if I say I want to change the fact that I gave you $10. I want to only give you $5. I erase the contents of the first sticky note and change it to say I promise to give you $5. Remember the IDs we created for each note? That ID is based on the content of the note and the ID of the previous block. A computer algorithm uses the blocks data to figure out what the ID should be. This technique uses cryptography which is why we call Bitcoin a crypto currency. If we change the notes content, we change the note’s ID. And if we change the ID of the first block, we break the chain because the second blocks ID was based on the first block. Once created a block cannot be changed. It is referred to as immutable. This guarantees the integrity of the data in the blockchain. Maybe a little confusing so let me give this simple summary. Each block of data has an ID that is computer generated based on the content in the block as well the ID of the block behind it. If anything is changed in past blocks the whole chain becomes invalid. In this way you cannot change one block without breaking the links to all the other blocks. This guarantees you have a traceable set of transactions through the whole chain with trust being established between all partners that have transactions in the blockchain.
But wait there is more. We now take the chain of sticky notes we have created and we make copies of them and send them out to all our friends and we call them nodes. Our friends agree to keep the copy up to date and anytime a transaction is made the changes will be sent out to all the nodes to be updated. Mary decides she want to give me $5. We do the whole process again creating a new sticky note or block and generating the blocks ID based on the content of the transaction as well as the previous ID where you gave Mary $5. We add a new sticky note or block to the chain.
But before we can say the transaction is complete, we send the notice out to all our friends that have the copy of the blockchain. They each create a new sticky note and add it to the chain. We use the same algorithms so we know the generated IDs will be the same. Each node will validate that yes that seems to be a valid transaction. The new ID looks correct based on the content and the previous ID. They confirm that the transaction is valid. We do not need to wait for every node to confirm it we just need a certain number of nodes. But eventually each copy of the blockchain will be up to date. The same number of sticky notes will be in each copy with the exact content on each sticky note.
If we inspect our simple example, we can see the history of the transactions. You and I now have $5. You got yours from me and I got mine from Mary because you gave Mary $5 of the $10 I gave you. The blockchain is designed to be transparent. We do not need a third party to have witnessed the agreement. Its digitally documented in the blockchain. People can look in the chain and see the transactions that have transpired. We have created a digital ledger that is self-governing.
That is the essence of a blockchain. A transaction-based ledger where each block of data is dependent on the content of the block as well as the ID of the previous block it is chained to. It is distributed to multiple nodes to ensure that the blockchain cannot be altered because if one block where to be altered the whole chain would be invalid. If a person could somehow change all the blocks in their copy, they still need to get access to all the other nodes and change those copies as well. This creates the deregulated nature of a blockchain. No one person owns the chain. A change made to one block in one chain must be confirmed in all chains to be valid. It is a trust-based model. We trust the technology to ensure we have valid transactions that are linked together.
What are the some the use cases for a blockchain model? Crypto currency is the most common these days. Bitcoin, Ethereum and Dogecoin all use an underlying blockchain model. And new currencies are popping up all the time. People contribute to the trust of the blockchain by offering to confirm the validity of the blockchain when a transaction is made. Typically, these people are called miners. They use software that has a copy of the chain and when a transaction comes through, they confirm that the transaction keeps their copy of the chain valid. The reward for this is typically a small generation of some crypto currency. So, if I am a Bitcoin miner, I am offering my services to validate the changes to the chain. In return I receive a little Bitcoin every time I perform that function.
The needed compute power to be a miner can be sizeable. That has drawn the attention of environmental groups that question a system that requires so much power to be supported. It takes a fair amount of energy to cool down the computers that are validating the transactions. As the popularity of crypto currency and blockchain in general rises so will the underlying energy needed to support it.
Blockchain offers solutions to many traditional business problems. The rise of Non-fungible tokens or NFTs, is an example where blockchain technology is being used to show proof of ownership for digital assets. Imagine that you have taken a photograph that is awe inspiring. You post it on social media and soon you realize its being used all over the Internet. How can you prove that you are the original creator of that content? This is the base idea behind NFTs. If the photo were tagged using an NFT blockchain you can prove ownership of the original item and if a transfer where to take place it could be recorded in the digital blockchain ledger. So why the strange name? Non-fungible token. In crypto currency a block is always equal to a block. So, one block of Bitcoin is always equal to another block of Bitcoin. In this way they can be traded back and forth with each block having equal value. Think of fungible as interchangeable. Money is fungible. Artwork is not. There is only one Mona Lisa. So NFTs are unique digital assets that use blockchain to prove a chain of ownership.
Another use of blockchain technology is in identity management. A great example is a person that puts on their resume that they graduated from The Ohio State in 2012. To prove that you must call the university and get validation. Colleges and universities are looking to use a common blockchain where they post the credentials of a student. In this way it is a traceable guaranteed event to be an accurate record of the individuals’ accomplishments and credentials. Each time I get a certification or degree the blockchain is updated proving my skillset. This is where you will start to hear the term smart contracts. Today we use Lawyers and Notaries to validate that we signed a document. In a blockchain the validation and trust are built in.
This is intended to be a short primer. There is much more to be said on this topic. Blockchain is a disruptive technology that will change the way we manage and trust transactions. We do not need to know all the underlying technologies but having a base understanding of the model can help build and sustain that trust. Hopefully, you now have a better understanding of blockchain technology.