For a large majority of us, the question “how does it work?” typically comes second to “why should I care?” or “what’s in it for me?” In the next part of the Blockchain 101 blog series, I’d like to explore the first two questions by getting to grips with the first. How does a blockchain work? What bit makes it potentially useful? Where and how can blockchain technology be used?

If you want to know more about “why you should care” about Blockchain, check out the first two blogs in the Blockchain 101 series (Part 1 and Part 2)

Nothing more than an immutable and auditable chain of information

When people use the word blockchain they can be referring to a number of different things: the Bitcoin Blockchain, the Ethereum Blockchain, smart contracts, sometimes even a form of digital asset or currency.

This can all get very confusing!

Even though they are all different applications of the same technology, the driving force behind its rise to fame is this concept of decentralised systems and distributed control. Blockchain technology should be seen as a collection of ideas that can be moulded into different applications, much like a bag of Lego. You can pick out different bricks and put them together in different ways to create different results. The concept of decentralisation and distributed control, however, remains the underlying feature (when I start discussing private blockchains we’ll see that they contradict the concept of decentralisation to some extent). The blockchain itself, digitally, is nothing more than a long chain of information, much like a ledgeror a database. It doesn’t matter if this chain of information represents a record of transactions, contractual agreements or ownership rights, what matters is that it becomes immutable, entirely auditable and distributable – information can be added to the chain, but cannot be taken away.

P2P vs Client server

P2P vs Client serverAt the core of it, blockchains are set up in what’s called peer-to-peer (P2P) networks as opposed to a typical client-server model in centralised systems (see fig. 1). This enables the chain of information to be updated, validated, replicated and distributed to other peers in almost real-time without having a single point of failure, and hence, existing as a system in distributed control. In the client-server model, if a server is attacked then false or null information is passed on to the clients. In a decentralised environment each peer is equally responsible for contributing to the success of the system by acting on local information in an appropriate manner

Even though the decentralised nature of P2P network is much more robust, reliable and secure, it becomes less efficient when large volumes of data are involved; imagine replicating and distributing a chain of information with a large-number-of-bytes between thousands of peers. The problem of scalability is a limitation in certain applications of blockchain where a lot of data needs to be kept.

Creating trust and certainty

Let me introduce you to the blockchain that started it all off: the Bitcoin Blockchain, and let me explain how this particular blockchain works over the next series of blog instalments. Bitcoin, as you may already know, is a currency much like your $’s and £’s except that it is exchanged virtually and it has no physical value associated to it. The underlying technology that deals with all bitcoin transactions is the Bitcoin Blockchain. Here, the Bitcoin Blockchain is often referred to as a ledger containing all past transactions, not too dissimilar to a bank’s general ledger. In the case of fiat currencies, banks act as a middleman between two persons wishing to exchange funds. They facilitate the transaction of goods by providing a platform of secure processes and by creating trust and certainty between the parties involved.

So, what makes the Bitcoin different?

The Bitcoin Network wishes to achieve two goals: to be a publicly available technology, meaning that anyone can write into its ledger (in fact, the Bitcoin Blockchain is a type of public blockchain); and to be a system that requires no centralised authority (or intermediary) to function.

The two fundamental goals of Bitcoin raises a few questions in relation to trust and certainty. If we wish to remove the need for a centralised authority, to take away the middleman in order to establish a faster, no-fee payment for transactions globally, how do we provide enough trust and certainty to give people the confidence to exchange goods with each other?

Think of our bank or bitcoin ledger as a notebook - if anyone in the general public can pick up a pen and write down transactions into it without a central authority establishing any oversight, how do we ensure that fraudulent activity, whether it be stealing, impersonation or falsification, doesn’t occur?

Stay tuned for my next post, where I will share my views on these questions!