The use of blockchain technology on a wide scale seems inevitable.
Throughout the past year, cryptocurrencies such as Bitcoin have exploded to the forefront of the business and news worlds, leaving many fascinated with the technology, but confused as to what it actually is and how it works. To clear up some of that confusion, this article will provide a short explanation of cryptocurrency, as well as the “blockchain” technology that supports it. While cryptocurrency has been the shining star in the media, it is actually blockchain technology which stands to potentially make huge waves in the business, economic and legal fields.
What is a Cryptocurrency?
A cryptocurrency is a digital asset designed to work as a medium of exchange that uses strong cryptography (coding) to secure financial transactions, control the creation of additional units, and verify the transfer of assets. Cryptocurrencies are a kind of alternative currency in a strictly digital form. They can essentially be traded from person to person through the exchange of encrypted messages which are only readable by the sender and receiver.
Each individual cryptocurrency possesses both a “digital wallet” with a “public key” (like a mailbox with an address) and a “private key” used to access the contents of their digital wallet. Any sender with the public key of a receiver can transfer cryptocurrency to the receiver’s digital wallet, and only that receiver, through the use of their private key, can access it. Each individual’s private key consists of 50-plus characters, making it extremely difficult to guess or hack. These coded messages and private keys make the exchange of cryptocurrency more secure than other digital transactions.
What is Blockchain?
Blockchain is a ledger technology which, in part, is used to account for and track the movement of digital cryptocurrency from one person to another. However, this technology is not limited to cryptocurrencies. It can be applied to track essentially any transaction, including the transfer of assets, land or information—basically anything that can be tracked or accounted for. This wide range of potential application is what may eventually allow blockchain technology to revolutionize the business, economic and legal fields.
Conventionally, records of transactions or the accounting of products have been stored in a central location—a single authoritative place to hold that information. Blockchain, however, calls for the distribution of information amongst many different sources, peer to peer. The “block” in blockchain refers to individual packages (blocks) within a record. Each package or block of information is individually verified by its peers as it passes from peer to peer through the secured keys mentioned earlier.
The Transaction Process
The trade of cryptocurrency is one example of blockchain technology. With cryptocurrency, an individual trying to transfer a bitcoin has both a public and private key—with the private key known only by the individual making the transaction and the public key (wallet address) shared with others. If Person A sends a bitcoin to Person B, the transaction will be represented by a block (a section of codified information or data). Typically, that individual bitcoin has been previously transferred many times. Each time it was traded, a block representing that prior transaction was created as well.
Each block contains data and a “hash,” as well as the hash from the previous block in the chain. The data in the block includes information about who Person A is and what they are doing, as well as who Person B is and what they are doing. The hash is created by an algorithm that takes each person’s public and private key and outputs an entirely new identifying number, which is then “hashed” into the block. Thus, the block contains the data (the information surrounding the Person A to Person B transaction), the new hash (the identifying number of the transaction), and the hash from the previous block. This makes the “chain of blocks,” or the blockchain’s history, easy to navigate and access.
At each stage in the process, the peer-to-peer network verifies the transaction’s history and authenticity, identifying concerns such as: Does Person A have the rights to this property? Is Person B who they say they are? Does the previous block in the chain support A’s rights? These questions can be answered and verified through digital analysis of the blockchain codes.
You may have heard of people attempting to “mine” bitcoins. This refers to the use of third-party computer servers to help speed up this digital verification process. In exchange for the use of their servers, the third parties are rewarded with tiny fractions of bitcoins. Through this process, the cryptocurrency (via blockchain technology) becomes a digital asset that cannot be copied, changed, double-spent or defrauded—and is verified at every step.
As a result, one important benefit of blockchain technology is that it is much less susceptible to cybercrime than other typical internet avenues (e.g., the cloud, email and websites). This is largely due to the keys involved with each transaction. No transaction can be approved without the use of each party’s private key, which is over 50 characters long and extremely secure. Further, blockchain possesses the additional security measure of the peer-to-peer network of individuals constantly verifying the transaction at each stage.
With this basic understanding, it is easy to see that blockchain technology is essentially a method of identifying, tracking, verifying and protecting the exchange of information, goods, property or other assets. As more and more commercial activity takes place online, there are more and more criminals attempting to exploit these ever-increasing transactions. Blockchain technology offers a much stronger method than those commonly in use today for keeping these online transactions secure.
The use of blockchain technology on a wide scale seems inevitable. Amazon now offers a blockchain ledger service (along with IBM and Oracle), which can be tailored for specific business needs. Further, Walmart is using blockchain technology to track its inventory. This has reduced the time it takes to track the supply chain of lettuces from farm to shelf from seven days to 2.7 seconds.
The added security and efficiency provided by blockchain technology could soon lead to its use for public records, stock transfers and the transfer of real estate. It seems clear that the expansion of the use of blockchain is coming. Any entity involved in the transfer of property, real estate, information or any other assets should be monitoring this important technological innovation. iBi