What is blockchain, where is it used, and will it become mainstream?
These are just some of the questions on the lips of the public because the word "cryptocurrency" in general - is increasingly used.
But if you’re new to the idea of a blockchain, it may seem like an intricate concept to turn your head. In a conversation with Dr. Ying-Ying Hsieh, an assistant professor of innovation and entrepreneurship at Imperial College Business School, we discovered something more about blockchain and its applications in cryptocurrency and beyond.
1. What is a blockchain?
Blockchain is simply a public book run by software and allows the sharing of values, such as payments and transactions between individuals online. It is important that the blockchain allows the exchange of information without the need to use third-party intermediaries, such as banks or payment companies. As the name suggests, it consists of blocks connected in chains and each block stores a small portion of the history of transactions that took place on the blockchain.
2. When was the blockchain first created?
Blockchain is not so much an original idea, as a combination of already existing technologies such as cryptography, peer-to-peer computing and others. The successful first digital implementation of the blockchain occurred in 2008, with the publication of a white paper by an anonymous development engineer named Satoshi Nakamoto, which first proposed the idea of a blockchain-mediated cryptocurrency, known as Bitcoin.
3. How does blockchain support bitcoin?
Bitcoin is a cryptocurrency that can be considered digital money. Bitcoin only exists on the Internet and therefore its exchange must be digitally recorded. Blockchain basically acts as a digital book to record all transactions that occur among peers online and provides a secure and decentralized record for all exchanges.
4. What does decentralized blockchain mean?
This means that information in a blockchain is not stored in one place, but is distributed over a network of people who use it. For example, standard cash, such as the euro or dollars, is issued by central banks that keep records of where the money goes. However, with bitcoin, there is no entity responsible for issuing bitcoin and keeping records. Bitcoin operates through an anonymous network of people who provide blockchain nodes. Anyone can join or exit the blockchain at any time, and cross-validation between nodes is required to record anything on the book.
5. Has the decentralized nature provided security for the blockchain?
Yes, here’s an example: if you have a pot of gold, you can store it in a vault and trust the people who own the vault, i.e. the banks and their staff, to keep it for you. But if your gold is analogous to bitcoins, then, instead of putting a gold pot in a bank vault, you are actually putting it in someone’s house in some fictional village and it moves into a new house every 10 minutes. No one knows where your gold will be moved, making it difficult for any burglar to know where it will be at any given time. Moreover, to enter the houses where your gold is stored, the burglar should solve complicated equations, which are time consuming and extremely expensive.
6. But there have been many reports that bitcoins have been stolen, so is it possible to hack a blockchain?
Well, most of these reports actually relate to hacking exchanges in which cryptocurrencies are traded, not blockchain. In fact, we can still find stolen currency on a chain that we simply don’t have access to or know who stole it.
7. Can someone run a blockchain?
Yes, in principle anyone with some computer knowledge can do this, but getting started is the easier part. The success and value of a blockchain comes from its size and in order to be attractive to users, the creator of a new blockchain must be able to increase it quickly by adding as many blocks to the chain as possible. Blockchain scaling is called bootstrapping and this is often done through so-called initial money offers in the early stages of cryptocurrency creation.
8. Are there different types of blockchain?
There are currently several different types of blockchains, which were mainly developed to improve the original bitcoin block. Another very popular blockchain is the Ethereum blockchain developed for exchanging tokens for ether. The Ethereum blockchain is more energy efficient, allows for smart contracts (currency transfer only under certain conditions) and also uses a share-proof protocol rather than transaction validation.
9. Are there any drawbacks to using blockchain?
Perhaps the biggest drawback from a government perspective is that blockchain-based technologies are very difficult to track. The decentralized nature of the blockchain makes it difficult to regulate transactions that take place on the Internet and is therefore very attractive to criminals to use it for illegal trade and money laundering. In fact, we often consider bitcoins to be the preferred method of payment during ransom attacks and on the online black market for weapons and drugs.
10. Can a blockchain be used outside the cryptocurrency field?
There are many potential ways to use blockchain, although it has so far been used more as proof of concept and has not yet been fully implemented. In essence, any situation where trust is crucial can take advantage of the blockchain, whether it is the financial industry or electronic voting systems. In shipping, the blockchain can be used to track where goods are in relation to money, and in the healthcare system it can be used to securely store patient data.