Blockchain is one of those buzzwords that keep popping up in the technology industry. A considerable hype has emerged around Bitcoin and other cryptocurrencies, which many companies and private individuals want to jump on. As with the topic of artificial intelligence, it is usually enough to mention the keyword blockchain to attract a lot of attention. But only a few understand what’s behind it. The financial world is already talking about the online banking revolution.
In contrast, the average consumer is more likely to have a question mark for words like Bitcoin mining or cryptocurrency. Time to shed some light on the darkness. Even if we do not claim to be complete in this article, we want to give you an understandable first insight into the question “what is blockchain technology?”—an explanation of the basics, current developments, as well as risks and opportunities.
Blockchain As A Data Chain
The technology “Blockchain” gets its name from the internal data structure. But we don’t want to anticipate. Online transactions, such as buying products from Amazon, paying with PayPal or simply making transfers via online banking, usually straightforwardly take place. The buyer instructs the bank, PayPal or another intermediary to transfer a certain amount to the seller. The intermediary receives the information, stores it, checks it if necessary, and then orders. So far, so unspectacular. At the latest since the financial crisis of 2008, however, it was clear that the trust that customers had in banks, joint-stock companies and similar companies was being abused.
Many customers were rightly dissatisfied with the bank’s omissions, and the desire for a more independent currency system grew. And this is exactly where blockchain technology comes into play, and this also found its first massive appearance in 2009 with the invention of the cryptocurrency Bitcoin.
Decentralized Administration Instead of Central Data Collection
The core idea behind cryptocurrencies like Bitcoin is to make yourself independent of the intermediary who collects and manages the data. Not only are central data collections, such as at a bank, susceptible to hacker attacks, but the data stored there is also highly personal. Therefore, the bank can always understand what customers are doing with their money. This is different from cryptocurrencies, and these are operated based on blockchain technology.
So instead of having a single central location where the transaction data is stored, the information is in an extensive network with blockchain systems. This consists, at least in the case of Bitcoin, of thousands of individuals who make their computers, servers or other technical devices available as “intermediate storage”.
How Does a Transaction Work in The Blockchain System?
So what exactly happens? If a buyer wants to buy something, he still takes the virtual money from his personal “wallet”, also called a wallet, in technical jargon. But instead of routing the transaction through a central hub, the entire network is involved. Once the virtual money reaches the buyer, the whole network confirms the transaction. To do this, it has access to the buyer’s wallet and can see that, for example, three bitcoins were taken from there. The network also has access to the seller’s wallet and can now see three bitcoins sent to him.
The network confirms the purchase because it can match the data from the two wallets, and the transaction takes place. As I said, it is not just one computer or server that checks the transaction, but hundreds or thousands. There are also systems in which only part of the network confirms a transaction. But that’s only marginal.
Why Is Blockchain Technology Anonymous Now?
If the network has access to users’ wallets, how can it be anonymous? Isn’t that the same as with a bank, only that even several people have access to my data? In theory, yes, in practice, no. Because the users are not assigned names but code names consisting of numbers and letters, Anna is no longer Anna, but only 157n30fm2p56221 in the network. When Anna starts a transaction, the code names of the other network participants also append to her number. Each user who confirms Anna’s transaction appends their username to the data chain. Therefore, it is ultimately impossible to trace whether Anna or another person started the necklace. From the outside, the transaction cannot be traced back to them. This data chain of user names is then called a “chain”.
And Where Is The Block?
Multiple transactions are always combined into a block, giving additional security. The chains are attached and get longer and longer until a so-called hash block is created. The last row of data in the first hash block connects to the first row of data in the second, creating a connection between the blocks. With Bitcoin, so-called “miners” (quasi “mineworkers”) store the finished blocks. They provide large amounts of storage capacity and get a few bitcoins themselves in return.
Are There Also Disadvantages of Blockchain Technology?
If the systems are not set up correctly, then yes. Not only do you need a lot of storage capacity for these systems, but you also have to ensure that there are always enough network participants. For example, a blockchain system in which only 50 people are involved would be too insecure, and hackers could take over all network participants and abuse the system. Of course, it would also be a disaster if the code names of the users could be filtered out, and one could then prove their transactions to each person. Because everyone can see the data blocks, the obfuscation of the data is essential.
In addition, inflation can, of course, also occur with cryptocurrencies such as bitcoins. So far, the miners have always received newly generated bitcoins. Each bitcoin has its code, which provides an additional system overview. No Bitcoin can be owned by two people simultaneously due to the unique code. If you keep adding new Bitcoins to the system to pay the miners, this would sooner or later lead to inflation. That is why the “salaries” for the miners have steadily decreased.
There are still some weaknesses in the implementation and, above all, in the regulation of blockchain systems. Especially “long-established” institutions such as governments or banks still find it challenging to introduce relevant rules for cryptocurrencies. Bitcoin, for example, is also often used today to make illegal purchases on the dark web. So at the moment, there are still significant challenges that need to be addressed.
Bitcoin is therefore not remarkable for its function as digital money – even if an official digital currency is entirely possible. Instead, the underlying blockchain technology makes numerous players euphoric because it has disruptive potential in many areas of today’s life. Many are even touting it as the next economic revolution, and many financial institutions are already looking at possible blockchain applications.
But the technology has already aroused interest in politics and administration. In January 2016, the British Ministry of Science published an 88-page report on the blockchain and its potential for government and administration. And some suggestions from the community and the British government do not sound that unlikely.
The blockchain principle could easily be modified for democratic elections. A separate account would be created in the network for each candidate, party, or topic (referendum). Every citizen now receives a “Wahl-Coin”, which they “transfers” to the desired person, party or position and thereby casts a vote. The Bitcoin problem of pseudonymity would not be compatible with the secrecy of the ballot. Some initiatives have already taken on this challenge and primarily propose anonymization using software still to be developed – similar to the existing anonymization network “TOR”.
Money Only For Specific Purposes
Such a blockchain is accessible to all people – a sine qua non for democracy. Other possible applications of the blockchain do not necessarily need this openness. So-called “approved” databases can also work with individual authorized persons. A new data record does not have to be confirmed by a majority of the computers in the network, but only by those participants who have been authorized to do so in advance (permissioned). This is particularly interesting for applications in political administration. With the blockchain system, units of value can be exchanged and data—an exciting application for management.
But not only authorities among themselves could build on this technology. The British Ministry of Science promises new transparency to the citizens. With the help of blockchain databases, public registers, such as land registers can become more transparent. The “glass state” would be the possible result. In general, all legal and claim transactions could be documented and transferred. Citizens could have an insight into all their data, which simplifies the issuance of official documents. In the social security system, effectiveness could be improved, including reduced financial loss through error or fraud.
Areas of Application Are Versatile.
In addition, digital coins could easily be tied to a specific purpose, such as health or pension. If the state allocates money for certain expenses, it could save time and effort for pre-and post-control; the costs of bureaucracy would fall. This idea of earmarking could also be transferred to other areas of government activity. Just think of development aid.