If you have any dealings in the financial or technology worlds, odds are that you’ve heard the word "blockchain." You might also think that it’s synonymous with Bitcoin.
It isn’t, but it’s a very big deal and you’re going to be hearing more about it, so it’s worth having a basic understanding.
My TechPar Group colleague Dr. Philip Pyburn has just published an excellent piece explaining blockchain, "Blockchain and Ledgers and Crypto: Oh My!" You can access it here (ignore any virus warnings; it’s safe), but it’s aimed at an audience of modest technical savvy. If you’re not among the so-anointed, I’ll try to supply a layperson’s explanation.
Blockchain is a way of storing transactions that comes pretty close to the holy grail of being both highly accessible and extremely tamperproof. Traditionally, databases have been an awkward tradeoff between these two goals: The more exposed the data are, the less secure.
That’s because most data bases are monolithic — there’s only one working copy — as well as centrally controlled: Someone or some business owns it, and the rest of us are allowed to use it only as that organization sees fit. The more secure the owner wants it to be, the more difficult it will be for the rest of us to see, add and change the data it contains. And if the security is breached, the entire database is open to attack.
If someone figures out how to hack it, all manner of mischief is possible, a large amount of which isn’t even detected, much less caught and contained.
If you’ve ever seen the movie "War Games," you’ll remember Matthew Broderick’s character showing off how easily he can hack into their school records and change a friend from a C to an A student with a few keystrokes. That’s because their grades were stored in a traditional database. Once the wily teen broke in, he had access to everything in there and the uncontrolled ability to change anything he wanted, or even destroy the whole thing. All he had to do was find the record he was interested in, change a few characters — et voilà.
The same thing is true of your bank, your medical care provider, and the Defense Department.
Enter blockchain, which turns the traditional paradigm on its head. First, a blockchain data base is not monolithic. Dozens or hundreds or thousands of copies of it can be spread across computers owned by different organizations. Those data bases do not rely on a single, overall access method or password. Every record (or block of data) has its own encryption.
Furthermore, the only way to add a record is to "chain" it from the last block. The new block is then chained to the next one, and so forth. This means that every single transaction ever added to the blockchain is there forever, creating an immutable record of everything that happened since the blockchain was created.
And here’s the cool part: Whenever there is an attempt to add a record, that change is first broadcasted to each of the dozens or hundreds or thousands of copies of the data base that live on separate servers. If there is any attempt to circumvent the required chaining process, it will be instantly apparent and the new record will be rejected by the rest of the servers.
This kind of automated consensus, coupled with strong encryption at every step, is what makes it virtually impossible to tamper with records.
There is also little danger in making the whole process totally transparent. Any person or organization participating in the blockchain is free to check all the records back to the beginning, giving assurance that nothing is amiss.
And in case it isn’t obvious yet, there is no need for a central authority. Nobody “owns” the blockchain. It’s just an arrangement among participants, each of whom has agreed to host a copy on its servers,
What makes this so especially inviting for systems designers is that it’s incredibly easy to implement. One developer referenced in Dr. Pyburn’s article built a fully functional blockchain using only 200 lines of Java code. The secret is in the strong encryption and chaining concepts, not in fancy technological tricks.
So where does Bitcoin enter in?
Bitcoins don’t actually exist; they’re about as virtual as virtual gets. Bitcoins are "mined" by performing complex computational tasks and then writing the results into an electronic ledger. In order for that process to be reliable and trustworthy, there needs to be a means of ensuring that the ledger is completely tamperproof.
So Bitcoin is implemented using blockchain technology, which is ideally suited for the task. Every Bitcoin transaction is logged, verified and stored in the blockchain. Despite billions of transactions since this cryptocurrency was created, every one of them is in the data base and accessible. And no central authority gets to call the shots.
You might be wondering: If blockchain is so secure, how come we read about Bitcoin getting ripped off or lost?
It’s because, while data in a blockchain can’t be changed, it can still be stolen. All you need is the digital key to a particular block, which is simply a 32-bit number. Once you have that key and get your hands on some Bitcoin, it’s yours.
As Dr. Pyburn explains it, Bitcoins are like traditional physical bearer bonds: No identification is needed to spend or trade them. Once you get your hands on it, it’s yours. If you scrawl your key on a PostIt note and stick it to the side of your monitor, anybody can come along and use it to break into your Bitcoin stores.
Similarly, if you forget or lose your key, your stash of Bitcoin is gone forever. Since it doesn’t actually exist except as a bunch of encrypted data, there’s no way to recover it without the key. Pyburn says that as much as 25 percent of all the Bitcoin ever mined has been lost, some of it because people who bought it back when it was dirt cheap just didn’t pay enough attention. (Bitcoin purchased for $100 ten years ago would be worth — you might want to sit down for this — over $28 million today.)
While cryptocurrencies are the most visible use for blockchain, there are many others, and the list is growing rapidly. Since blockchain is a "data base of agreements," it’s perfect for managing contracts. Once a deal is made, there’s no way for either party to go back and change the terms of the "smart contract."
Its use for bookkeeping is also obvious. As a financial ledger, it’s incorruptible, transparent and practically audits itself. It has been used to supply Syrian refugees with currency to buy food, and no corrupt government or agency was able to tamper with the accounts. In the same way, people in poverty can use a smartphone as a bank, and because of the decentralized and purely virtual nature of blockchain, there need not be any remittance fees when they use their money.
The medical field will benefit, too, from electronic health care records that are secure, authenticated, and confidential yet easily shared.
And here’s something truly relevant for our time: Blockchain can be used to create a fully transparent, tamperproof voting system.
It’s an exciting new technology that has the capacity to be a substantive game-changer.
I can hardly wait to find out how someone outsmarts it — which is why I still won’t buy Bitcoin.
Lee Gruenfeld is a managing partner of Cholawsky and Gruenfeld Advisory, as well as a principal with the TechPar Group in New York, a boutique consulting firm consisting exclusively of former C-level executives and "Big Four" partners. He was vice president of strategic initiatives for Support.com, senior vice president and general manager of a SaaS division he created for a technology company in Las Vegas, national head of professional services for computing pioneer Tymshare, and a partner in the management consulting practice of Deloitte in New York and Los Angeles. Lee is also the award-winning author of fourteen critically-acclaimed, best-selling works of fiction and non-fiction. For more of his reports — Click Here Now.
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