What is blockchain: the definitive explanation for the most fashionable technology

What is blockchain? Among other things, it is one of the buzzwords in recent times. The blockchain is also a concept that raises an enormous revolution not only in our economy but in all sorts of areas.

Understanding what that blockchain is is not so difficult, and given that this concept is used more and more, we wanted to do a kind of quick introductory course to the blockchain, to explain what it is, how it works and what that revolution is that the blockchain poses.

Goodbye, Mr. (banker) intermediary

Let’s get into a situation. The normal thing is that if a person called, for example, Mariano would like to send 1,000 euros to another person called for example Luis, the normal thing is that the operation was carried out through a bank. This bank acts as an intermediary of these and many other transactions, effectively centralizing the movement of capital from one side to the other.

Mariano would ask his bank to withdraw 1,000 euros from his account and transfer them to Luis’ account: in just a few hours (depending on the bank, of course) that bank will have noted the transaction in his account, subtracting 1,000 euros in his account and communicating to the other bank that it must add 1,000 euros to Luis’ account. Someone in Luis’s bank (at this point, we already know that someone is a computer program) will note that in Luis’ account there are 1,000 more euros from Mariano’s bank account.

That management has not needed a transfer of banknotes from one side to the other, but simply there has been one or two banks that have been responsible for making the money pass from one to another with a simple change in the balances of their accounts. Everything is great and fantastic, except for one problem:

That neither Mariano nor Luis have any control over the process, of which only those banks have all the information. Both depend on those banks and their way of doing things to complete that transaction. They are subject to their conditions (and their commissions, of course).

Hello, blockchain

This is where the blockchain comes in, which basically eliminates intermediaries, decentralizing all management. They are the ones who basically become part of a huge bank with thousands, millions of nodes, each of which becomes a participant and manager of the bank’s account books.

So what is the blockchain? A gigantic account book in which the records (the blocks) are linked and encrypted to protect the security and privacy of the transactions. It is, in other words, a distributed and secure database (thanks to encryption) that can be applied to all types of transactions that do not necessarily have to be inexpensive.

This blockchain has an important requirement: there must be several users (nodes) in charge of verifying these transactions in order to validate them, and so the block corresponding to that transaction (in each block there are a large number of transactions that are variable) must be registered in this gigantic account book.

This is how a transaction works in the blockchain

The process is relatively simple, but as we say it involves more people. Now Mariano and Luis are not alone, and will be part of a large group of users who are responsible for verifying that the whole process is produced as it should be produced.

If Mariano wants to remove a bitcoin from his account to give it to Luis, he first warns everyone with a peculiarity: nobody knows that Mariano is Mariano and Luis is Luis. They only know that from a digital wallet (what would be a bank account) they want to transfer that amount (which is known) to another.

Mariano, therefore, warns of his intentions, but without revealing his identity: “Hey, guys, I want to send a bitcoin from my wallet to this one, please, update your account books! By sending that message, all users of that network first check that Mariano’s original wallet has enough money to send to the destination wallet. If so, everyone writes down that transaction, which is completed and becomes part of the transaction block. However, they are not yet definitively registered in this database.

As time goes by, more and more transactions are completed and that block, which has a limited capacity that depends on the structure of the blockchain and the size of each transaction. When a block no longer admits transactions, an important moment arrives: that of “validating” or “sealing” it, which is what users do when they do bitcoin mining.

I’m a miner

This mining consists in the realization of a series of complex calculations that require time and (increasingly) electricity, but when the process these blocks are permanently registered in that blockchain, and cannot be modified without altering all the blocks that are linked to it, an operation that would also require that most of the nodes validate it.

In that P2P network, the miners receive notices of new transactions and gather them in a new block, but they do so also competing with other miners, because the first one who manages to create a valid block and seals it receives bitcoins (if it is mining bitcoins, of course) For that service. Thanks to the use of a common blockchain that synchronizes between the nodes, the irreversibility of the transactions are achieved, which allows anyone to “trick” the system or make fraud to benefit, modifying the account book to divert money (bitcoins) from side to side without others knowing.

In fact, adding new blocks is an increasingly expensive process, which usually causes miners to work together (the famous “pools” that work similarly to a cooperative) instead of working for themselves (“mining only”, with very low chances of success/reward). When one of the miners solves the cryptographic problem represented by the calculations to “seal” a block, he warns the others, that they prove that it is indeed so and they add that block to the complete blockchain they have in their computers.

That account book is not only distributed and it is safe: the linked blocks (hence the blockchain) have a hash pointer (encoded) that links to the previous block, in addition to a timestamp and transaction data, and that information is public. What does that mean? That the blockchain, although it protects the privacy of its users, does allow to control the traceability of those transactions.

Or what is the same: lets you know all the way that bitcoin has taken the wallet that belongs to someone (in this case to Mariano, although his identity is not known by the rest of users) before reaching the wallet of someone else (from Luis, although his identity is not known to other users).

The blockchain design itself has clear advantages, and for example confirms that each unit of value (for example, each bitcoin) has only been transferred once, which avoids the traditional problem with double spending of digital currencies or with fake money, which reduces the confidence of users in that currency and also in the circulation of it.

Of ICOs and blockchains

One of the concepts that are appearing most when talking about cryptocurrencies and blockchains is that of the ICOs, the Initial Coin Offerings.

An ICO is how we explain in depth a way of financing a business project that instead of offering shares offers virtual tokens, or what is the same, new cryptocurrencies.

These new cryptocurrencies have a certain hypothetical value due to their scarcity and demand, and are directly associated with the business project that creates them, as is the case with well-known examples such as the Brave browser: if that project succeeds, the cryptocurrencies on which its Financing gains value and that ends up offering an interesting return on investment for investors.

The operation is therefore similar to that of the public sale offers, but instead of buying shares of a company – one that also has a product on the market and that has undergone rigorous financial controls before being able to make its OPV – we buy cryptocurrencies in an operation with a much more uncertain format, without any regulation and in which we are basically “betting” on the future of that business project with much less evidence or guarantees that this future success will occur.

The speculative component, as in everything that currently surrounds cryptocurrencies, is very high, and in fact there are those who qualify ICOs as the biggest scam ever seen, but there are also clear advocates of an increasingly attractive financing model.

All these new cryptocurrencies are supported by a blockchain that supports the structure of that new virtual token. The most used is that of Ethereum for its versatility and for the ease that this platform poses. A developer recently explained how to create one of these blockchains easily from Geth, one of the best known implementations (in this case, in Go language, hence the name, “Go Ethereum”) of the ethereum protocol.

The blockchain beyond the economy

Although the blockchain is closely related to new cryptocurrencies or cryptocurrencies, it is logical to ask whether this system would be valid for other types of transactions, and the answer is a resounding yes.

In fact, that is what the Ethereum platform is trying to achieve since its inception, which has its own blockchain (you can check it out on sites like Etherscan.io) and its own currency, called Ether. Unlike bitcoin, the transactions here are smart contracts – programmers love this concept – which can be more or less complex and allow you to define all types of transactions.

As with bitcoin, the good thing about these transactions is that they will remain in the blockchain, unalterable and accessible throughout the life of that blockchain. If we go to the extreme, Ethereum could basically replace any intermediary, replacing products and services that depend on third parties to be fully decentralized.

Of course this is only one of the alternatives that have originated with the blockchain as the protagonist, and in fact there are many ideas that try to exploit the benefits of a technology that has a virtually unlimited scope. Let’s see some examples:

  • Consortium R3: the very financial entities that many try to replace with bitcoin or Ethereum have created the consortium R3 to find out how to take advantage of the blockchain in traditional financial systems. One of the first problems with the application of this scheme is the anonymity provided by the design of the blockchain, something they have solved with the so-called ‘permissioned ledger’, a very peculiar variant of the bitcoin blockchain, for example, which does identify users who add blocks and makes system transactions only available to certain parties.
  • Register of properties: the Japanese government has initiated a project to unify the entire register of urban and rural properties with blockchain technology, which would provide an open database in which the data of the 230 million farms and 50 million buildings estimated to exist in the Asian country could be consulted. In Dubai they are planning something very similar.
  • Payments in the real world: a startup called TenX has created a prepaid card that can be recharged with different cryptocurrencies and then paid with it anywhere as if the card had conventional money, regardless of whether or not that establishment accepts this type of virtual currency.
  • Carsharing: the company EY, a subsidiary of Ernst & Young Global Ltd is developing a system based on the blockchain that allows companies or groups of people to chainaccess a service to share cars easily. The so called Tesseract would allow to register who is the owner of the vehicle, the user of that vehicle and to generate the costs based on the insurance and other transactions in this type of services.
  • Cloud storage: Typically storage services are centralized in a specific provider, but Storj wants to decentralize this service to improve security and reduce dependence on that storage provider.
  • Digital Identity: Recent gigantic security breaches and data theft have made managing our identities a very real problem. The blockchain could provide a unique system for irrefutably, securely and immutably validating identities. There are many companies developing services in this field, and they all believe that applying blockchain technology for this purpose is an optimal solution.
  • Music: although there are critics who say that this option is invalid, there are those who say that musical distribution could undergo a revolution if a system based on the blockchain to manage its reproduction, distribution and enjoyment could be implemented. Spotify itself is betting heavily on its own blockchain.
  • Public/governmental services: another of the most interesting areas of application of the blockchain is in public services that could boast absolute transparency. The areas of activity are multiple: from the management of licenses, transactions, events, movement of resources and payments, property management to identity management. In fact, the massive theft of data in Equifax has led some to propose replacing social security numbers in the United States with a system based on the blockchain. There are even initiatives to “decentralize government,” and Bitnation is one of those projects that try to call us “citizens of the world.
  • Social security and health: although it could be included within the aforementioned public services, public health could undergo a real revolution with a blockchain system that could be used to record all kinds of medical records and solve one of the classic problems of health management.
  • Authorship management: although related to what has been mentioned for the world of music, Ascribe is a platform that tries to help creators and artists to claim authorship of their works through the blockchain. There are many other platforms in this field (Bitproof, Blockai, Stampery, for example) that among other things allow you to generate stores where you can buy original works in a safe and easy way.
  • These are just a few examples of the application of the blockchain to all kinds of areas, but there are many more: the versatility of this technology is so enormous that it is difficult to think of an area that cannot be transformed by this idea.

At the moment, all these ideas are just projects in full development, so the revolution, although possible, seems distant, especially when intermediaries (in all fields) have become an integral part of the economy and society. Decentralizing all these industries is much more complex than it seems, especially because those same intermediaries will try to reject those changes or adapt them to their own needs.

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