In recent years, several technologies have grown out of the Bitcoin technology. Blockchains have their roots in the peer-to-peer technology that undergirds the entire peer-to-peer system. The “blockchain” is simply a record of the conversations and events that occur via the network. A new type of digital money was created using the same principles of the original coin-of exchange, but with a more encrypted method of transfer. The new name for this technology was “crypto-currency”, because it mimicked the way money is moved through networks – but it wasn’t until recently that we reached the point where we could say that a certain type of currency was a form of “blockchain”.
But what exactly is the definition of a “blockchain”? And why is the term “blockchain” being bandied about by the financial industry and techies everywhere? Is it merely an analogy for how the world works, or is there much more to the concept than what’s currently known? And if there’s so much confusion going on about what a “blockchain” really is, just what can we realistically expect from it?
The most basic characteristic of the modern Blockchain is that it’s a distributed ledger. Unlike traditional ledgers, which are controlled by one central authority, the blocks that make up the ledger are arranged online. This arrangement, called the proof-of-work system, ensures that every participant in the system is accounted for accordingly, and that every transaction that occurs goes through the permission of all other participants in the system. Transactions are secured by digital signatures rather than passwords, making them much more secure than paper transfers. The proof-of-work system also prevents certain types of tampering and fraud, such as by a person pretending to be someone else or by a company that tries to trick its clients into sending them more money than they actually need. In short, the Blockchain is a kind of distributed computer network, with every participant having their own set of public keys that unlock digital certificates and grant permission to transact using those keys.
There are two ways for software developers to contribute to the health and growth of the Blockchain. First, by creating applications that facilitate real-time financial transactions, developers can build applications that run behind the scenes on user computers. These programs, called smart contracts, are programmed in such a way as to be compliant with the various laws that will govern the future use and transfer of digital currency. Second, developers can build applications that let users participate in ” decentralized “web-based applications”. This approach has several advantages, including the fact that such applications are less subject to outside influences (since the web-based application cannot dictate specific regulations), and that there are fewer service providers involved in maintaining the integrity of the ledger.
However, both methods have one inherent weakness. Since the Blockchain is open-ended, it can be susceptible to outside influences once it becomes too pervasive. That can result, in turn, in a reduction in the speed and reliability with which the ledger can function. The speed of the transactions needed to make the necessary gains in value occur only after an extensive backlog of inputs has been accumulated. If the backlog is large enough, then the central ledger could become susceptible to control by entities outside of its user community.
To avoid this problem, a solution known as “distributed ledger adoption” was released to remedy the speed issue. Through such a system, developers who want to contribute to the Blockchain can use a special type of digital “keys” to sign off on specific transactions. A “keys” could be a physical thing (like a computer) or a token (like a credit card). Both ways allow for speedy transaction approval, since the transaction must be approved before it can be executed. The system, however, does not solve the problem of the openness of the Blockchain if an outside party controls the distribution of “keys.”
Another potential disadvantage of the Blockchain has to do with smart contracts. Smart contracts are a way for a particular party to indicate that they will execute certain actions in the future. A popular example is a so-called escrow agreement, which is a pre-determined schedule of events where a particular asset is expected to be transferred between two parties by some specific time in the future. Since the Blockchain is open-ended, smart contracts can pose problems for the ledger system itself, since an outside party can technically place their own agreements into the code of the ledger.
This potential problem highlights one of the major advantages of the Blockchain: the ability to apply it to a wide variety of different uses. In fact, the adoption process for smart contracts is currently underway in different forms in a number of different locations. An increasing number of financial institutions and merchants have already adopted the Blockchain through smart contract systems. For instance, one of the most prominent examples of this is the London Stock Exchange, which has created a new open-standard for trading the London Stock Exchange’s digital stock exchange. Other areas are exploring the opportunities for use of the Blockchain in different contexts, such as gaming, the environment, government, and more.