What is blockchain? Only few know, but everybody is talking about it. That may be because the concept of blockchain seems so abstract, that it can be difficult to explain to people unfamiliar with coding. Nonetheless, we will give it a try.
In order to verify a transaction, a contract or the transfer of money, you typically require a witness for the transaction. That can be a lawyer or a bank. Since the transaction includes only few parties, it is vulnerable to fraud. Hackers could, for example, change the transaction’s content or one of the parties might try to dispute the transaction taking place.
With a blockchain, however, there are several hundred witnesses to a transaction, which makes it more difficult to manipulate the agreement’s content. To change the content, it has to be done on all the different versions at the same time.
Blockchain is the popular name for “distributed ledger technology” (DLT). It is primarily used as a distributed journal or database, in which one can register and verify transactions.
A blockchain consists of a number of connected blocks that refer to each other and contain some cryptographic information. These include a timestamp and a number of transactions continuously verified by a peer-to-peer network. When a transaction is registered, changes can only be made by changing it simultaneously in all the following blocks.
That way, it is very difficult to manipulate transactions that are part of a blockchain. The technology also contains a number of algorithms (referred to as protocols) that enforce the process behind every single validation of new transactions.
Anything can be hacked, but when one block changes, the following blocks will change too. Thereby, you can always go back and retrace changes made to the blockchain. Thus, it is not possible to just hack a single machine. Instead, you have to go up against a whole network.
Blockchain is primarily used in legal tech and the financial sector, where it has become synonymous with the spread of cryptocurrency and Bitcoin. The idea man behind Blockchain (going by the pseudonym Satoshi Nakamoto) published this in 2008 already, in the text “Bitcoin: A Peer-to-Peer Electronic Cash System”.
Blockchain is also most easily understood in the context of Bitcoin, where the technology sustains and distributes an archive of all transactions in the system. When a transaction is created in the blockchain-system (e.g. when the currency of Bitcoin sells at a certain value), it is entered into a public archive available to all. These transaction archives are built as interconnected blocks (a blockchain) all referring to one another, which makes it impossible to manipulate and forge.
It is essential for the Blockchain-technology’s functionality, that a number of users provide their computer- or server power to execute the transactions. These “miners” sustain the system and are compensated with cryptocurrency. It is, after all, a process that requires a lot of server power and energy. Thus, it is important to incorporate more sustainable and green energy in order for Blockchain to spread further.
Blockchain/DLT is approved by the EU’s institutions in order to provide innovative economic systems that are in accordance with a number of the Union’s political goals. Influential financial institutions, such as the European Central Band and the European Banking Authority, have illustrated several serious risk factors, that have to be taken into account. In spite of this, Commission President Jean-Claude Juncker, acknowledges that the Blockchain-technology should be embraced and used for innovative purposes, also outside the financial sector. Moreover, it can be used to combat the counterfeiting of currency and money laundering, for copyright protection and registering to vote.