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Cryptocurrency and blockchain technology 101: what is blockchain?

Posted on 31 August 2018 by Tom Grogan

Cryptocurrency and blockchain technology 101: what is blockchain?

The terms 'cryptocurrency' and 'blockchain' are often used interchangeably by the general population.  It is vital that we understand that these terms are very different, however. The vast majority (with a few notable exceptions, which are beyond the scope of this article) of cryptocurrencies utilise blockchain technology, while the possible applications of blockchain technology are infinite and are not limited to cryptocurrencies.

This article seeks to set out a clear, fundamental introduction to blockchain, which is crucial to master and understand before we move on to more advanced topics. I note and acknowledge, for the benefit of the more advanced reader, that any rigid classification or definition of blockchain is liable to fail when exposed to scrutiny. For a basic understanding however, this introduction should suffice.

At its most fundamental, a blockchain is a ledger of ownership and transactions. The earliest ledgers date back to c.4,000BC in Mesopotamia. These were kept on clay scripts or carved into stone and were used to record ownership, and the transfer of ownership, of crops in storage.  Recording the ownership and movement of value has been a central tenet of human civilisation ever since. If we skip forward a few millennia, we pass the earliest evidence of double-entry bookkeeping in the Farolfi ledger of c.1,300AD and reach the modern day, where our banks and financial institutions keep ledgers in respect of our bank accounts, recording our income and expenditure on a daily basis.

Blockchain ledgers, like the majority of modern ledgers, are kept digitally. What then, makes them so interesting? The key difference relates to how information is inputted in the ledger and goes to the question of trust. In ancient Mesopotamia, if the stone ledger shows two successful farmers, Annabelle and Brian, as owning 100 carrots each, this would have been taken as definitive evidence of their ownership. If Charlie, a rival farmer, were to amend the ledger by carving a new transaction, whereby Annabelle and Brian each transferred their carrots to him, what would be the outcome? Clearly, there are issues in this scenario (not least the use of modern names in ancient Mesopotamia). Stakeholders such as Annabelle, Brian or the wider village may seek to reject and remove Charlie's entry, but this could not be guaranteed and may undermine the community's faith in the stone ledger as a definitive record. In modern times, we rely on trusted intermediaries such as banks to keep and protect our digital ledgers, but what happens when these intermediaries fail? If you were to check your bank account tomorrow and be told that all of your money was transferred to a bank account the previous afternoon and that your digital ledger shows zero assets, what could you do about it? What if the destination bank account belonged to the government, which in turn owned the bank? You have put your faith in a ledger and, if it fails, your options are limited.

Enter, blockchain. Rather than trusting a single entity to input data onto a ledger, new information regarding transactions is broadcast to each computer connected to the network (or 'node'), which verify the validity of the transfer and agree on it amongst themselves, before it is recorded in the blockchain ledger. Once recorded, the ledger is replicated across the nodes of the network and is considered immutable – that is, they are stored chronologically and in such a manner that it is not possible to 'tamper' with previous blocks without 'breaking' the chain (which would result in the nodes rejecting the transaction). Thus, ledger input decision-making is distributed amongst network participants – you may have heard of distributed ledger technology, which blockchain technology is a high-profile example of.

People are excited by blockchain technology because, by introducing community validation and consensus together with an immutable, auditable ledger history, a tamper-proof and therefore trusted value transfer system can be created. The potential applications of this system are infinite – it can decentralise, disintermediate and democratise governance structures and is only just getting started.

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