Blockchain is a concept of unhackable (well almost) write only once database. It directly has no connection with crypto-currencies. But it made possible trustless atomic transactions and inturn Crypto-currencies and Smart contracts.
The mystery in history
When we ‘transfer a file’ from one computer to another, it actually only copies the file to the destination. The file really exists in the origin. Even if we move / Cut & Paste the file, it first copies to destination location and then deletes the file from the original location. There is no guarantee on the second step. This was a classical issue in computer file transfer called ‘Double Spend Problem’. A digital currency concept was impossible because of this issue.
Although many suggestions were made to address this, there was no convincing solution until November 2008. A white paper was posted in a cryptography discussion forum by someone claiming ‘Satoshi Nakamoto’ titled Bitcoin: A Peer-to-Peer Electronic Cash System (Link to Original white paper). This suggested a globally distributed almost unhackable ledger (or write only once database) to record any transaction forever. The real identity of Satoshi Nakamoto is still a mystery.
The inside story
This ledger is made of blocks (like pages) which can hold a set of data ( transactions ) and will be cryptographically sealed once filled. The next block will contain the next set of data and will also include a hashed signature of the previous block and so on. This ensures that if any change is made to a block (other than the latest), it will require the modifier to re-encrypt all the following blocks as the hash signature of the modified block will be changed on modification. To make this more difficult, there is a concept of nonce number that is added to each block to make the hash signature fall to a specific pattern (like first 8 characters must be Zero). This nonce number need to be found by putting its value from 0 to infinity until the hash signature that falls to the specified pattern is found. This is called mining.
How is the double spend problem addressed?
We really don’t want a pure file transfer where only one copy of the file exist. We only need to have the ownership of the asset (file) to be transferred. With blockchain in place, we will record the ownership of the asset as transferred from one entity to another in a block of the blockchain. There is no roll-back or duplication possible. Thus we make sure that the ownership of asset is in existence only once. The asset here can be anything from file, contracts, diamonds, cars, real estate, shares or anything that has a value.
Its potential is opening new horizons in internet based transactions. The biggest of them currently are mentioned below.
Cryptocurrency: These are more like shares in stock exchange. The volume of coins are limited. So if the demand increase, so does its value. It has no backing with physical entity like gold. In this context, the normal currencies (like USD or Pound) and referred as fiat currencies.
If you have only heard of Bitcoin, you need to visit CoinCap website. It lists almost 850+ currencies in existence along with their values. There are believed to be much more in the dark web. [Bit coin image source: REUTERS/Benoit Tessier]
Smart Contracts: These are records that are added to blocks about any contractual agreements.
Now we have a solution for double spend problem. This basic concept has been researched and developed in the past 8 years, resulting in more efficient chain technologies under Hyperledger project and many more. The application and possibilities of them are being studied by audit consultancies including the Big Four and technology innovators like IBM, Oracle, Microsoft and Google.