Crash Course In Distributed Ledger Technology

Why was blockchain started?

Remember the financial crisis of 2007 and 2008? After the crash, the Financial Crisis Inquiry Commission had determined the entire recession was avoidable. It was caused by a lack of financial regulations and intelligent supervision. Additional specific factors that lead to the recession were subprime lending, the growth of the real estate bubble and easy credit conditions. We believed that "trusted third parties" such as banks and financial institutions were dependable. “Unfortunately, the global financial crisis proved intermediaries are fallible. The crisis resulted in evictions, foreclosures, and extended unemployment; it was considered the worst financial crisis since the Great Depression.” (CIO from IDG, “If I Only Had 5 Minutes to Explain Blockchain, August 30, 2016)

Immediately following the crisis in 2008, Satoshi Nakamoto wrote a paper titled, "Bitcoin: A Peer-to-Peer Electronic Cash System." The document mentioned that "trusted third parties" along with many other pain points could be erased from financial transactions forever.

What is blockchain?

It is a system in which a record of transactions made in bitcoin or another cryptocurrency are maintained across several computers that are linked in a peer-to-peer network.

How does blockchain operate?

Blockchain technology is most known for eliminating the need for middlemen or intermediaries. In doing this it allows for more seamless, secure and quicker transactions than ever before. It accomplishes this in the following ways:

1. Prevents double spending  

2. Establishes unanimity

It prevents double spending by providing real-time authentication of all assets and transactions, therefore, preventing double spending. This solves a large pain point in a variety of industries such as medical claims, real estate, insurance, voting ballots, music payments, government payments, and records, etc.

Blockchain’s next most innovative “perk” is establishing unanimity. It does this by creating powerful networks that agree together. In other words, networks are all the computers working together, and 51% of the computers, aka the network, must reach an agreement with regards to a transaction and it is then recorded on a digital ledger called the blockchain. “The blockchain contains an infinite ordered list of transactions. Each computer contains a full copy of the entire blockchain ledger. Therefore, if one computer attempts to submit an invalid transaction, then the computers in the network would not reach consensus (51% agreement) and the transaction would not be added to the blockchain.” (CIO from IDG, If I Only Had 5 Minutes to Explain Blockchain, August 30, 2016)

Some core principles of blockchains networks:

1. Distributed: Across all the peers participating in the network. Blockchain is decentralized and every computer has a copy of the blockchain.

2. Public: The participants in a blockchain transaction are hidden, but everyone can see all transactions.

3. Time-stamped: The dates and times of all transactions are recorded in plain view.

4. Immutability: Because of unanimity of the chain, recorded transactions cannot be altered thereby providing a security verification mechanism.

How are blockchains secure?

Blockchain technology has given the power to the “people” in a sense. Its authenticity can be measured and proven by all the participants on the blockchain.

For example, to create a new block, let’s call it block number 2, some of the data used in this new block number 2 is taken from the previous block number 1. Then to create block number 3, some of the data used is from block number 2 and block number 1 and so on. Each transaction contains verified data from the previous block which is why it creates such an immense level of security. Through this consensus mechanism, it's basically re-verifying transactions along the way while creating new ones. This method of verification results in a highly immutable, secure, and trustworthy trail of data for every transaction on the blockchain.

Blockchain technology is quickly becoming the next generation of the internet from which all future decentralized applications will be built. It continues to reshape industries for the better and has proven to be an immensely valuable piece of technology for our world today. If you are interested in learning more about blockchain and other technologies, reach out to Capital Innovators to explore how new technologies can impact your business.