Blockchain will transform our internet! Or is it? In this article, you will learn what’s behind Bitcoins – and why the Blockchain has the potential to be a game changer for the Internet (or for our lives).
Pretend you could easily connect from hotspot to hotspot and pay only for those few seconds whilst travelling across the city on the streetcar. Putting the security element aside, blockchain has the capability of making such a scenario a reality. Forget about monthly subscriptions, no termination periods, no disconnections, no dependency on telcos or any other provider.
Peer-to-peer is not in its zenith at the moment. Associations such as takedown notices, bootlegging and piracy lie heavy in our minds. Yet one cryptocurrency could be the impetus for a new age of computing, namely Bitcoin. Specifically, the database behind Bitcoins: which is known as the blockchain.
Explaining the Blockchain in 3 minutes
The Blockchain is the underlying technology of the cryptocurrency Bitcoin. Quite simply put, the blockchain is a gargantuan, encrypted text file where all transactions are stored. In the process, the single transactions are recorded in “blocks”, which must be generated beforehand, i.e. “mined”. This process of “mining” then produces a new block, each of which will be attached onto the preceding one. Together, all the blocks constitute the blockchain. A colossal stack of Post-Its, in a sense.
As a result of these interconnected blocks, that contain the transactions of, say, two parties, no third-party such as a bank is necessary – hence the biggest benefit and at the same time why the transactions are so rapid and cost-efficient. From a technical point of view, the blockchain is a log file in which all peer-to-peer connections are stored, beginning with the Genesis block.
This means that the database itself, i.e. the blockchain, is spread out. Several database systems exist, naturally, enabling the data to be disseminated throughout multiple nodes. That being said, one of the beauty of blockchain is that anybody can possess a node that doesn’t necessarily have to be trusted by the other nodes in order to guarantee consistent data. In lieu of trust, a proof of work is demanded within the Blockchain, which is pretty resource hungry to accomplish. The reason for this is the fact that the participating nodes fundamentally and mutually lack trust in each other, thereby making it more complex to manipulate the blockchain.
The Blockchain: Peer-to-Peer Revolution
Having a distributed, decentralized system that can nevertheless demonstrate a clear and traceable human-data relationship enables more freedom. Greater freedom? Absolutely. This is what happened when Wikileaks was under pressure, and supporters found that donating money was virtually impossible because Paypal had frozen their accounts.
Blockchain as a peer-to-peer technology renders such things absolutely impossible, because Paypal is simply not needed anymore for such a money transfer. Hence, there is nobody that can force a service provider like Paypal or other financial service provider to halt the transfer of funds. Using the blockchain facilitates a direct transfer from the donor to the beneficiary.
Yet the Blockchain is capable of more than that, in fact, some smart minds are even clamoring to “Rewrite Everything!” because: Bitcoins are simply the tip of a mammoth technological iceberg.
The Limited Utilization of the Blockchain
Indeed, the very concept underlying bitcoins is transforming how we deal with by-the-book data – yet the blockchain is not well suited for every imaginable scenario, as it does not scale well without radically modifying the fundamental principles of the bitcoin protocol. Moreover, the blockchain suffers from a lack of performance for the simple reason that even a dictatorship can act faster than a democracy: within the blockchain, no authority exists.
Indeed, the blockchain was built to make Bitcoins possible. As such, Bitcoins are not a result of the Blockchain, but rather the reason for it. Which is what we should keep in mind: The Blockchain, plainly speaking, is a stack of Post-Its, and not a high-end architecture or framework. There is precisely one specific use case: bitcoins.
Blockchain Applications: Authoritarian Oligarchy?
No authority exists within the blockchain, nor is there a third party that makes decisions. There is no bank to handle a transfer, nobody to determine the authenticity of data. All data is transferred peer-to-peer, i.e. from one user to another.
This benefit turns into a problem, that is, when blockchains are used in a different environment, i.e., in a different way than an accounting database. After all, the blockchain is the basis for Bitcoins. Plus, in the Bitcoin universe, users are rewarded with Bitcoins for helping to keep the system up and running. This is done by generating blocks with which interaction can take place in the future. Herein lies the problem.
Blockchain systems being created today are necessarily “pre-mined.” In other words, someone has to create blocks in order for the system (for example, a WebApp or SaaS) to be used at all. Otherwise, if they don’t exist, the system won’t work either. Consequently, the blockchain in practice degenerates into an oligarchic system wherein only a few individuals possess a disproportionate amount of “coins”. It is precisely because the complexity of providing proof-of-work exponentially increases as the system is used that early entrants find it many times easier to generate blocks than those who enter the system at a later stage. Hence, early users become oligarchs who must be trusted not to exploit the system. Thus, transforming them into an artificial authority. This is exactly the problem that breaks with the main argument in favor of blockchain, and that is not having to trust any authority!
Blockchain: An Innovation Leader?
Finally, do you think it’s time to herald the blockchain as the new database paradigm? Absolutely not. Possibly, however, in certain use cases. Blockchain is a cornerstone technology, much more: it is a platform for innovation, whose value will only become established in the future.
Similar to TCP/IP in the past. Its protocol made the Internet possible in the first place, of course, so just as it was unforeseeable in the 1990s exactly how the web would evolve to date, it is now unforeseeable what the blockchain will be capable of enabling in the future. Nowadays, smart contracts that take care of their own compliance are just the beginning of something really big.
Can you imagine a world in which data can be exchanged – without a third party?