Everyone’s probably heard of it, but do they know what it is, or is what it is going to be? Welcome to the world of blockchain.
The word is bandied about a lot but, from people I have spoken to, there is still a fair amount of confusion over what it is exactly. Luckily, I came across a useful introduction to blockchain and cryptocurrency by accounting software group Sage.
It’s certainly helpful, if not definitive. So here’s a short excerpt to whet your appetite…
Blockchain is essentially a recorded ledger of transactions managed by a decentralised peer-to-peer network. It could be a record of crypotocurrency purchases (Bitcoin is an example). Or any kind of transaction for that matter.
Most people agree that blockchain technology is here to stay and will be used by the accounting professions. Some would say it’s the start of the next tech revolution. Anyway here’s a sneak peek at the article.
How does the blockchain work?
Imagine a document that is not held in any single location but is replicated across and managed by every computer that has access to it in the ultimate, democratised system.
The blockchain consists of a sequence of ‘blocks’ that consist of recorded data. In each block there is a record of the transactions made since the last block was created, this includes details of the sender, the receiver and the transaction amount.
The block also contains a hash that provides a unique digital fingerprint for a given piece of data. A hash is produced by a complex mathematical equation.
For a new block to be recorded, it employs a process called proof-of-work. This involves the network verifying the block hash before it can be added to the chain.
How secure is the blockchain?
Each block contains a hash of all previous blocks. Therefore, to change a data record every copy on the network and every preceding copy stored in the chain would have to be changed, ensuring security of the data recorded.
As the Blockchain is not held on a single server or controlled by a single entity, it has no single point of failure and cannot be hacked.
How can blockchain technology be applied?
Existing block chain (originally two words) technology was developed in 2008 by Satoshi Nakamoto (whose identity is yet unknown and this may be a pseudonym used by a single person or a group) to support cryptocurrency, specifically Bitcoin, as a public ledger to record transactions of Bitcoin cryptocurrency.
Aside from cryptocurrency, blockchain technology has huge potential for many other applications that involve the recording and management of any data of value. Imagine public records such as land registry; private records such as medical records and identity documents; contracts and voting all easily accessible and updated by anyone on the network but protected from manipulation and fraud.
Like the internet, blockchain technology is going to have a huge impact and businesses should not ignore or underestimate the digital evolution. By its nature both of removing the need for a third party and the security of recording sensitive data, there is a possibility to change how all transaction and data recording is conducted.
What is cryptocurrency?
At a basic level, a cryptocurrency exists as an entry in a database that cannot be changed. It is the record of an agreed transaction that has taken place.
Much like fiat money, which the traditional currency system is based upon, the actual monetary ‘coin’ has no value of its own, but instead is based upon the agreed value of a transaction between two parties for an exchange of some kind. A recording of the transaction offers validation to secure the transaction.
Cryptocurrency in itself has no value but maintains its value by its verifiable record.
Historically, the challenge for creating a digital currency has always been in how the record of the transaction would be securely held and how to avoid double-spending, without the intervention of a third-party centralised bank or institution.
Satoshi Nakamoto solved this problem with the blockchain as the foundation to support Bitcoin:
“Announcing the first release of Bitcoin, a new electronic cash system that uses a peer-to-peer network to prevent double-spending. It’s completely decentralized with no server or central authority.” – Satoshi Nakamoto, 9 January 2009, announcing Bitcoin
Bitcoin was the first, and remains the most well-known cryptocurrency.
The ledger for Bitcoin was started when the first block was generated (known as the genesis block) on the 3 January 2009 and has been limited to the creation of 21 million coins.
The full Sage article can be found here.