Yes, it powers radical digital currencies like the bitcoin, but that’s just one of the many great things blockchain can do. Here’s a preview
Just after the 2007-08 global economic crisis bitcoin entered the living room — and, soon, the wallet too. The digital currency, reportedly invented by super-brainy geek(s) Satoshi Nakamoto, started figuring in discussions about a parallel market that no one can tamper with, taking the digital economy a step ahead. Some even argue that cryptocurrencies (bitcoin and peers like ethereum) are the future, much beyond the digitisation of normal payment systems. Even the hackers love digital currencies, so much so that recently WannaCry, a data-stealing ransomware that spread on the web, demanded ransom in bitcoin. Bitcoin does not have a central issuing authority to ensure trust, unlike normal currencies where an issuing agency like a central bank vouches for its value. In the case of digital cash, transactions are done via the web and it runs using an algorithm which can prevent issues like double-spending. Bitcoin combines peer to peer file sharing and public key cryptography to achieve this.
So, what’s blockchain got to do with all these? We’ll come to that now.
Bitcoin works on a self-policing algorithm built on blockchain. As the name indicates it is a chain of blocks with each block carrying information about transactions. This can be viewed as a public ledger which records all the transactions since its inception to present. This ledger is available to everyone publicly, maintained by digital miners who act like accountants here. Blocks of transactions are added to this chain in a linear order chronologically. The interesting feature of this huge public ledger is that it can contain any data which can be updated and shared without having a central agency to trust it. The way this ledger is updated and maintained across the different computer nodes ensures that any attempt to corrupt the data is thwarted by the algorithm itself. If this public ledger is accessible by all participating nodes, one would wonder, how it can ensure that no single node would be able to tamper the ledger(blockchain)? As and when these nodes transact, new blocks are added to the blockchain. The process of adding new blocks to be bitcoin blockchain is called mining.
What is it, again?
Bitcoin mining is a process in which the computing node performs work that is CPU intensive. The amount of work done by the computing node acts as the proof of work. Blockchain technology also ensures that a block once added is near impossible to be tampered with. Mining is the process that adds new bitcoins into the system as well. For a miner, the incentive of participating in mining to ensure the credibility of the ledger is bitcoins itself. So mining doubles as money generation process as well as a validation process within the network.
Producing a proof of work lies at the heart of mining. Proof of work is difficult to produce since it needs intense computing and hence requires special purpose hardware. Bitcoin uses hashcash (An algorithm used in spam filtering which is requires a considerable amount of work to perform and can be verified easily ) to generate proof of work. Since each block in the chain is connected to the previous block via its hash(output generated from a certain amount of data using certain algorithms), tampering an intermediate block is difficult. This would mean tampering all the subsequent blocks and would imply it requires enormous amount of computing power to produce proof of work, get accepted and then tamper the entire ledger. The difficulty in acquiring that amount of computing power makes it near impossible to tamper the blockchain. However, there is a possibility exists for this to happen via the 51 percent attack. This happens when more than 51 per cent of the computing power is in the hands of attackers. This helps them construct a transaction chain faster than the actual network, thus invalidating the already validated transactions within the ledger.
So, now we have an algorithm which will ensure a decentralised mechanism which is tamper proof. This enabled the application of blockchain technology to digital cash, bitcoin being a great example. But the structure of this public ledger is such that it can easily find applications in other areas as well. Public records like property documents, driving licenses, birth and death certificates are some examples. Another potential application is to use the mining process to do some actual computation work which is otherwise useful as well. Tieing the mining process to solving problems in science which needs efficient computing is another direction that Blockchain technology is trying evolve. This could also address the criticism of bitcoin mining not being green. Given that bitcoin uses a proof of work approach where the amount of computing power spent carries more value, it is also seen as something which wastes energy.
Future of blockchain
Bitcoin is a demonstration of the capabilities of blockchain technology to eliminate the need for third party verification of a transaction between two unknown people without having to trust each other. It is a clever use of cryptography to substitute the trust element. There is an incentive to each miner in keeping the blockchain ledger clean. It also forms a network of users who are coming together entirely on their own. Acquiring mining power is one way to tamper the entire bitcoin network. While the probability of that is very less, we cannot really rule out that from happening. Cryptocurrencies are actively discussing about moving to a proof of stake system from a proof of work system which is currently used. Proof of stake, since it does not rely on computing power is considered a more greener solution. The ability of both these algorithms to reach consensus and prevent tampering is still debatable. Blockchain is a general purpose technology which could potentially open up new areas of innovation. The impact it could have would be nothing less than the disruption caused by Internet.
Blockchain technology gains a lot of relevance in India today, especially when digital transactions are getting popular, as in the developed world; but they face several security risks as well. Modi government’s demonetisation drive started a debate on digital transactions, many eulogising their security and easiness in transaction. Tax authorities were also happy since digital transactions can be tracked easily compared to their paper counterpart. There were even talks that the government should harness the blockchain technology to come up with its own digital currency. Granted, that could be a centralised currency which could go against the very openness and decentralised character of the blockchain technology, but such discussions point towards a great future for blockchain in this part of the world too.