by Peter B. Nichol

If I only had 5 minutes to explain blockchain

Aug 30, 2016
Health and Fitness SoftwareHealthcare IndustryInnovation

Are you struggling to understand how blockchain works, why blockchains are secure or why blockchain technologies will transform the world? Here's a five-minute answer to all those questions.

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As a leader in your organization, you have a duty to your organization to understand why blockchain technology will transform the economy.

Why was blockchain started?

The bursting of the U.S. housing bubble underpinned the global financial crisis of 2007-08 and caused the value of securities linked to the U.S. real estate to nosedive. Easy access to subprime loans and the overvaluation of bundled subprime mortgages all leaned on the theory that housing prices would continue to climb.

Ultimately, the Financial Crisis Inquiry Commission determined the entire financial crisis was avoidable and caused by widespread failures in financial regulation and supervision. There were many reasons for the financial crisis, including subprime lending, the growth of the housing bubble and easy credit conditions. The world 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.

In response to this horrible global financial upheaval, in 2008, Satoshi Nakamoto wrote a paper titled, “Bitcoin: A Peer-to-Peer Electronic Cash System.” The paper suggested that “trusted third parties” could be eliminated from financial transactions.

What’s Bitcoin and how does it relate to blockchain?

Bitcoin is a peer-to-peer system for sending payments digitally signed to the entire Bitcoin network. When the “b” is capitalized, “Bitcoin” refers to that network, e.g., “I want to understand how the Bitcoin network operates.” When the “b” is not capitalized, the word “bitcoin” is used to describe a unit of account or currency, e.g., “I sent 1 bitcoin to a friend.” The digital signature is made from public keys (given to anyone for sending assets) and private keys (held by the asset owner).

The public ledger of Bitcoin transactions is called a blockchain. Bitcoin also runs on top of a technology called blockchain. Blockchains are permissionless distributed databases or permissionless public records of transactions in chronological order. Blockchain technology creates a decentralized digital public record of transactions that is secure, anonymous, tamper-proof and unchangeable — a shared single source of truth. Blockchains apply to any industry where information is transferred and roughly fall into the following six classifications:

1. Currency (electronic cash systems without intermediaries).

2. Payment infrastructure (remittance; sending money in payment).

3. Digital assets (exchange of information).

4. Digital identity (IDs for digitally signing to reduce fraud).

5. Verifiable data (verify the authenticity of information or processes).

6. Smart contracts (software programs that execute without trusted third parties).

How blockchains work

For the first time in history, blockchain removes — or disintermediates — the middleman from business transactions and by doing so improves the value of existing products, services and interactions in the following ways:

Preventing double spending: With blockchain, you can’t spend money more than once. Blockchain presents a solution by ensuring the authenticity of any asset and preventing duplicate expenditures (real estate, medical claim, insurance, medical device, voting ballots, music and government record or payments to program beneficiaries).

Establishing consensus: In this new model, crowds are networks of computers that work together to reach an agreement. Once 51% of the computers in the network agree, “consensus” has been reached and the transaction is recorded in 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.

There are four principles of blockchains networks.

  1. Distributed: Across all the peers participating in the network. Blockchain is decentralized, and every computer (full node) has a copy of the blockchain.
  2. Public: The actors 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. Persistent: Because of consensus and the digital record, blockchain transactions can’t catch fire, be misplaced or get damaged by water.

Steps to create a block (transaction)

Blocks are a record of transactions and chains are a series of connected transactions (blocks).

  1. Create transaction: A miner (computer) creates a block.
  2. Solve the puzzle: A miner (computer) must do mathematical calculations and if correct will receive a “proof of work.”
  3. Receive “proof of work:” If the puzzle is solved — the “proof of work” is a piece of data that is difficult (costly, time-consuming) to produce but easy for others to verify and which satisfies certain requirements. In short, it’s difficult to solve the puzzle but easy to verify it’s solved correctly.
  4. Broadcast “proof of work:” The miner broadcasts its successful proof of work to other miners.
  5. Verification: Other miners verify the “proof of work.”
  6. Publish block: If the miners reach consensus (51% agreement) that the proof the miner presented solved the puzzle, then that transaction is published to the blockchain.

Why are blockchains secure?

With blockchain technologies, truth can also be measured and consumers and producers can prove data is authentic and uncompromised.

To create a new block, block 101, some of the data is used (or a hash is created by an algorithm that turns an arbitrarily large amount of data into a fixed-length random number) from the previous block, block 100. Then to create the new block 102, information from block 101 is used, and so on. Transactions are dependent on the prior transaction. Similar to a light string on a Christmas tree. If a light bulb were pulled from the string (changing a transaction), the miner would have to change every previous transaction ever made in that string. Probabilistically this is almost impossible, as not everyone would reach consensus on the proposed change.

The result is an immutable digital record for every agreed transaction: a single source of truth.

Why blockchain technologies will transform the world

Blockchain technologies will improve trust in industries where information (assets) is transferred, including these:

  1. Accounting (auditing and fraud prevention).
  2. Aerospace (location of parts and chain-of-custody).
  3. Energy (smart metering and decentralized energy grid).
  4. Healthcare (medical devices and health information interoperability).
  5. Finance (remittance and currency exchange).
  6. Real-estate (deeds transfer and speed buying or selling property).
  7. Education (better manage assessments, credentials, transcripts).

Blockchain technologies will change everything — from clothes you wear, the food you eat and even the products you buy.