I’m old enough to remember the year 2017 when bitcoin and blockchain were all the rage. The two were brought up together so often that the technologies seemed almost inseparable. But the two things are not synonymous, and blockchain has potential uses far beyond bitcoin and other cryptocurrencies. So what exactly is blockchain, what can it be used for, and what’s holding it back?
To understand blockchain, first I want you to picture a ledger, like your bank statements. Your bank keeps track of every transaction and how much money is coming into and going out of your accounts. It’s also the central authority keeping track of everything. If there’s a bank error in your favor and you collect $200, good for you! Actually, spending that money can be legally tantamount to theft… so, maybe not. And if a decimal is misplaced or an autopayment is charged twice and your account is zeroed out, it can be a headache dealing with the bank to fix it.
Enter distributed ledger technology, or DLT. Rather than having just one authority keeping tabs on transactions, DLT is managed by an entire network of participants who all share the ledger of transactions. If over half the systems on the network verify a transaction, then it’s approved. Records of multiple transactions form a block, which is then added on top of previous blocks to form a chain, hence the name. Each block contains records of the transaction details, as well as a unique cryptographic “hash,” which is like an alphanumeric fingerprint plus the hash of the previous block in the chain.
Altering the information of the block will also generate a new hash, so tampering with a block earlier in the chain creates a mismatch that invalidates all the blocks after it. While malicious hackers can quickly generate new hashes for all the blocks in the chain to try and cover their tracks, the decentralized nature of DLT makes their job more difficult. Remember over half of the systems keeping track of the ledger have to agree with any changes, so hackers would have to take control of 51 percent of the network to achieve their goal. Plus, some blockchains artificially increase the time it takes to generate new hashes, making the process of hacking multiple blocks impractical.
For example, Bitcoin’s “proof-of-work” mechanism means new blocks are added to the chain in 10 minute intervals. Basically, blockchain can be a way to get multiple parties that may not trust each other to share and agree on data. It’s this peer-to-peer system that’s made blockchain appealing for financial applications like Bitcoin and other cryptocurrencies.
But ironically, the same features that make it secure also make it impractical for many applications. Making every node in the network keep track of every transaction, plus intentionally slowing down the generation of hashes, means transactions can take an inconvenient amount of time. While a credit card company can handle well over a thousand transactions per second, bitcoin can’t handle more than seven.
Cryptocurrencies are trying to find ways to speed up these transactions without compromising security, which is a major hurdle. Still, there are other applications where a blockchain can come in handy, like tracking shipments. Some ports and shipping companies are testing out DLT so everyone can securely track and monitor containers. After a batch of lettuce was contaminated with E. coli, Walmart made produce providers use a distributed ledger, so they could automatically track exactly where all its produce came from and where it went. There are potential uses for the blockchain in healthcare, like managing data in medical trials while maintaining anonymity.
But the enthusiasm for blockchain has dimmed since the word entered the public lexicon a few years ago. As is typical with any emerging technology, laws have lagged behind its development, making it hard to legally use blockchain applications, especially across jurisdictions like is required for international finance.
In some cases, there is already other software that can do most of what blockchain does, just without the security of a decentralized network. So, if security isn’t a huge concern, there’s no need to adopt it. And smaller networks might not be that secure anyway, since it’s easier for bad actors to take control of over 51 percent of the nodes.
All this means that blockchain is a really cool and clever idea that just hasn’t found its niche yet. Give it a few years for the systems to advance and laws to mature... and you may one day be relying on blockchains without even realizing it.
Some countries are trying to develop their own cryptocurrency, like China’s digital yuan.