Image illustrating blockchain

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What is blockchain?

Mon Feb 28, 2022
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In this explainer, ​​Principal Technologist Tim Hill spells out what blockchain is by outlining how it works, what it’s used for and why people are talking about it

Can you explain blockchain in very simple terms? I always think I get it and then my brain explodes!

In the simplest terms, blockchain is, well … it’s a chain of blocks. In itself, that description probably doesn’t help much. But it’s useful to keep in mind that, at base, blockchain is a very simple idea.

However, there are (at least) four reasons why the word ‘blockchain’ might induce the cranial-combustion symptoms you describe.

  1. The underlying technology (‘cryptographic hashes’)
  2. The functionality this technology supports (‘distributed ledgers’)
  3. The social infrastructure this functionality supports (‘decentralised trust networks’)
  4. The hype

Most explanations of blockchain start with an explanation of hashing algorithms (the underlying tech) and then move at speed all the way through to the hype. For a change, this explanation’s going to run in reverse and start with …

The hype

Blockchain has actually enjoyed/suffered roughly three rounds of hype, both of which have obscured understanding of the technology.

The first round lasted from about 2015 to the start of 2018 when blockchain shot to fame as the technology underlying Bitcoin. Throughout that period, blockchain and Bitcoin were often confused with each other – both in the media and in popular perception. Bitcoin is not blockchain, any more than the internet is the web; but at the height of the Bitcoin bubble, there were many who didn’t bother to make the distinction.

Alongside, and continuing past, the Bitcoin bubble has been an ongoing second round of blockchain hype, focused on applications beyond cryptocurrency. For blockchain advocates in this second wave, there seems to be almost no domain for which blockchain is not seen as potentially transformative. There are attempts to apply blockchain to problems as diverse as contract guarantees, medical record storage, and the fact that trees don’t charge money for the oxygen they produce.

The latest concept to bubble up from this ferment of new ideas is NFTs (Non-Fungible Tokens), which formed the focus of intermittent blockchain-based market frenzies through 2020 and 2021. Acting as a kind of ‘digital signature’ for claims to ownership, NFTs have been associated with everything from fine art to toilet paper – and, with the Token market valued at roughly $40 billion USD in January 2022, this excitement looks likely to continue.

Even where blockchain-based applications are more pedestrian or conventional, they often obscure what it is that blockchain actually does. ‘Blockchain’ isn’t so much a single technology as a technical concept that can be implemented in various ways – and one that often needs to be complemented by other technologies in order to be useful. Application designers and venture capitalists often blur the exact role played by blockchain in the solutions they’re promoting – and, just as is with ‘artificial intelligence’, the buzzword sometimes gets attached to projects that have little or nothing to do with the technology they invoke.

As a result, blockchain can easily seem to be everywhere and doing everything. Needless to say, it’s not and it doesn’t.

So why do people like it so much? And what is it actually for?

Decentralised trust networks

Central to most blockchain proposals is the belief that the technology solves a problem as old as human society but arguably exacerbated with the rise of the internet: trust. When we give our credit card details to a retailer online, how do we know they will take only the amount needed to pay for their goods? How do I know the person I am buying my house from has fulfilled all their contractual obligations? How do I know the digital contract I signed hasn’t been altered? Hundreds of everyday transactions rely, ultimately, on some kind of trust used so routinely we take it for granted.

But what is the basis for this trust? Throughout most of human history, and today, the answer to this question has usually involved reliance on some third party. Banks handle financial transactions; estate agents handle property transactions; the NHS deals with medical transactions; and so on and so forth. This model for establishing trust is sometimes called ‘centralised’ trust: we don’t need to trust the people we’re transacting with directly, because there is a well-regulated and hopefully reliable institution in the middle ensuring compliance and recording these transactions for us.

But banks fail; estate agents can be unreliable; the NHS, as we have seen, is vulnerable to data breaches. And all of them, of course, charge in one way or another to provide this centralising function. Furthermore, all these big institutions need to be backed by even larger legal and governmental structures to ensure they continue to play by the rules established for them.

But what if these centralising institutions could be bypassed? What if there was a way for groups of individuals to simply establish trust directly with each other, in decentralised networks? Financial and social overheads could be eliminated; liberty could flourish; and, in the wake of the likely industry disruption that would ensue, money could be made.

This, its advocates often argue, is the promise of blockchain.

Distributed ledgers

But how? How can a fundamentally social phenomenon like ‘trust’ be addressed by a (relatively simple) information technology?

The answer lies in the concept of a ‘distributed ledger’. Normally, centralised trust organisations are entrusted with storing a record of all the transactions they mediate in some kind of ‘ledger’ – typically, in the 21st century, a database. The central organisation then has privileged access to this ledger and is charged with ensuring its contents are correct, that they are up-to-date and immune from tampering, etc.

Distributed ledgers turn this idea on its head. Instead of having one central record locked away behind institutional (fire)walls, in a distributed ledger system lots and lots of copies are made and then distributed around a network of interested parties – and the larger the network, the better. Each member of the network is known as a ‘node’, and as new entries are added to the database they are distributed to every other node, so that eventually everybody has an identical record of all transactions. And if for some reason one of these copies should fall out of sync with the rest (because of eg hacking, fraud, or simple technological failure), comparison with other copies available via the network will quickly reveal and correct the error.

The blockchain

And here, at long last, is where the blockchain enters the picture – because at least in principle, blockchain technologies solve two of the fundamental challenges in successfully implementing a distributed ledger.

The first challenge is how to update the ledger itself. This is addressed by the ‘block’ part of ‘blockchain’. Network nodes periodically scan the network for recent transactions and bundle them together into ‘blocks’, which they then broadcast across the network. If the other nodes accept these blocks as valid, they are added to the distributed ledger. There can be some complexities here, typically to address security concerns. For instance, some blockchain implementations specify metadata formats so that block contents can easily be verified. Famously, some also demand that nodes expend intensive computing power to solve mathematical puzzles as ‘Proof of Work’ before submitting a block to the network, in order to filter out spam and other kinds of attacks. But at their core, ‘blocks’ are just transactions. In principle, they’re not far removed from the concept of rows in a spreadsheet.

What about the ‘chain’? This simply refers to the way the blocks are linked together to provide a complete transaction history. In addition to containing its transactions and whatever metadata is required, each block is assigned a unique ID. It also stores the unique ID of the transaction block that immediately precedes it. In this way, all the blocks in the chain can be assembled in reverse order to provide a complete transaction history.

The clever part is simply the way the identifier values are generated – which is to say, they’re a cryptographic hash of the contents of the block itself. While the mathematics of hash functions are a little involved, what makes them useful in blockchain applications is their sensitivity to changes in content: should a fraudster attempt to alter the transactions in a block even by a comma, the value of the hash – and hence the block’s identifier – would also change. This, in turn, would break the chain, because the ID back-pointer in the following block would no longer correspond to the new value. This means, to successfully counterfeit a transaction, the fraudster would need not only to recalculate the ID of its block, but also of every subsequent block in the chain – a difficult proposition, and one that would quickly be detected by the other nodes in the distributed-ledger network. The result? A reliable, shared record of transactions almost invulnerable to attack.

And, if the blockchain visionaries are to be believed, the foundations of a new, decentralised anarcho-libertarian utopia. And they might be right. Blockchain-based technologies have been widely denounced as a bubble, time and time again. But if so, it’s a remarkably resilient one, that’s proven itself capable of reinflating at will. It may yet take over the world.

TL;DR

Still confused? Remember, it goes like this:

  1. A blockchain is just a series of blocks.
  2. Blocks are just a series of transactions.
  3. The way blocks are linked into chains makes it hard to alter the blocks once they’re added to the chain.
  4. This immutability (arguably) makes blockchains suitable for use as distributed ledgers for transactions.
  5. Distributed ledgers will (arguably) remove the need for institutions central to current socioeconomic life, such as banks, notaries, data trusts, and registries.
  6. This will be (arguably) good for (arguably)(some sector of) society.

As you can see, the difficult and uncertain aspects of blockchain aren’t so much technological as social: in what we expect the technology to do, and how it will be used.

Watch this space.


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