The way blockchain technology is being hyped these days, you’d think it was being pushed by the monorail salesman on The Simpsons. At Catallaxy Files, this guest post by Peter Van Valkenburgh is another of their informative series on what blockchain tech can do:
“Blockchain” has become a buzzword in the technology and financial industries. It is often cited as a panacea for all manner business and governance problems. “Blockchain’s” popularity may be an encouraging sign for innovation, but it has also resulted in the word coming to mean too many things to too many people, and — ultimately — almost nothing at all.
The word “blockchain” is like the word “vehicle” in that they both describe a broad class of technology. But unlike the word “blockchain” no one ever asks you, “Hey, how do you feel about vehicle?” or excitedly exclaims, “I’ve got it! We can solve this problem with vehicle.” And while you and I might talk about “vehicle technology,” even that would be a strangely abstract conversation. We should probably talk about cars, trains, boats, or rocket ships, depending on what it is about vehicles that we are interested in. And “blockchain” is the same. There is no “The Blockchain” any more than there is “The Vehicle,” and the category “blockchain technology” is almost hopelessly broad.
There’s one thing that we definitely know is blockchain technology, and that’s Bitcoin. We know this for sure because the word was originally invented to name and describe the distributed ledger of bitcoin transactions that is created by the Bitcoin network. But since the invention of Bitcoin in 2008, there have been several individuals, companies, consortia, and nonprofits who have created new networks or software tools that borrow something from Bitcoin—maybe directly borrowing code from Bitcoin’s reference client or maybe just building on technological or game-theoretical ideas that Bitcoin’s emergence uncovered. You’ve probably heard about some of these technologies and companies or seen their logos.
Aside from being in some way inspired by Bitcoin what do all of these technologies have in common? Is there anything we can say is always true about a blockchain technology? Yes.
All Blockchains Have…
All blockchain technologies should have three constituent parts: peer-to-peer networking, consensus mechanisms, and (yes) blockchains, A.K.A. hash-linked data structures. You might be wondering why we call them blockchain technologies if the blockchain is just one of three essential parts. It probably just comes down to good branding. Ever since Napster and BitTorrent, the general public has unfortunately come to associate peer-to-peer networks with piracy and copyright infringement. “Consensus mechanism” sounds very academic and a little too hard to explain a little too much of a mouthful to be a good brand. But “blockchain,” well that sounds interesting and new. It almost rolls off the tongue; at least compared to, say, “cryptography” which sounds like it happens in the basement of a church.
But understanding each of those three constituent parts makes blockchain technology suddenly easier to understand. And that’s because we can write a simple one sentence explanation about how the three parts achieve a useful result:
Connected computers reach agreement over shared data.
That’s what a blockchain technology should do; it should allow connected computers to reach agreement over shared data. And each part of that sentence corresponds to our three constituent technologies.
Connected Computers. The computers are connected in a peer-to-peer network. If your computer is a part of a blockchain network it is talking directly to other computers on that network, not through a central server owned by a corporation or other central party.
Reach Agreement. Agreement between all of the connected computers is facilitated by using a consensus mechanism. That means that there are rules written in software that the connected computers run, and those rules help ensure that all the computers on the network stay in sync and agree with each other.
Shared Data. And the thing they all agree on is this shared data called a blockchain. “Blockchain” just means the data is in a specific format (just like you can imagine data in the form of a word document or data in the form of an image file). The blockchain format simply makes data easy for machines to verify the consistency of a long and growing log of data. Later data entries must always reference earlier entries, creating a linked chain of data. Any attempt to alter an early entry will necessitate altering every subsequent entry; otherwise, digital signatures embedded in the data will reveal a mismatch. Specifically how that all works is beyond the scope of this backgrounder, but it mostly has to do with the science of cryptography and digital signatures. Some people might tell you that this makes blockchains “immutable;” that’s not really accurate. The blockchain data structure will make alterations evident, but if the people running the connected computers choose to accept or ignore the alterations then they will remain.