What is the Blockchain?

What is the Blockchain?

Original cartoon can be found at http://dilbert.com/strip/1995-11-17

Anyone who has even a passing knowledge of Bitcoin has heard of the “Blockchain.” In fact, you will see a lot of media outlets now praising the Blockchain while dismissing Bitcoin itself. What is the Blockchain? How does it work? Can you have the Blockchain without Bitcoin?

What is the Blockchain?
The Blockchain is the underlying network that powers Bitcoin. It is important to remember that Bitcoin is both a currency and a payment network that uses that currency. Typically, these are separated in modern life – credit cards (payment network) and dollars (currency). But with Bitcoin they are integrated. The Blockchain is what allows trusted transactions to occur without needing a third-party (such as a bank or other financial institution).

How does the Blockchain work?
Whenever a Bitcoin transaction occurs, it is propagated throughout the Bitcoin network. However, this does not mean that the transaction has been fully validated (or “confirmed”). The transaction could be, for example, a fraudulent attempt by someone to “double-spend” their bitcoins (i.e. spend the same bitcoins more than one time). This is where the Blockchain comes in.

Every ten minutes or so, a “block” is added to the network which contains most transactions since the last block was added (these blocks being added form a linked “chain” back to the first-ever block, thus the name “Blockchain”). These blocks are added by powerful computers (called “miners”) around the world which are competing for the right to add a block. Why do they want to add a block? Because if their version of the block is added (i.e. they win the competition), then they receive all the transaction fees associated with that block, plus a “block reward,” which is new bitcoins that have just been created (currently, the block reward is 25 bitcoins). In other words, at current values they receive over $5,750 worth of bitcoins. Once the block is added, all transactions in that block are “confirmed” on the network, and the competition begins again for the next block.

This process of adding blocks to the Blockchain is primarily for security purposes. Without getting technical, the competition of powerful computers to add blocks makes it very difficult for anyone to take over the Bitcoin network, and it also allows everyone to trust that the transactions on the Blockchain are not fraudulent.

Note the difference between how the Blockchain works and how most payment networks work. With credit card transactions, there is a centralized control center that validates each transaction to ensure it is not fraudulent. This centralized control center is (expensively) managed by one organization. But the Blockchain is decentralized: anyone can attempt to compete to add blocks to the network, and it is this process of competition that ensures no fraud, not one massive authority.

Can you separate the Blockchain from Bitcoin?
Here is where the big debate comes in. Many technical and financial groups are fascinated by the potential for the Blockchain technology, but they aren’t really enamored with the Bitcoin currency. So they say they want the “Blockchain without Bitcoin.”  But is this possible?

Note in the discussion above that there is a financial incentive to add blocks (i.e. secure the network). This makes it so that people from around the world, with self-centered desires, cooperate in securing the network. If there is no financial reward associated with adding blocks, then the Blockchain itself crumbles. So if an organization wishes to use the “Blockchain technology” without Bitcoin, it will have to figure out some way to incentivize those who secure the network. Otherwise, if they just have centralized control of a “Blockchain,” it really is just a shared database.

The Blockchain is one of the greatest technological advances of the past 50 years, but count me among the skeptics who think it can be exploited without some valuable digital currency (be it Bitcoin or another) underlying it.

 


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