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Why do I need to know about blockchain?

Blockchain is the encrypted data storage technology that authorises and records Bitcoin transactions.
Soon it could be handling your most sensitive personal, financial and official information too.
Here's what you need to know before blockchain starts organising your life...

Photo: iStock

What is blockchain?

Blockchain is an electronic 'distributed ledger'

It's a way of updating a record (or ledger) that ensures the most up-to-date copy of the record is distributed among all users at all times, with full transparency of all transactions, who made them, and when.

It's called 'blockchain' because updates to the recorded information are stored in blocks, which are added to previous blocks to form a chain.

Crucially, it becomes less and less easy to go back and alter information in any of the blocks because the encrypted record of the entire chain is held by all users rather than being stored in one vulnerable place.

What information could be stored on blockchain?

Anything and everything

In theory, any record that can be stored electronically and recognised by a computer could be stored on a blockchain distributed ledger.

It has potential for use by governments, financial institutions and businesses in 'smart contracts', land registries, money, medical test results, academic and professional qualifications, criminal records, authentication certificates, ballot papers, supply-chain documentation…

Will blockchain keep my confidential information secure?

It depends what you mean by 'secure'…

Your information will be safe from surreptitious changes as long as the encrypted blockchain is distributed among enough computers to make it unfeasible to hack into a majority of them simultaneously without being caught. You should at the very least be able to see who has accessed your information (and what they did with it) ever since the blockchain record was created.

But confidentiality is not built into blockchain as a fundamental feature: the system relies on an encrypted real-time copy of the entire historical record being agreed upon and held by many users, so anyone with the decryption key can see what is in the whole of the ledger. Blockchain confidentiality is not impossible, but it requires some dilution of this underlying principle.

Thieves have been known to steal Bitcoins on exchanges (which allow the e-currency to be converted into real money) because these are weak points compared to the underlying blockchain record itself.

Is blockchain better than what we have now?

In most ways, yes

Blockchain is better at what it does (keeping accurate, encrypted, censor-resistant, immutable, trustable, up-to-date records) than central-database systems that are clunky to operate and vulnerable to hackers, corrupt officials and so on.

Blockchain also enables 'smart contracts', in which a transaction takes place automatically once a record in the blockchain has been amended. For example, your insurance company could stop charging you for cover the instant you register the sale of your car, or a trading firm's goods could be released from customs the moment it pays the import tax.

However, confidentiality has to be achieved through technical protocols (involving a permissioning system of public and private encryption keys) that automatically govern who has access to your information, in what circumstances, and what they can do with it.

When will blockchain start handling my sensitive information?

Whenever we're ready

If you're Estonian, you already use your national ID card to perform lots of official activities (including voting, filing tax returns and reviewing your children's school records) that are recorded on blockchains.

If you're from the UK, your political leaders are only just waking up to blockchain's potential, though developments may accelerate since the publication of a well-received Government Office for Science report by Chief Scientific Adviser Sir Mark Walport (co-authored by Dr Phil Godsiff from Surrey Business School).

Many large financial institutions have departments dedicated to investigating how they can use blockchain, and some organisations (such as offer a blockchain-based service to verify the source of goods and to track them through their clients' supply chains.

Diamonds can now be etched with a unique microcode that allows their entire history to be traced with extremely high confidence through a blockchain maintained by a company called Everledger, ensuring that so-called 'blood diamonds' are kept out of the legitimate jewellery market.

Who will be in charge of blockchain?

Anyone, everyone or no-one

Blockchain was originally designed by people who mistrusted government and wanted a currency (Bitcoin) that could not be controlled from any central point by any one party.

In practice, a blockchain can be created by a specific organisation (such as a government, a bank or a business) for a specific purpose and with highly restricted access, but this could leave them as vulnerable to hacking as any other recordkeeping system with a single point of access and control.

Whether a blockchain system is created on a centralised, decentralised or distributed model, it will be governed by protocols that need to be created, monitored, enforced and updated, which could be interpreted as a form of control.

Will blockchain cost more or less than current data-storage systems?

In theory, less

Because much of the work is automated and dispersed, blockchain could require fewer humans to operate than current government and financial recordkeeping systems, which require complex reconciliation of separate records and transations and rely on people to run huge centralised computer infrastructures.

On the other hand, the research, expertise, equipment and energy required to run a blockchain does not come cheap, and has to be paid for somehow.

With Bitcoin, users called 'miners' are rewarded with free units of the currency (whose value against 'real' currency can fluctuate) in exchange for providing the huge amount of electricity-hungry computing power required to keep the system running. Different funding models would be required for blockchains serving different purposes.

Do I need to be a computer expert to use blockchain?

Absolutely not

In Estonia, people can fill in their tax forms and pay their taxes on their mobile phones - and it usually takes less than 10 minutes.

Estonian banks are experimenting with Bitcoin-backed electronic-transaction mechanisms, but their customers don't need to know how this works (or even that it is happening), just as you don't need to know how your bank card moves money from your account to the vendor's.

Because your up-to-date personal information will be stored accurately across different official recordkeeping systems, your interactions with officialdom (such as filling in passport-renewal forms or changing the address on your driving licence) should become much simpler, quicker and less frustrating.

How does blockchain work?

Here comes the technical bit…

  1. An electronic record of information is created and encrypted. This is called a 'block'.
  2. Any computer with the correct encryption key can read the block and create a new version of it, reflecting changes in the information on the record (such as a real-world transaction).
  3. If a majority of the computers with the encryption key agree that the update to the information is valid, a new block is created.
  4. This updated second block does not overwrite the first block - it is added to it, starting a 'chain' of blocks.
  5. When new blocks are created and approved by a majority of users, they are added to the 'blockchain'.
  6. As the blockchain lengthens, and the network of computers grows, it becomes progressively harder to gain control of a majority of the computers that can alter the blockchain.
  7. Soon it becomes effectively impossible to change information previously stored in the blockchain, thereby creating an immutable censor-resistant historical record of changes to the original information.
  8. The most up-to-date record of the information (along with the entire blockchain) is simultaneously owned by all the computers in the network, which is known as a distributed ledger.

Should I be for or against blockchain?

Remember Kranzberg's first law of technology:
'Technology is not good or bad; nor is it neutral'

Bitcoin was used by criminals as the currency for illegal transactions on a website called the Silk Road, but it has also been used by a London church to allow its congregation to make anonymous donations in line with scripture.

As with any technological development there will be winners and losers, angels and villains, opportunities and setbacks, surprises good and bad.

Whether you're for or against it, you need to know that blockchain is coming, so stay informed and keep an eye on the people who are entrusted with its implementation.

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