Cryptographic trainspotters will be well aware of bitcoin and the underlying blockchain technology which was developed a number of years ago by a mysterious man named Satoshi Nakamoto (although many believe it is the work of Australian Craig Wright). In the last six months, EITC Holdings, a company believed to be associated with Craig Wright, has filed over 50 provisional patent applications relating to blockchain technology. Should these provisional applications proceed to complete applications, EITC Holdings will have to name the inventors, which should solve the Satoshi Nakamoto/Craig Wright mystery.
It is convenient to explain blockchain in the context of cryptocurrencies, including bitcoin, but blockchain is not limited to this use. In a world of cash transactions, banknotes are physical items which are hard to copy or reproduce, avoiding what is known in computing as the ‘double-spending’ problem. For example, imagine you need to give someone $50 and you pay them with one $50 note. It is clear that once you hand over the $50 note, you no longer have it, and counterfeits aside, it is also impossible for you to provide that same $50 note to someone else at the same time. That is not necessarily the case in the digital currencies; which is where blockchain technology comes in.
Ledgers and the Hawala system
Before we delve into blockchain, we need to understand the notion of a ledger. Ledgers have been used for centuries to record transactions, and they are just that, a record of a transaction. In fact, before Western banking as we know it existed, many parts of the world used (and to this day, continue to use) an informal funds transfer system known as Hawala ( ةلاو حِ ). It is a very simple system based on ledger and trust! For example, sender A wishes to transfer funds to receiver B (usually in another distant location). Sender A approaches a Hawala dealer C and provides the funds. Hawala dealer C contacts Hawala dealer D who agrees to release funds to receiver B. Hawala dealers C and D have a ledger to track all of the transactions and eventually settle-up at an appropriate time. While cash is provided, no money is actually physically transferred. Again, in this scenario, the ‘double-spending problem’ is avoided, but perhaps not so in the digital realm.
The idea of a ledger is a good one since it tracks all of the transactions and keeps a record. But in the digital realm, who is in charge of the ledger? Might they alter the ledger or create false transactions or duplicate digital notes? While the Hawala system and ledger is based on trust and shared between a small number of people, blockchain provides a ledger visible to Patents any number of people and replaces trust with ‘proof of work’.
The proof is in the blockchain pudding
A blockchain is formed by a number of blocks linked together to form a chain. Each block in the chain represents transaction data and blocks are arranged in a linear sequence over time, forming a blockchain. Any new blocks that are appended to the chain cannot be changed or removed. Users of the system update and check the integrity of the ledger by participating. The process of adding a new block to the blockchain involves hard work (in terms of computing power, and in turn, electricity) by solving a cryptographic proof, a hash function. Only once this ‘proof of work’ is completed can a block be added to the end of the chain and get the approval of other people in the network. This ‘proof of work’ concept ensures the integrity of the ledger. So imagine you have total faith in the integrity of a ledger, you can see how there may be other applications beyond cryptocurrencies.
Consequently, we are now seeing a swathe of innovations in this space. For example, digital notaries that require no third-party verification, management of financial contracts and wills, e-voting and cloud storage applications to name but a few. Blockchain technology will change the way we carry out day-to-day transactions in the future, in ways we are yet to imagine.