Most of us have at least heard of Bitcoin by now. Whether or not you still think it’s just the play money of geeks around the world probably depends on how closely you pay attention to the news surrounding this cryptocurrency. Just in October 2017 alone, Bitcoin has twice hit an all-time high in dollar value per coin, and the amount of Bitcoin worth within the global economy has recently been estimated to be $41 billion dollars.
But what’s even more interesting here is blockchain, the revolutionary technology that makes Bitcoin possible. As the first decentralized method of sharing digital information, blockchain actually promises to revolutionize more than just money. Education, IoT infrastructure, cloud storage, stock trading, supply chain management—these are just some of the many industries blockchain could potentially transform. Identity management, too, presents an incredible opportunity for blockchain to secure sensitive data sharing across myriad industries, and we’ll cover that in Part II. But, for Part I, let’s unpack how blockchain actually works.
The Google Docs Analogy
“Before Google Docs, you’d have to send a Microsoft Word document back and forth between Person A and Person B in order to get revisions. One person is always locked out of the editing process. This is how most databases work today, and it’s also how a bank transaction works when “they briefly lock access (or decrease the balance) while they make a transfer, then update the other side, then re-open access (or update again)” (William Mougavar).
Google now allows for shared, real-time access to the same document.
“Picture a spreadsheet that is duplicated thousands of times across a network of computers. Then imagine that this network is designed to regularly update this spreadsheet and you have a basic understanding of the blockchain.
Information held on a blockchain exists as a shared—and continually reconciled—database . . . The blockchain database isn’t stored in any single location, meaning the records it keeps are truly public and easily verifiable. No centralized version of this information exists for a hacker to corrupt. Hosted by millions of computers simultaneously, its data is accessible to anyone on the internet.” (What Is Blockchain Technology? . . . )
The blockchain database is also called a distributed database, which, in financial context, is called a distributed ledger. Here’s a graphical representation of the difference between a centralized and a distributed ledger:
How Distributed Ledgers Work
The distributed ledger keeps track of the entire history of all Bitcoin transactions, and this ledger is constantly distributed and updated across a worldwide network of private computers that are simultaneously storing this data and executing computations in order to ensure its absolute security. These private computers are called nodes, and every time a transaction takes place, a message is sent to every node in order to continuously update the ledger. A major difference here between Bitcoin and a bank’s centralized ledger is that, with the bank, only the user and the bank are aware of that user’s transaction history, while, with Bitcoin, all transactions from all time are always available to the public (How Does . . . ).
Source: World Economic Forum
In order to participate in Bitcoin’s blockchain, you must have a wallet, which is one of a handful of programs designed to store and exchange your Bitcoins, and “each wallet is protected by a special cryptographic method that uses a unique pair of different but connected keys: a private and a public key” (How Does . . . ). Here’s an example to help clarify:
“When David wants to send Bitcoins, he needs to broadcast a message encrypted with the private key of his wallet, so he and only him can spend the Bitcoins he owns as David is the only one to know his own private key necessary to unlock his wallet. Each node in the network can cross-check that the transaction request is coming from David by decrypting the transaction request message with the public key of his wallet.” (How Does . . . )
There are many reasons this process is so secure:
- “When encrypting a transaction request with your wallet’s private key you are generating a digital signature that is used by blockchain computers to double check the source and the authenticity of the transaction.
- The digital signature is a string of text that is the result of a combination of your transaction request and your private key, therefore it cannot be used for other transactions.
- If you change a single character in the transaction request message the digital signature will change, so no potential attacker can change your transaction requests or alter the amount of Bitcoins you are sending.
- To send bitcoin you need to prove that you own the private key of a specific wallet as you need to use it to encrypt the transaction request message. Please note that since you broadcast the message only after it has been encrypted, you never have to reveal your private key.”
(How Does . . . )
To be clear, Bitcoin’s distributed ledger does NOT keep track of each user’s balances. The ledger only keeps track of all transactions that have ever taken place on Bitcoin’s network. Therefore, any time User A attempts to send 10 bitcoin to User B, User A’s wallet creates a transaction requests that includes the entire history of that wallet’s previous transaction. The Bitcoin network then that the sum of that transaction history equals 10 bitcoin or more. (How Does . . . )
Stay Tuned for Part II
Now imagine that the wallet mentioned above, instead of finances, contains all of the sensitive info that makes up your digital identity. In Part II, we’ll explore how blockchain translates to identity management and discuss certain companies helping to make this technology a practical reality across industries.
Contact tekMountain today to learn how blockchain can benefit your business.