JOIN USBitcoin, one of the first and now most famous users of blockchain technology, is often thought of as synonymous with blockchain. But there is a difference. Blockchain can be thought of as the technology providing the ledger system or "operating system" upon which the Bitcoin "cryptocurrency" is certified and exchanged.
The Bitcoin idea was to provide a currency which completely bypasses any government currency controls and removes all third-party payment processing intermediaries. Of course, as with all currencies there must be a secure method of performing these transactions. That's where blockchain comes in.
Since it all began with Bitcoin, let's use the Bitcoin-blockchain discussion to point out the differences and how the system works. What is blockchain and why I should be interested in it? Bitcoin and other crypto currencies start with regular money. A purchaser begins by obtaining an online Bitcoin wallet and a traditional payment method such as a credit card, which is used on an online Bitcoin exchange to begin the transaction.
At the site, the purchaser clicks on the "Buy" tab (or "Sell" tab) to begin. The purchase is not in the form of minted "coins" but rather a transaction on the ledger. These transaction balances are maintained using public and private key cryptography, which are long strings of numbers and letters mathematically encrypted to provide the surety of the transaction.
Think of the "public key" as a bank account number, which can only be accessed through the "private key" which acts as your secret ATM or credit card pin. This private key is stored in the Bitcoin wallet. The purchaser's money? It is now just a publicly recorded "transaction."
The purchaser can now buy commodities,
pay for services or conduct other monetary transactions the same as other currency transactions. Instead of banks or third parties "promising" to send the funds to other institutions through private accounting systems, the blockchain enables the transaction to be recorded and certified publicly.
This digital ledger can only be changed by adding a "block" to the end of the transaction "chain." Participants in the process known as "miners" detect transaction requests, aggregate and validate them, then add the "new blocks" to the chain.
To do this, they must verify that the purchaser owns the Bitcoins in a specific transaction, that is, that they were not spent previously, by using the public key and private key. When validated, the miners are responsible for processing a new public key for the coins.
The miners must ensure irreversibility of the new transaction to make them final and tamperproof, without the benefit of a central controlling authority making or enforcing the transaction rules. The miners perform this function through the Bitcoin code alone, using the concept of "proof of work."
Proof of work: miners are in competition with one another. The first to create a new valid block gets paid in Bitcoins for the service. The miners must have a common starting point on the blockchain. To add a new block, the miners must provide a cryptographic proof of the block, produced by "hashing" until an acceptable solution can be found. When a miner produces the satisfactory hash, he announces it and others confirm it, then append it to their blockchain to start the process for the next block of transactions.
Benefits of blockchain technology: blockchain provides a cost-effective means of transferring currency or data from one party to another by reducing overhead costs and securely recording the transaction only once, rather than having multiple backup systems.
The transaction is transparent to all parties, ensuring the validity of the transaction. A blockchain transaction also provides a tamper-evident environment, as one transaction cannot be changed without another transaction, with both of these transactions visible to all parties. However, the identities of the purchasers and sellers are anonymous.
Limitations: many of the limitations of the blockchain technology are also considered strengths. First, it is limited to providing secure, but transparent transactions. Each transaction is open to the public, so anyone on the network can view any transactions that have ever occurred on the network.
But the process is also anonymous, so the
exact identity of those involved in a transaction are masked. This is great at keeping your personal identification a secret, but also allows criminal organisations to use the system while police are unable to track where the money or documents may have originated, and to whom they are going.
The system relies on very intensive cryptography to deter fraud. Heavyweight cryptography requires significant computing power and in turn, significant electrical power - the costs of doing business. As the blockchain craze continues, energy will become the important "Blockchain Drain" that reshapes the world.
The enormous increase in hash rates over the last year has resulted in Bitcoin's global electrical draw to rise to more than 700 megawatts simply for transaction processing. Authorities expect that as Bitcoin use increases, the global demand will require more than 14 gigawatts by the year 2020 - about 5% of India's current energy capacity for Bitcoin activity alone.
As we add new types of industries to blockchain and its heavy cryptography, we will significantly add to this computational and electrical demand. That's the bad news. The good news is that Bitcoin data mining has begun resurging economies in areas previously abandoned by mainstream industries. Since data mining industries can be run from energy-rich, but otherwise minimally populated locations, cities like Ordos (China) are reaping the benefits of the blockchain frenzy.
Ultimately, blockchain may become the single technology that revolutionises not how we interact with one another, but also how we govern and where we live.
(Iyengar is a distinguished Ryder Professor and Director, School of Computing and Information Sciences, Miami; Miller has been with US Air Force for over two decades and is Coordinator, Discovery Lab, Florida International University)