The idea of decentralized internet money has been conceived and dreamed about by many people since the early 90s; namely since the inception of the Internet.
The world-wide-web was indeed an astonishing invention and is one of mankind’s greatest creations. Many people of the time were quick to realize the great potential it heralds. They understood the unauthoritative nature of the Internet and how that will have a positive impact on the intellectual freedom of the world.
Some people, however, thought that the Internet was missing something important, something that would complement it; a digital currency that is natural to it and based on the same ethos of decentralization.
To that end, few attempts were made at such Internet money at that time but, since the concept itself was very complicated, all had failed. Creating a truly decentralized money system was an overwhelmingly hard challenge.
In 2008 an unknown person who went by the pseudonym Satoshi Nakamoto published a whitepaper titled “Bitcoin: A Peer-to-Peer Electronic Cash System” where he detailed his proposal of a decentralized currency.
The actual implementation of Bitcoin developed by Satoshi was released in January 2009 and the Bitcoin network launched days later.
Bitcoin went on to become the world’s first ever truly decentralized cryptocurrency. It is decentralized in that it operates with no central authority. It is an entirely trustless and permissionless money system. But how does it achieve true decentralization? What did it do differently from previous attempts?
Bitcoin’s power lies in its underlying technology called blockchain. A blockchain is a public ledger or database that stores a record of all transactions that have ever occurred. This database, however, is not stored in one location; rather, it’s stored on thousands of computers. Those computers are called nodes and are just personal computers made to run a Bitcoin node voluntarily by their owners. These nodes are connected with each other and collectively make up the Bitcoin network.
New sets of information (transactions) called blocks are appended to the blockchain in a sequential manner. Every new block sets on top of the preceding one, forming a chain of blocks and hence the name blockchain. A new block only gets added to the blockchain if more than half of the existing nodes agree on its validity. This is known as consensus and is an essential concept in blockchains.
As opposed to having a single entity keeping transaction records and potentially controlling them, as is the case with banks, in blockchain we have a collection of nodes all with equal authority over the network. These nodes collaborate together to store and maintain a valid and unalterable record of transactions.
Moreover, once a block is added to the blockchain it cannot be deleted or altered, and that’s another invaluable aspect of blockchain technology.
We talked about how nodes work together to maintain a valid ledger of transactions. But how do these transactions get verified in the first place? And what incentive do people have to support a cryptocurrency’s network?
In blockchain technology, mining is the process of spending computation power to secure and validate blocks before adding them to the blockchain. Mining can be performed by anyone given they have good enough computation power.
In Bitcoin, a block is formed every 10 minutes that contains all the transactions that are occurring at that time. For this new block to be successfully appended to the blockchain, miners compete with each other to calculate its hash.
This hashing process consists of linking and hashing together various factors of the block like its contained set of transactions, a reference to the previous block and a nonce value. The first miner to successfully calculate this hash and add the block to the blockchain currently gets, along with the fees of the transactions in that block, a reward of 12.5 new issued bitcoin. This is how new bitcoins are introduced to the network. Of course, after the block is successfully added, nodes will propagate it to other nodes to let them know about it. Soon after, the new block will be present at most nodes.
The benefits of this mining process are:
- The network is secured with hashing power. Unless a single entity has more than 50% of the overall hashing power, it cannot fool the network in any way.
- The reward of bitcoins is an incentive for mines to keep securing and running the network.
- The persistent problem of double-spending is effectively tackled.
Blockchain Outside Cryptocurrency Realm
Blockchain technology, invented by Satoshi, is of a really disruptive nature. Although its current main use is to run cryptocurrencies, the technology’s incredible features and aspects make it appealing for many other uses. Blockchain’s immutability in particular is an interesting aspect. One universal problem where blockchain would help greatly is voter fraud prevention. The united states’ 2016 elections is a great example of how big of a problem voter fraud is. Many startups have already set out to venture into applying blockchain technology to voting systems.
Another great use of blockchain technology outside digital cash realm is decentralized social networking. Centralized social media sites tend to censor information as they please. Also, when we look at giants like Facebook, we must consider the state of our privacy. A one great example of decentralized social media platforms is Steemit.
We’ll conclude with the most popular use of blockchain technology outside the digital money realm; smart contracts! Smart contracts are basically computer programs that are be built on top of a blockchain. They are usually programmed to execute certain actions when certain conditions are met and, since they reside on an immutable blockchain, they cannot be deleted or tampered after they are put on the blockchain. Ethereum’s blockchain is arguably the most known smart contracts platform.