Blockchain basics: Understanding the concepts behind the technology

We’ve been hearing more and more about blockchain. The Maltese government launched pro-blockchain legislation that seeks to put Malta at the forefront of this technology. Local businesses are gearing themselves up for it, and various foreign companies have already announced they will be joining Malta’s blockchain ecosystem. 

This all sounds very promising. But what does it really mean? What is blockchain exactly? If you’re one of those people who can’t quite get your head around it - worry not. You’re not alone. 

In this tip we seek to outline the basics of what blockchain is all about, how it works and how it has uses that go beyond cryptocurrencies like Bitcoin.

What is blockchain?

Blockchain can be described as a decentralised distributed ledger that keeps record of digital transactions. What’s that, you ask? Let’s break it down. 

A ledger, in case you don’t know, is a book in which a company notes down the amounts of money it spends and receives. Now, here we’re not talking about any type of ledger. This is an append-only ledger, meaning that new information can be added to it, but the previous information (stored in blocks) cannot be changed or edited. 

It’s also a distributed ledger. This means that all the information is held in an interlinked network of computers, owned and run by the users themselves. This contributes to making it tamper-proof - which is one of the main strengths and benefits of the technology. 

Why decentralised? Because there’s no middleman or central authority - such as a bank, accountant or lawyer - involved.

In the article titled ‘The Ultimate Guide To Understanding The Basics of Blockchain and Cryptocurrencies’ author Indrek Lasn paints a clear picture of what ‘decentralised’ means: “Let’s imagine you have two apples and you want to give one apple to your friend, William. In a centralised world you would have to ask permission from William’s friend, Bill. First Bill will have to vet if you have the apple or not and if you do — Bill gives you permission to hand over the apple. Bill in this example is the bank.”

Building on the apple analogy, in a decentralised  system there’s no need for permission. This is because the blockchain provides all the checks and balances required to confirm you actually have the apple.

Of course, in the case of blockchain, we’re not talking about the exchange of objects, like apples. We’re talking about the exchange of information.

So, how does it work?

The first thing to understand is that blockchain networks can be private (restricted to permitted parties) or public (open to anyone). 

So, you might ask: with all these people involved, how could it possibly be incorruptible and tamper-proof? This is where the stability and reliability of mathematics comes in - in the form of cryptography.

Let’s take a step back and understand how blockchains are built. In the below demo video, Anders Brownworth gives a very clear introduction to the basic concepts behind a blockchain.

As the word “blockchain” suggests, we’re talking about a chain made of blocks (of information). The content of each block is translated into a unique encrypted digital fingerprint (called a hash). The slightest change in the information results in a change in the hash.

So when more than one block of information is created, cryptography forms the link with previous blocks. As a result of this tight-linked structure, any change to the contents of a block invalidates the data in all the blocks after it.

The system is built in such a way that if someone changes anything, even a full stop, this is immediately red-flagged by the system. This is where it gets complicated.

As explained in the article ‘What is Blockchain and What Can Businesses Benefit from It’: “Blockchains are consensus-driven. A large number of computers are connected to the network, and to reduce the ability for an attacker to maliciously add transactions on the network, those adding to the blockchain must compete to solve a mathematical proof. The results are shared with all other computers on the network. The computers, or nodes, connected to this network must agree on the solution, hence the term ‘consensus’."

Fine, but what’s the big deal?

Experts have described blockchain as a highly disruptive technology that can change the world as we know it. It has the potential to change the way we use the internet and revolutionise the global economy. 

In his article ‘How does the Blockchain Work (Part 1)’ Collin Thompson explains: “By enabling the digitisation of assets, blockchain is driving a fundamental shift from the Internet of information, where we can instantly view, exchange and communicate information to the Internet of value, where we can instantly exchange assets.”

This removes the need to rely on intermediaries in various sectors like banking, finance, academia, real estate and insurance. As a result, time and money are saved with the elimination of processing time and fees. Add to this the protection against corruption and tampering, and you’ll start seeing why this can look so attractive. 

What can blockchain be used for?

What’s for sure is that the uses of blockchain go way beyond money transfers. Many people confuse “blockchain” and “Bitcoin”. The difference is pretty simple.

Blockchain is a generic type of technology that has many uses, whereas Bitcoin is a peer-to-peer version of electronic cash also known as a cryptocurrency. The person (or group of people) known by the pseudonym Satoshi Nakamoto developed blockchain for Bitcoin. The aim was to build a secure system to track all Bitcoin movements.

Since then, the technology has evolved. Today blockchain applications could include electronic voting, smart contracts, digitally recorded property assets and health-record management.

While there’s still debate over the efficiency of blockchain in certain fields, certain businesses are set to reap the benefits. These include transaction-based businesses and organisations that thrive from public scrutiny - because the incorruptible nature of blockchain promotes transparency.

To give a few examples, blockchain technology allows businesses to track the movement of goods and their origin. This impacts supply chain management and facilitates quality assurance. The technology can also facilitate accounting by recording transactions and protecting data from tampering.

As the technology evolves, the uses of blockchain are set to expand. While some remain sceptical of this new technology, many are already equipping themselves and their business with the know-how and understanding needed to gain from the benefits it offers. 

Maltese businesses are no exception. Just as the dawn of the internet changed the way of doing business, blockchain promises to do the same. This is a new dawn. 

If you’d like to learn more about how your business can benefit from blockchain, ask one of these law firms listed on Yellow about the legal uses of this technology. 

Take your business to the next level - use yellow.com.mt.