People that are just learning about Bitcoin often think that all transactions are anonymous, insecure and untraceable. After all, cryptocurrency transactions are barely regulated and are conducted over the Internet. However, the anonymous founders of Bitcoin developed a ledger system to track all Bitcoin transactions. This system is known as the blockchain.
Blockchain was originally developed for the sole purpose of tracking Bitcoin transactions. For the last couple of years, it has unexpectedly evolved into something much more. Many developers are exploring new ways to use blockchain technology. Blockchain will probably actually have a much bigger impact on our world than Bitcoin itself because it can be used for many everyday purposes that will impact people that don’t even use Bitcoin.
How Does Blockchain Work?
Every Bitcoin owner has a wallet with two unique cryptographic keys. One key is public to identify his wallet and the other is private and only available to the owner of the wallet. The security of the key is very important because you obviously don’t want anyone else to be able to access your Bitcoins.
Every time you want to send Bitcoins from your wallet, you need to use both your public and private keys to verify the transaction. The private key is necessary to unlock your wallet before you can transfer Bitcoins to another member of the network. The public key is necessary for the Bitcoin network to verify whose wallet it is transferring Bitcoins from. Blockchain computers are responsible for the authentication process.
When you encrypt a transaction, you will create your own digital signature. The signature is unique so blockchain computers will be able to use it to identify that you are the sender.
The signature is determined by the transaction details. If a hacker tried to change the quantity of Bitcoins that you were sending while they were on route, the signature would have to change. As a result, the request from the blockchain server would fail. This makes blockchain one of the most secure encryption solutions in existence.
Blockchain may sound like a fairly simple concept to people that don’t understand the technical nuances behind it. However, it is actually a revolutionary concept. It promotes both full transparency and nearly perfect security. Marc Andreessen, a tycoon that has invested over $50 million in Bitcoin startups, told CoinBase that it is a technology to be reckoned with.
“The practical consequence […is…] for the first time, a way for one Internet user to transfer a unique piece of digital property to another Internet user, such that the transfer is guaranteed to be safe and secure, everyone knows that the transfer has taken place, and nobody can challenge the legitimacy of the transfer. The consequences of this breakthrough are hard to overstate.”
There are a couple unique things about Bitcoin:
- The ledger is developed by the thousands of people that trade Bitcoin every day.
- The blockchain network has a unique digital infrastructure because it is made up of many different computers (nodes). Rather than storing the ledger information on the Internet, all computers share it on their personal servers.
- Every node in the network updates the ledger details on their hard drive after a transaction is processed.
In addition to the unique cryptographic authentication technology behind blockchain, it is harder for hackers to target than a typical website, because the nodes don’t have an identifiable presence on the World Wide Web. Of course, the wallet itself is traceable. The wallet itself could be accessed by a hacker that uses a keylogger, so it is still a good idea for Bitcoin users to hide their identity with a VPN and firewall.
Why is Blockchain so Important?
The technology was originally intended for the Bitcoin community, but plenty of mainstream businesses have started to embrace it as well. Last March, Business Insider reported that the banking industry has started considering using blockchain to make transactions quicker, more resource efficient and more secure.
“The important thing to understand is that it has nothing to do with Bitcoin — at least for Wall Street’s purposes. Blockchain is the technology behind Bitcoin, but it has many other uses too. Wall Street wants to use blockchains to simplify the way it processes transactions. That may not sound very exciting, but if it works, it could eliminate back-office jobs and costs. So it’s worth paying attention to — especially if you’re one of the thousands of people who work in bank back offices.”
Blockchain may also be used for a number of other purposes beyond the financial industry, including:
- Verifying your identity for passports, residency and birth certificates
- Signing smart contracts
- Voting in elections without a paper ballot
- Creating decentralized cloud storage services
There are probably many benefits of blockchain that haven’t even been considered yet. It is likely to change our lives in unprecedented ways.