Blockchain is like the gluten diet a few years back; everybody’s into it but nobody’s quite sure why and few people really need it though to those who do it’s important.
I’ll analyze it through the only metric that really matters, value. But before doing that, we need to understand what the it actually is.
Here’s a (hopefully) easy-to-understand primer about what blockchain is. Don’t sweat the terminology; it will make sense in a few hundred words.
When I run my name, Michael Olenick, through the SHA-1 hashing function it returns:
Hashing is a mathematical model that takes information and returns a unique string of letters and numbers. The same input will always return the same string. Different data will never return the same string.
No matter how long or short the data input, the length of the string will be the same. The SHA-1 hash (1) of the entire text of War & Peace is:
There’s vastly more input — the text of the entire book — but the hashed string is the same length. If I hashed a digitized movie, a photo, a contract, or anything else it would return a unique string the same length as my name. And every string would be unique unless the data input was exactly the same. War & Peace will always return the value above but nothing else will.
Getting to blockchain, if I used a prior hash or two plus something else it would make a new entirely unique hash. For examle, if I combine the hash for my name plus the words ” fell asleep reading ” then included the hash for War & Peace I’d get:
If I changed a single letter in War & Peace, or changed anything in my name, or wanted to change ” fell asleep reading ” to ” is intellectually stimulated by ” then the hashed value would change.
Hashing makes it is impossible to change anything without the hashed value also changing.
The heart blockchain is a running series of hashed values using the technique above, a chain. Every item, called a block, in a ledger includes the hash value of the prior items plus the hash value of the new ledger entry. Those combined together create a new hashed value.
Chaining these blocks makes it impossible to change anything in the ledger without invalidating all the following hashed values.
Unlike a regular ledger, the entries need not be only numbers. People can enter entire contracts into the ledger combined with downpayment amounts and digitized signatures. Biometric information like fingerprints can go in. Timestamps can and are entered. Even DNA sequences of, say, plants or animals (sure, and people) can go into the chain of hashed blocks.
How can we ensure somebody wouldn’t change all the prior blocks to distort the entire chain? Each entry in the chain is essentially a receipt. If somebody tried to change a prior entry then all the hashed values on the subsequent entries — all those receipts issued — would become invalid.
We can also demand the chain, or at least the current value of the chain, be made public. That would make it impossible to change the prior blocks without the public impression changing.
Blockchain itself is often tied to an open ledger where anonymous people record transactions and keep the running total. Maintaining this ledger is baked-into Bitcoin mining to incentivize people to keep the ledger. That is, by keeping the ledger there’s a chance to make bitcoins out of thin air; one is generated about every ten minutes.
Back to blockchain … why would ordinary people care about a system where the accounting entries of a ledger could never be changed? For that matter, why would ordinary people care about accounting at all? Accounting classes aren’t exactly the rage. If they were elective, accounting classes would filled with the pocket protector crowd and little else.
Blockchain and Bitcoin were released together in 2009 at the height of the financial crisis. There was an implicit fear that, with the chaos during that time, banks would cheat.
Somebody using the pseudonym Satoshi Nakamoto released Bitcoin and its underlying ledger, blockchain in response. Since blockchain is not controlled by any single entity, there was nobody who could cook the books was the idea.
Of course, the financial system has since healed and trust has been restored. Bitcoin has become a speculative investment. But blockchain — tying together blocks of transactions in chains — really does increase value by raising trust while lowering costs by providing an ongoing audited transaction chain.
All this leads to an obvious question: given that all blockchain does is prevent cheating, and the core hashed ledger is inexpensive to implement, why don’t existing ledgers simply adopt these techniques? Why doesn’t every receipt contain, say, an immutable hashed value of your purchases and also the hashed value confirming payment? I don’t know.
Blockchain and the hashing that underlies it open all sorts of interesting potential applications. Hashing contracts with signatures, terms, and timestamps is an obvious addition. Adding a payment ledger to the mix, a mini-blockchain — itself possibly an entry in a larger blockchain of all entries for a securitized trust – seems obvious and trivial.
There is a lot of hype and, apparently, a lot of money going into blockchain. And some of the hype makes sense; I thought about using it to track the DNA of wood to ensure it was sustainably harvested. It’s easy to imagine stamped email ensuring the sender is who they say they are and, if not — if the email is spam — to quickly delete it. Contracts and land recording are also obvious uses.
But, like most fads, a lot is far-fetched or nonsense. We’re not going to stick every web page on a chain of blocks (interestingly, one of the original purposes of hashing was security for digital rights management — it was and remains universally disliked).
Too much blockchain hype is driven by people who equate interesting technology with value. They’re jumping on a bandwagon because stuff sounds cool, or maybe because there’s a lot of investment capital.
Blockchain is likely here to stay. I can’t really see the purpose of distributed ledgers but, hey, the only thing they’re doing is wasting electricity (albeit quite a bit of it with Bitcoin). Will blockchain change the world? Who knows; predicting the future is dangerous stuff. Might it help reduce fraud and spam? Probably, once the hype dies down when technologists get their act together. Can it increase value while reducing costs? Yes, but it’s important to focus on the applications that do this, not on the technology itself.
(1)Brief but important digression: there are countless hashing algorithms; methods for turning data into a unique string. As computers get faster they get better at guessing what the string might be. In response, the algorithms become stronger. Unless you’re working for the NSA or some equivalent, the details don’t really matter except that SHA-256 is stronger than SHA-1 but they both return a unique string. Most hashing algos are available online, for free, with implementation in the major programming languages. They’re easy to use.