What is blockchain?
It is a foundational technology or a platform that allows designing a secure way to record transactions and circulate it among signatories, or any kind of target group with an Internet connection. At its core it is an extremely democratic ledger that cannot be arbitarily manipulated and easily shareable.
Blockchain’s appeal is that it achieves this without a central authority. Blockchain burst into public consciousness because of its association with Satoshi Nakamoto, a mysterious individual or cabal that laid out a white paper on how blockchain could be applied to bitcoin, a virtual currency wrought from the principles of blockchain. Having money free of the fiat of Central governments raised utopian possibilities especially in a world where democracies complain of being subverted and labour and capital continue to be entangled in the elusive quest for equilibrium. Thereafter, it spawned its own hype-cycle, imitation currencies, association with the sordid and Dark Net. While cryptocurrencies have a bad reputation, Silicon Valley tech giants and investment banks are trying to salvage the underlying promise of blockchain and use it for other collaborations.
How does blockchain work?
Every block in a blockchain is a record of transactions and the more of the latter, the longer the chain. Just as worthless paper transforms into valuable currency with the signature of the RBI governor, blocks are great because they provide an unalterable document of the history of every transaction. In the context of currency, it stores the place, time, value (rupee, for example) and location of a purchase. There is minimal identifying information and every block is linked to a unique ‘digital signature’ of the transacting participants. Every block is distinguished from another through a unique code which is a string of numbers. When you use your debit or credit card to make a transaction, VISA or Mastercard employ their technology to verify your bank account, connect with banks and process a transaction.
In blockchain applications, this verifying role is outsourced to several computers on a network — each has the exact same copy of the block. These computers verify the genuineness of transaction by solving mathematical problems that can only be done in brute-force, energy intensive ways that require a lot of computational power, and therefore electricity. This is a key reason why blockchain enthusiasts vouch for the security of blockchain-backed transactions. Depending on where the blockchain technology is deployed, these participating computers or users have to be incentivised for all that energy expenditure.
In the case of bitcoin, the computers are rewarded with bitcoin. This is stored in digital wallets and may be used like money provided there are sellers of real world goods who would accept bitcoins. Nowdays, they are frequently traded as another speculative, volatile asset.
What real world problem does blockchain solve?
As of today nothing, but blockchain backers say it solves the problem of ‘trust’. Because the major cost of any transaction or exchange of services or goods is the act of verification — VISA charges fees to ensure that your card swipe is connected to your account or a property charges you for the effort of ensuring that you are entering into a genuine transaction — blockchain asks you to trust the energy-intensive nature of mathematical problems and have them masquerade them as ‘locks’ to secure your money, confidential documents or any kind of information.