Cryptocurrencies like Bitcoin are supposed to revolutionize our monetary system. But the blockchain, the technology behind it, is much more than that: it could make supply chains more transparent and global trade more secure, reduce corruption and bureaucracy – and replace your wallet. But is the technology rightly so exciting? We explain what’s behind it.
Bitcoin was born
It all started mysteriously – with a name that, to this day, nobody knows who it belongs to, Satoshi Nakamoto.
They published a paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System” in 2008. The idea describes a digital currency that can be sent anonymously, a monetary system that is not controlled by a state authority – as is often the case today – but by an extensive public network.
Bitcoin was born, a cryptocurrency that makes it possible to send digital money directly from person to person – without central authorities such as banks intervening. Today, Bitcoin is more of an investment than a means of payment, mainly because of the high prices, but it is still probably the best-known application of blockchain technology.
More Than a Cryptocurrency
There are now many other cryptocurrencies in addition to Bitcoin: Ethereum, Cardano, Solana – to name a few – and many ideas for blockchain applications that have nothing to do with money transfer. In principle, any information can be stored and managed on a blockchain, for example, proof of ownership of art, music or houses, freight books, proof of certificates, and even identities.
While such information is traditionally stored centrally in an actor’s database – for example, at a bank, a notary, a supermarket, or an authority – all information is stored decentrally on a blockchain. The information is therefore distributed across many, sometimes thousands of computers that form the blockchain network.
Put, the blockchain is a tool with which data can be stored and managed – comparable to an accountant who keeps a register and writes new entries in his table every day: This creates a list of data that keeps getting longer. Chain), and which are stored together in blocks, the blockchain. Because every computer on the blockchain network has an exact copy of all stored data, many computers collectively take on the accountant role, if you will.
The Benefits of The Blockchain
In a classic database, entries can be changed later due to technical errors and by individuals deliberately. That doesn’t work with a blockchain – precisely because it has a decentralized structure. So if the information stored on a computer is subsequently changed or even deleted, this is immediately noticeable – since there are still many identical copies of the blockchain on the other computers in the network.
This means that what has once been written into the blockchain can no longer be overwritten or deleted, making the technology counterfeit-proof.
Each new piece of information to be stored on the blockchain, i.e. each new block, is also encrypted. For this purpose, a hash value is generated – a unique mathematical key, a kind of fingerprint of the data block – which links the individual blocks together. This means that all actions stored on a blockchain – every certificate, every title deed, every transaction – can be traced back precisely.
By storing data in encrypted form on many computers, the blockchain technically creates trust, for which we have previously needed actors who act as intermediaries: banks that guarantee that a banknote is genuine; polling stations that ensure that only those who are eligible to vote end up in the ballot box; Notaries who certify that we are the owners of a house. According to various forecasts, the blockchain could (theoretically) replace central players such as banks, authorities or notaries.
The idea for some blockchain applications goes so far that it is not people who write new data on the blockchain but machines. Let’s assume that a product can only be manufactured at a specific temperature, which is essential for quality. The machine can measure this using a temperature sensor, automatically write the value to the blockchain, and, if necessary, transmit it to a machine that will carry out the following process step – provided that the temperature is in the appropriate range. This way, automatic quality control occurs, and the production process is documented in a forgery-proof manner via the machines involved. Since there are now many processes in which machines (semi)automatically control production,
In the end, using blockchain applications could always make sense when many players are involved and need a trustworthy system. In supply chains of goods, for example, which often involve many parties and subcontractors who often do not know each other. Blockchain technology is also used in the federal government’s “Digital Identities” project. Here companies are working on a kind of digital wallet that can be stored on the cell phone and contains all the evidence that we have in the average wallet today, from driver’s licenses to ID cards. In this way, we should be able to identify ourselves more efficiently – and forgery-proof.
The Limits of The Blockchain
What was once written in the blockchain is forgery-proof – but the blockchain does not guarantee that information is accurate. Theoretically, incorrect data can also be stored in a blockchain. For example, a bad grade can be transferred to a digital certificate – and the blockchain would still guarantee the certificate’s authenticity.
In addition, some blockchain applications, such as Bitcoin, consume vast amounts of energy. According to estimates by Cambridge University, it currently uses about as much energy as the Netherlands consumes in a year to operate the Bitcoin network alone. The reason is that all computers in the network must solve a complicated calculation before a computer can finally write a new transaction on the blockchain. This proof-of-work mechanism – a special algorithm that regulates write permission – ensures that Bitcoin transactions on the blockchain require a lot of electricity and thus – depending on how the electricity is generated – also causes CO2. But some mechanisms secure a blockchain differently and consume much less energy (e.g. proof-of-stake or proof-of-authority).
Many applications currently being developed for the blockchain work according to these less power-intensive mechanisms. Another difference: they are often based on a private or restricted blockchain, a “trusted consortium” – as it is often called. Unlike Bitcoin, for example, not every computer can participate in the network. Although there is no central actor in a consortium who controls everything, the data is also distributed on different servers here – but they may belong to companies, administrations, or the state. As some players are announcing, many new blockchain applications do not offer a complete farewell to intermediaries.
How To Proceed With Blockchain
A lot has happened since bitcoin was born in 2008, not just in the area of cryptocurrencies. Many start-ups and companies are currently working on blockchain applications, and the number of projects is increasing yearly. However, many blockchain projects are still in their infancy. They are far from being used in everyday life – some ideas only exist on paper so far.
While some sing the praises of the blockchain and attribute the same importance to the technology as artificial intelligence, others do not believe that the blockchain will replace all the central players in our society – such as banks, notaries or land registries. Somewhat, blockchain as technology could change many vital processes that require certificates of authenticity and run in the background – invisible to most.
Also Read: Blockchain Importance Is Growing Every Day & Its Benefits For Companies And Countries