How Does Blockchain Work? The Technology Behind Bitcoin

The very first execution of the blockchain technology took place in 2009 and corresponded to the transaction of Bitcoin, which made it the first digital currency. Until the end of 2013, the general public focus remained on cryptocurrencies, but this changed when at the beginning of 2014 the “R3”, blockchain software development company, was founded. R3 explores and implements the blockchain technology in the financial markets. The following blockchain 2.0 era has unfolded new horizons by implementing the technology in the form of smart contracts, cloud storages, digital identity, and smart properties.

The technology behind is a list of records, called blocks, which are interlinked and secured. Each block links to the previous one and contains a timestamp and transaction data. The growing blockchain is managed in a network, in which new blocks must be validated by a consensus of multiple yet equal parties. This improves the accuracy and reliability of the data while breaking down the traditional mechanisms, in which a mediator is required. This makes the technology suitable for those networks in which multiple parties are required, such as in supply chains or financial markets.

Agreed and recorded transactions cannot be changed, making the blockchain immune from any intervention, which allows to track the whole lifeline of a single transaction. Moreover, regulatory compliance is easier as a blockchain is always credible and fully auditable – this makes corruption less likely to emerge. The unique technology with its features exposes the Trust, the world’s most impactful economic power, at the risk of falling into disrepair.

However, the maintenance of a blockchain is both expensive and not eco–friendly due to the high electricity consumption. The creation of one block today costs over $40000 whereas in January 2018 the price was around $15,000. Another issue is the speed of transactions: the technology is far away from the level of the global enterprises, i.e. Visa does around 1,700 transactions per second while Bitcoin only 4.2 as on the 8th of January, which makes the proliferation of the technology among the top enterprises yet not likely.

According to its characteristics, a blockchain is a suitable solution over a traditional database, if there are multiple writers, if not all of them are trusted and/or known. A great use of the technology can be extracted in the shipping industry: the end-to-end lifecycle of a physical good cab be tracked by the whole network of a value chain up to a final consumer.

This does not mean solely the literacy of managing data, but also if there is a risk with the product, the complete transparency of a blockchain enables an effective issue resolution.

Blockchain is also beneficial in a form of digital identity. Online transactions usually require a high level of security, online identity verification or face-to-face authentication. The blockchain in return does not require a verification again and again; it allows the user to employ an already registered identity.

It has the potential to be a power at any financial system. For instance, payments that are processed cross borders usually take time and often have multiple fees, since several intermediaries are involved. But blockchain offers an easy and secure solution without third parties, fees, and in no time.

Another possible application of the technology is Smart Properties. A blockchain can be used for controlling the ownership of any physical asset such as cars or houses, but also non-physical assets for example access rights to a computer. Blockchain technology is a gold mine for asset management. Whilst there are several intermediaries involved in a traditional contract when buying a house (a lawyer to prepare the contract, an insurance company, and a notary to validate the transfer, for instance) if the transaction is executed with a smart contract, the intermediaries are removed without any effect on security.

With the use of technology, it is also possible to securely store documents, files, and data while providing trusted access to multiple parties. It is undoubtfully much more advantageable over current databases since it is theoretically impossible to hack a correctly implemented blockchain, which makes the technology vital for some top organizations among which is the World Food Program. In the future, even voting can be carried out on blockchain technology, and some start-ups are already trying to develop this idea.

Researchers and entrepreneurs, start-ups, and large companies have been implementing the technology in a variety of ways. Its potential is in creating a highly efficient and globalized financial infrastructure, in which multiple traditional layers of mediation and control can be replaced by transparent and immutable IT rules of the blockchain technology.

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