There are few subjects about which so much has been written in the past five years as bitcoin. Now that the hype surrounding this virtual currency, not to mention investor and user interest, has died down somewhat, the financial sector is focusing on the blockchain, the ingenious technology behind bitcoin.
Outside the financial sector, however, there are countless possible applications for blockchain technology as well. Indeed, some even compare its revolutionary potential to that of the Internet.
This first post describes the ingenious mechanism behind bitcoin in plain language. In the coming weeks, we'll elaborate on a number of possible blockchain applications and their economic impact, in particular for the legal profession.
The Fifth Paradigm Shift in Computing
Blockchain is heralded as the fifth major paradigm shift in computing, after mainframes, personal computers, the Internet and social networks, as it will once again significantly change our way of living and working. Even though it has become difficult to imagine life without these technologies, our knowledge of how they function and their underlying mechanisms is still very limited. After all, it's not necessary to have more than a basic understanding to make full use of these technologies and appreciate their benefits. Nevertheless, a world of opportunities awaits those who fully understand how they work.
For the time being, blockchain technology is used only on the virtual currency market. Therefore, it remains a highly abstract concept for most of us. Below we provide a simple explanation of the blockchain, how it works, and its advantages and disadvantages.
A Decentralised Register
In simple terms, a blockchain is a digital, publicly accessible ledger or register. All transactions involving bitcoin are saved in the register, and anyone with the access codes can verify ownership of the virtual currency at any time. That's pretty much it. However, it's necessary to dig a little deeper to reveal the advantages and future perspectives of this new technology.
Blockchain's revolutionary character lies in the fact that it is decentralised, meaning it operates independently of a central authority, such as a central bank or notary. This ensures significantly faster and cheaper settlement of transactions, and a trustworthy central party is no longer necessary.
Decentralisation is achieved by automatically saving a copy of the entire register (i.e. the blockchain) on the computer of each network member upon accession and when any change is made. As every member has an updated copy of the blockchain at all times and transactions are measured against the latest version before being validated, fraud is rendered practically impossible. The blockchain derives its name from the chain formed by a succession of blocks of transactions.
The blockchain was originally developed to enable the creation of and trade in bitcoin. However, it soon became clear that the technology had many more possible applications.
In a recent report, the World Economic Forum identified distributed trust as one of the six technological mega-trends which will shape our society going forward. Indeed, the blockchain technology replaces the need for a central party to provide trust for financial, contract and voting activities.
The abovementioned application possibilities illustrate what could be called blockchain 2.0. The premise behind this second-generation decentralised register is that it should be possible to record any form of ownership or identification in the blockchain.