Cryptocurrencies such as Bitcoin and Ethereum have been both lauded and criticized recently. However, the one thing everyone can agree on is that the technology behind these cryptocurrencies, called “blockchain,” is a useful innovation that’s here to stay. So what exactly is a blockchain?
At its simplest, a blockchain is a decentralized ledger system. For example, Bitcoin uses a blockchain to keep track of financial transactions. Instead of relying on a central bank, Bitcoin relies on its network of individual computers (sometimes called “nodes”). The entire network of computers forms a sort of chain, each verifying the other’s data. This makes it nearly impossible to corrupt the entire network. To date, any known problems with the Bitcoin blockchain have come from either malicious intent or human coding error – not a failure in the technology’s concept.
However, Bitcoin is just one use of blockchain technology. A blockchain could conceivably ledger any data at all. From music and art to scientific data, the blockchain cuts out the need for a middleman now more than ever through its capability to enforce “smart contracts.”
“Smart contracts” are coded into a blockchain system to automatically execute a transaction once certain conditions are met. For example, if musicians put all their music onto a blockchain, they could decide exactly how much they would like to charge for their music. A program could be coded onto the blockchain to automatically pay the musicians when their music is downloaded.
The blockchain, in this case, gives the infrastructure needed for a true peer-to-peer economy. The musicians sell directly to their fans instead of through a record label. An author could sell directly to consumers instead of through a publishing house, or Amazon. Blockchain can also help improve government’s efficiency and transform the energy grid.