On Nov 5, Reliance received India's first payment using blockchain. Though blockchain-powered virtual currencies are banned in India, the underlying technology has immense potential across several industries. A look at the basics of blockchain and its future.
Don't blockchains have something to do with Bitcoin?
Indeed. The first blockchain was the database on which every Bitcoin transaction was stored. Since Bitcoin began in 2009, the blockchain has come to hold over 160 gigabytes worth of data.
Why is it called a blockchain?
In the original documents describing Bitcoin, the virtual currency's new database was not referred to as a blockchain. But it got that name over time because all of the transactions coming onto the network were grouped into blocks of data and then chained together using sophisticated math. That makes it hard to go back and rewrite or monkey with the older records.
How is blockchain different from other transaction databases?
Most databases used to keep financial records are maintained by a central institution. Banks, for instance, are responsible for keeping track of the money in all of its customers‚?? accounts. With Bitcoin's blockchain database, the ledger is kept and updated communally by all the computers that are hooked into the Bitcoin network.
The shared nature of Bitcoin was useful for the virtual currency because its shadowy creator, known as Satoshi Nakamoto, wanted to create a currency with no central authority. Because records are kept communally, no one computer or institution is in charge. If any one computer keeping the records is hacked or knocked offline, the others can go on without it.
Are all the blockchain projects tied to Bitcoin in some way?
No. Most blockchains have nothing to do with Bitcoin. After the Bitcoin blockchain had operated for a number of years, many wondered if the design of the Bitcoin blockchain might be replicated to create other kinds of secure ledgers, unrelated to Bitcoin.
Are blockchains used only to record virtual currency transactions?
Most of the early efforts to imitate the Bitcoin blockchain were done by programmers looking to create virtual currencies with slightly different features from Bitcoin. Over time, some of these new virtual currencies added on significant new features that updated the blockchain concept so it could handle more kinds of information.
More recently, many companies and governments have been interested in using blockchains to store data that has nothing to do with transactions of any sort. While banks are building blockchains that can track payments between accounts, governments are experimenting with using blockchains to store property records and votes.
Why are companies excited about it?
There are several limitations that come with the old way of keeping data, with a single authority responsible for all the updates. If that authority gets compromised by a hacker, or even by natural disaster, the people relying on that database can lose access to all their data. With a blockchain, all the people relying on the database can keep and update their own copy of the data.
Can anyone join any blockchain and help update the records?
With most large virtual currencies, anyone can join in and see and help maintain the records. These are called public blockchains. This system has made many big players looking at the technology uncomfortable. Consequently, most corporations and governments have worked with private blockchains, which only approved computers can see and join.
Don't thefts involving Bitcoin show that blockchains aren't secure?
Most thefts involving virtual currencies are a result of having its password, or private key, stolen or hacked. Virtual currencies are particularly vulnerable to this kind of attack because once a hacker moves money out of a wallet, there is no central authority to move it back. While private keys are a security vulnerability, blockchains are generally more secure against attacks in which a bad actor tries to change the records in the database. Because of the way blocks are chained together, it is obvious when someone has tampered with old records.
Do we know if blockchains are better than old ways of recording data?
We don't, really. Virtual currencies have shown that blockchains can work at some level, but they also come with significant downsides. Because all the computers on the network have to record every transaction, there are limits to how much data blockchains have been able to process. Many critics of the blockchain design have said the inefficiencies in keeping data communally are likely to make blockchains unattractive.
At this point, aside from the big virtual currencies, few blockchains have been battle tested in the real world.