Blockchain FAQ

In this introductory FAQ, I look at the basics of blockchain.

Q: What is it?

A: Blockchain is a distributed ledger technology that just might be as important as the internet.

Q: Why is that?

A: Its proponents argue that blockchain technology has the potential to revolutionise the exchange of value, just as the internet has revolutionised the exchange of information.

Q: How so?

A: Blockchain aims to creates a system that is distributed (like the internet) but trustworthy (like a central bank).

Q: Specifically?

A: The blockchain is a database hosted on participants' computers. Users of the blockchain download a computer program that connects to other users in a peer-to-peer fashion and synchronises this database. The database contains a ledger. The database is stored in "blocks" of transactions on the ledger. Blockchain makes heavy use of encryption technology. Each block is encrypted, and the act of making a transfer and adding it to a new block, relies on cryptographic principles. Even the notional "value" that is transferred is created and validated using cryptographic principles. Hence the blockchain contains a "cryptocurrency".

Q: That sounds like Bitcoin.

A: Indeed. Blockchain is the name for the generic concept of a cryptographic ledger. The blockchain was first described by its inventor, the pseudonymous Satoshi Nakamoto, in the white paper "Bitcoin: A Peer-to-Peer Electronic Cash System".

Q: Isn't Bitcoin just for anarchists?

A: Bitcoin aims to be a digital equivalent of cash: a fungible and relatively anonymous transfer method. Blockchain and bitcoin have plenty of legitimate and are definitely not "just for anarchists". Bitcoin became popular for philosophical, as much as technology, reasons. Bitcoins are not truly fungible, as their individual history can be traced back through the blockchain. Some people may choose not to accept bitcoin that appear associated with questionable activity, such as known actors on the dark web.

Q: Is it secure?

A: Pretty secure, yes. To send bitcoin, a user must apply his own private encryption key to the public encryption key of the recipient of the bitcoin. This type of cryptography (public-private) is among the most secure methods to transfer information. Users of the blockchain must keep their own private key safe; it acts as a the password to their digital wallet.

Q: Is it accurate?

A: Yes. When a transaction is proposed to be added to a new block, not only do all machines on the network check that the cryptography stacks up (without needing to know the private key of any user), they also check the chain of previous blocks to validate that the bitcoins belong to the sender. This solves the so-called "double-spending problem", and makes sure that each bitcoin is unique.

Q: So, the ledger is public, secure and accurate.

A: Mathematically so. It means that it can - to a degree - be trusted: a great place to store value. Like a coin, a bitcoin has only nominal cost to produce but it can have an ascribed value in a market, based on its scarcity and liquidity. Bitcoin, and other virtual currency such as Ethereum's ether, have become tradable over-the-counter and on-exchange.