IT IS COMMON, in tech circles, to hear a business pitch that is simultaneously simple and baffling. “It is going to be like “X” [insert the name of any successful business], but on a blockchain.” The eager entrepreneur is quick to assume that everyone is both familiar with the technology and agrees on its merits. But what is a blockchain? And what are the benefits of using it meant to be?
A blockchain is a database that contains the history of whatever information it was designed to store. It is made up of a string of “blocks” of information that build on top of one another in an immutable chain. Bitcoin, one of the first blockchains, was built in 2009. It stores data on transactions in bitcoin, providing proof of who owns what at any time. What distinguishes a blockchain from other databases is that its ledger is distributed, publicly available and replicated on thousands of computers—or “nodes”—around the world. Rather than a centralised entity, like a bank or a tech platform, ensuring that the ledger is accurate, it is verified by a decentralised network of individuals.
Though Bitcoin’s blockchain is public, it is also trustworthy and secure. This is guaranteed by the mixture of mathematical subtlety and computational brute force built into its “consensus mechanism”, the process by which the nodes verify new transactions and add them to the blockchain. Computers race to solve a cryptographic problem—the first to do so wins newly mined coins—and a new block is added.
Newer blockchains, like Ethereum, store more information, such as lines of computer code. A function or application that can be programmed in code can be guaranteed to operate as written. The Ethereum blockchain offers proof that the code was executed. Developers can write conditional code—software that executes after a certain trigger—making it possible to set up “smart contracts” about future events.
Unlike private networks, open, public blockchains are transparent (anyone can view them), permissionless (anyone can use them) and censorship-resistant (no one can stop them). But because they demand consensus, they can be slow and complex to build. Building applications that conduct financial activities and distribute digital content on top of a blockchain can therefore be trickier than operating through trusted intermediaries. Building “X” on a blockchain may be sensible, but is easier said than done.
This article appeared in the Briefing section of the print edition under the headline “Building consensus”