Up until recently, all computer data, anything you can store in a computer, was treated the same way. You copied it to your computer from a floppy disk, a CD, a USB flash drive, or an external hard drive. Then came the internet and you could send and receive files over the network, and cloud storage services. Whichever way you sent or received data, it was all stored in the same way, and so could be shared in any way.
Neither you nor anybody else could know if they were the only person holding that same piece of data, that same document, picture or movie, or if there were two or ten thousand other copies being stored somewhere else. If your computer crashed and you didn't have a backup, you may have been worried that you lost all your data. If you work as a team sharing one document, you couldn't be sure if the file you were using was the most updated one, and so you kept several revisions of the document in your folder, just to be sure.
Computer files then, could be copied, sent and stored by anyone without anyone having a record of where that document came from, where it was stored, what the latest version was and if there were multiple copies being stored somewhere.
Then in early 2009 an invention launched an era in how data is recorded, stored and shared, and although it was simply known as "Bitcoin" at first, the two main branches of the technology became known as "Blockchain" technology and "Cryptocurrency" technology.
How do Blockchain technologies change the way data is recorded, shared and stored?
Cryptography, the area of knowledge that focuses on how data can be hidden, encrypted, so that only the desired recipient can know what the data is, has its roots in military communications going back thousands of years. Creating special symbols to represent letters and words, and the use of smoke signals and drum beats to communicate commands over long distances was how armies could keep their movements coordinated in the field.
However, in some cases when different armies allied in order to face a common threat, the leadership was not always sure that the different armies fighting together would actually do what they were ordered to do. Would both armies advance forward as ordered, or would one hold back in order to let the other army take the brunt of the enemy attack first? Would one army misunderstand an order, or actually act like a double-agent to weaken the alliance in order to strike a peace deal rather than fight to the death for victory as they were ordered?
The idea that leaders could not always be sure that their subordinates received the exact same message is called the Byzantine Generals' Problem.
Blockchain technology is the first technology capable of solving this problem, by proving that a particular message cannot be changed, and secure in that it can only be read by those who have been granted access to it.
At its most basic level, Blockchain technologies use Public - Private Key cryptography, which is a way of locking data so that only those with the private key can open it. Anyone may be able to see the existence of the data, but they have no way of unlocking it.
This data is locked into blocks, which after a certain period of time are connected to each new block that is added to the chain. These blocks are shared with everyone in the network, and another cryptographic function proves that each block in each computer in the network is identical. In short, we now have a way of proving that a piece of data on the blockchain is unique, unchangeable, and only can be accessed by the intended recipient.
In order to ensure that all blocks are identical, there needed to be a way to incentivize this behaviour, and so cryptocurrencies were created to fulfill this function of protecting an open blockchain. When someone helps to protect the network, they receive a token as a reward. As long as there is a significant number of people working to protect the network, rather than working to destroy it, the data is safe.
What does this have to do with Bitcoin?
Bitcoin used this technology to create both the most powerful computer network in the world in under 10 years, but also the most secure financial system the world has ever known. Some accounts in the Bitcoin network contain nearly a billion US dollars of equivalent value in a single account, but so far nobody has figured out how to break into it, no vaults or security guards needed!
Bitcoin and other blockchain-based cryptocurrencies being far more secure than any bank in the entire world has understandably made some banks concerned that their business model will go the way of the dinosaur, and so understandably they've been trying to regulate it, or even keep it out of their country. Other states and countries see the many benefits that embracing such technology will have for their economy in the future.
What about private blockchains?
Some have tried to create private blockchains, ones where only their trusted friends can ensure the security of the network, who do not receive cryptocurrency as a reward. This is similar to the current system of inter-bank money transfer, SWIFT, which used to be quite secure but in recent years has seen some spectacular break-ins. Private networks are much less secure than public ones, which is why we haven't seen any private networks being used to store significant amounts of financial wealth.
So being able to securely record, store and share data, we have entered a new era where some forms of less-important data can be shared freely with anyone, while more important data, usually data related to money and assets, can be shared only with those we want to share them with. Blockchain and cryptocurrency technologies work together to keep this new network safe and secure.
The writer is Blockchain Evangelist, Pundi X.
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