The goal of blockchain is to allow digital information to be recorded and distributed, but not edited. That concept can be difficult to wrap our heads around without seeing the technology in action, so let’s take a look at how the earliest application of blockchain technology actually works.
Here’s how it works.
When it comes to printed money, the use of printed currency is regulated and verified by a central authority, usually a bank or government—but Bitcoin is not controlled by anyone. Instead, transactions made in bitcoin are verified by a network of computers. This is what is meant by the Bitcoin network and blockchain being “decentralized.”
Public and Private Key Basics
Here’s the ELI5—“Explain it Like I’m 5”—version. You can think of a public key as a school locker and the private key as the locker combination. Teachers, students, and even your crush can insert letters and notes through the opening in your locker. However, the only person that can retrieve the contents of the mailbox is the one that has the unique key. It should be noted, however, that while school locker combinations are kept in the principal’s office, there is no central database that keeps track of a blockchain network’s private keys. If a user misplaces their private key, they will lose access to their bitcoin wallet, as was the case with this man who made national headlines in December of 2017.
A Single Public Chain
In the Bitcoin network, the blockchain is not only shared and maintained by a public network of users—but it is also agreed upon. When users join the network, their connected computer receives a copy of the blockchain that is updated whenever a new block of transactions is added. But what if, through human error or the efforts of a hacker, one user’s copy of the blockchain manipulated to be different from every other copy of the blockchain?
The blockchain protocol discourages the existence of multiple blockchains through a process called “consensus.” In the presence of multiple, differing copies of the blockchain, the consensus protocol will adopt the longest chain available. More users on a blockchain mean that blocks can be added to the end of the chain quicker. By that logic, the blockchain of record will always be the one that most users trust. The consensus protocol is one of blockchain technology’s greatest strengths but also allows for one of its greatest weaknesses.
Theoretically, it is possible for a hacker to take advantage of the majority rule in what is referred to as a 51% attack. Here’s how it would happen. Let’s say that there are five million computers on the Bitcoin network, a gross understatement for sure but an easy enough number to divide. In order to achieve a majority on the network, a hacker would need to control at least 2.5 million and one of those computers. In doing so, an attacker or group of attackers could interfere with the process of recording new transactions. They could send a transaction—and then reverse it, making it appear as though they still had the coin they just spent. This vulnerability, known as double-spending, is the digital equivalent of a perfect counterfeit and would enable users to spend their bitcoins twice.
Such an attack is extremely difficult to execute for a blockchain of Bitcoin’s scale, as it would require an attacker to gain control of millions of computers. When Bitcoin was first founded in 2009 and its users numbered in the dozens, it would have been easier for an attacker to control a majority of computational power in the network. This defining characteristic of blockchain has been flagged as one weakness for fledgling cryptocurrencies.
User fear of 51% attacks can actually limit monopolies from forming on the blockchain. In “Digital Gold: Bitcoin and the Inside Story of the Misfits and Millionaires Trying to Reinvent Money,” New York Times journalist Nathaniel Popper writes of how a group of users, called “Bitfury,” pooled thousands of high-powered computers together to gain a competitive edge on the blockchain. Their goal was to mine as many blocks as possible and earn bitcoin, which at the time were valued at approximately $700 each.
By March 2014, however, Bitfury was positioned to exceed 50% of the blockchain network’s total computational power. Instead of continuing to increase its hold over the network, the group elected to self-regulate itself and vowed never to go above 40%. Bitfury knew that if they chose to continue increasing their control over the network, bitcoin’s value would fall as users sold off their coins in preparation for the possibility of a 51% attack. In other words, if users lose their faith in the blockchain network, the information on that network risks becoming completely worthless. Blockchain users, then, can only increase their computational power to a point before they begin to lose money.
Blockchain’s Practical Application
Blocks on the blockchain store data about monetary transactions—we’ve got that out of the way. But it turns out that blockchain is actually a pretty reliable way of storing data about other types of transactions, as well. In fact, blockchain technology can be used to store data about property exchanges, stops in a supply chain, and even votes for a candidate.