Blockchain seems to be one of the bigger buzzwords you hear of these days. But while you may (kind of) understand what it is, do you really know how it works and how it can benefit you as an individual? With the online landscape evolving and gradually favouring decentralised platforms, you will find that sooner or later many services you use will be using blockchain too.
So to help you make a more informed decision about the technology and uses, we’ve put together this guide to help you understand how it can affect you. We break down and explain how the technology works, and how it can help you gain more control over your personal data. Because with more control comes more responsibility, and we must be clear on how it all works.
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The emergence of blockchain began in 2008 when the individual (or group) known as Satoshi Nakamoto released Bitcoin and the first blockchain database. The initial white paper discusses how financial transactions (with Bitcoin) are made possible without using a third party (like a bank), but still remain secure. Now before we dive into how this is possible, it’s important to understand a few key terms first.
At a high level, blockchain is defined as “a decentralised ledger containing monetary [or data] transactions across a P2P network.... contain[ing] a set of rules and protocols that facilitates transactions.” From this, we can understand that blockchain facilitates the transfer of data or (most commonly) cryptocurrency, and creates a record of these transactions that cannot be changed once they’ve been ”hashed” (or created).
Each hashed transaction is described as a block, so when a new transaction occurs it is linked to the previous block in the chain to inevitably create a blockchain.
|Decentralised||You’ll quite often hear the term “decentralised” in blockchain lingo, so what is actually meant by it? Decentralised is formally defined as the “transfer of decision making power and assignment of accountability and responsibility for results.” In the case of blockchain, this is simply referring to it’s peer-to-peer nature, where individuals are in control of the transfer of data without the need for a third party to validate the transaction or manage their data.
|Miners||Before a transaction can be finalised from you to me and stored on the blockchain, it must be validated on the network by “miners”. Miners are “a specific set of users on the blockchain network who have a copy of the public ledger and who computationally verify and validate transactions before locking them with a hash and storing them in blocks inside a blockchain.” These people are compensated for their work financially, but do not have access to the details of your blockchain transaction
|Hashing||Hashing is the process of developing the random number used to validate each blockchain transaction, and applying it to the transaction (or data block). Hashing the transaction is a critical step, as it ties the new transaction to the rest of the blockchain.|
When transacting cryptocurrency or data on the blockchain, the request needs to go through a set of steps to ensure it is validated, secure and compliant. Satoshi Nakamoto describes the possibility of the process by; “timestamp(ing) transactions by hashing them into an ongoing chain of hash-based proof-of-work, forming a record that cannot be changed without redoing the proof-of-work.” Put simply, this means:
1. You send an encrypted transaction request into the blockchain to send me two bitcoins. These bitcoins are yours and no one else has access to your account.
2. Miners in the blockchain receive a notification and verify the transaction, to create a new block for the blockchain.
3. Miners hash the transaction using a complex computer generated number. This secures the data, and provides the all important link to the chain.
4. The miner’s work is checked by other miners in the network before final validation.
5. The transaction (block) is added to the blockchain with transaction data and number.
6. I receive and decrypt the two bitcoin transaction from you via our crypto wallets.
Blockchain is so secure because it uses multiple techniques to keep your data safe. These are described below.
1. The chain: Because each block in the chain is connected, if anyone was to alter data from a transaction they’d have to alter every block in that chain. In the verification process, blocks become bound to each other using the complex computer generated number.
2. Cryptography: Users in the network all have their own public and private keys which allows encryption and decryption of data at the beginning and end of the transaction. This means any miners won’t see your transaction data, and alerts will be sent if someone tries to alter the data without the appropriate keys.
3. Decentralisation: The P2P nature of blockchain and the data being treated as separate linked transactions, means that data is not stored in any one place but multiple places with multiple entry points. This would then require hackers to need a number of computers to pinpoint and attack the multiple locations that the data is stored to successfully hack a blockchain. In saying this, the larger the network is the more secure your data will be.
4. Nodes: The network of computers in the blockchain network is known as nodes. These nodes all store a copy of the database (where is copy is regularly synced simultaneously) and a set of rules (called the consensus protocol). No one node has the power to alter the data or to examine changes.
Now that you hopefully have a better understanding of what blockchain is and how it works, we will dive into they ways it can be used by individuals - more specifically, how it can help you manage your online identity.
With the recent Cambridge Analytica scandal via Facebook, the question was raised around who actually owns your data - particularly online. As more and more individuals move to using digital platforms to manage various aspects of their lives, more and more personal data is given to a number of organisations.
If you’ve ever taken the time to dutifully read the terms and conditions when you sign up to and use yet another site, you will notice that any data you provide can be used by the organisation for things like marketing, advertising, location reporting, website personalisation, behavioural preferences, and more (and this includes the way you browse their site). However, most people are not aware of these details and unknowingly give their personal data away while organisations use it.
While technically these organisations are not doing anything wrong, it does highlight a grey area of data ownership and lessens individuals’ confidence in using online platforms and understanding how and what data is being used.
There are many reasons why blockchain can provide a solution for both individuals and organisations, that helps them manage data more securely and easily - most of which we have touched on earlier. These reasons include:
The security of blockchain for managing data and online transactions is far more secure than a centrally managed system via third parties. This is the number one reason that many organisations are moving to using blockchain for the safe transfer and storage of data. This is also a drawcard for individuals, as they can be confident that their data is safely being managed online with improved fraud prevention capabilities.
The P2P nature of blockchain gives ownership of data back to the individual. Instead of relying on third parties to store their data, individuals can access their data whenever they like without taking days to receive it. Once an individual has registered their identity on the blockchain, they won’t need to create a new registration for every service they interact with. They also have the ability to see all their data, and share what they like with organisations or individuals as necessary via a data transaction.
While being incredibly secure, data stored on blockchain is very transparent. Once an organisation requests (for example) the financial history of an individual, they will be able to see any relevant transactions while having confidence that they are not fraudulent. And the individual can have confidence that they still own this data while not giving away any information unintentionally.