Bitcoin cryptocurrency and other types of digital currencies are an emergent property of a blockchain ledger.
For those who are unfamiliar with the terminology, the interconnected concepts of cryptocurrency and the blockchain technology that makes it possible can be more than a little confusing. The facts are a little easier to understand if a gradual approach is taken starting with the foundation and working towards a high-level understanding of how the two terms are related, and what each means independently of the other.
Cryptography is the key element in both blockchains and digital currency like bitcoin cryptocurrency. It is the mechanism by which data becomes unique and uncopyable. Without cryptography, copying data is a simple matter of setting these bits to match those bits. With a cipher, however, in order to know what the original data is, you need a key. This is what makes it possible to secure a digital ledger, and it is how the blockchain was born.
21st Century Stone Tablets
Imagine it were possible to write something that can’t ever be altered. Ancient civilizations made this happen by carving messages into rock or stamping them into metal plates. Today, although it is possible to print a document and guarantee its authenticity, the practical considerations make it less than convenient.
So a group of programmers got together and said “what if we set up a peer-to-peer ledger?” Simple enough. Any computer can write to the ledger, any computer can read from it. But the question was how do we make sure nobody tampers with it?
The only way to make data unalterable is to encrypt it. Encryption is simply a means by which a data stream is turned into a different data stream through the use of a key. Without the key, the new data is gibberish. With the key, the new data can be turned back into the old data.
In the blockchain, each entry is secured with its own key, and each of those keys is related to the other entries in the ledger. Altering one would cause the entire series to unravel. This is why it is called a chain. The programming analog is the elementary data structure known as the linked list.
Bitcoin cryptocurrency and other types of digital currencies are an emergent property of a blockchain ledger. If you have a digital record of transactions that can’t be altered without solving a completely unsolvable math problem, then you can have a financial transaction between two completely anonymous people that can’t ever be changed, altered or mistaken for something else.
All that is necessary to keep the ledger accurate is an agreement between all participants in the blockchain infrastructure that a certain number of currency units are available for all to spend, and that any transaction must be recorded in the chain in a standardized manner. It’s really no different than a bank’s balance sheet, if the bank were being run by its customers. The agreed-upon supply of currency is controlled by a very complex math problem which makes new units available on a slowly degrading curve over time.
The encryption in the system renders the potential for tampering impossible, since any one participant in the chain would need to harness unattainable processing power in order to unravel the ledger, alter one transaction and then reconstruct the entire record in order to match what all the other participants expect.
Of course this leaves aside all of the mature technologies already available to verify the integrity of nearly any data image from a single file up to an entire hard drive’s capacity. If a blockchain were modified in any way, it would become immediately obvious to any single computer in the system capable of seeing the altered portion of the record.
Naturally, blockchain technology itself is applicable to any kind of record-keeping task. Modifying it so it can record say, building permits or law licenses is a simple matter of altering the standardized set of records it maintains. Since nearly any information can be digitized, this information can include just about anything from text to photographs to recordings of voices and so on.
Encryption is the key to the blockchain infrastructure. It is likely to become one of the most important digital technologies for this and many other reasons. Inventions like digital currency are only the beginning.
This article first appeared on Magneticmag.com