On its most basic level, the blockchain is a new class of information technology that combines encryption methods with distributed computing, both of which have existed for a number of decades. It was the genius of Satoshi Nakamoto to combine them in new ways to create a model where a network of computers collaborate to maintain a shared and secure database. As such we can say that the blockchain as a technology is simply a distributed secure database.
This database consists of a string of blocks each one a record of data that has been encrypted and given a unique identifier called a hash. Mining computers on the network validate transactions, add them to the block they are building, and then broadcast the completed block to other nodes so that all have a copy of the database. Because there is no centralized component to verify the validity of the alterations to the database the blockchain depends upon a distributed consensus algorithm. In order to make an entry on to the blockchain database, all the computers have to agree about its state so that no one computer can make an alteration without the consensus of the others. Once completed, a block goes into the blockchain as a permanent record. Each time a block gets completed, a new one is generated. There is a countless number of such blocks in the blockchain, connected to each other, like links in a chain in proper linear, chronological order. The blockchain was designed so these transactions are immutable, meaning they cannot be deleted. Every block contains a hash value that is dependent on the hash of the previous block, so they are all linked meaning if one is changed then all the other blocks linked to it going forward will be altered. This works to make the data entered tamper-proof.
What we have described here is the workings of the first generation blockchain which functions largely just as a database. But the technology is evolving to become much more than this as the second generation already provides the capacity to execute any computer code on the blockchain. The system is evolving to become a globally distributed cloud computing infrastructure. But as we will discuss in a future module it remains very much a work in progress when seen from this perspective.
Blockchain technology works to create a permanent and secure database, this makes blockchains suitable for the storage of a record or transaction that involves value or in some way needs to be a secure and trusted source of information. These secure distributed records are called distributed ledgers. A distributed ledger is a consensus of replicated, shared, and synchronized digital data geographically spread across multiple sites, countries, or institutions without central administrator or centralized data storage, being maintained by a distributed network of computers. Such ledgers can be used for any form of asset registry, inventory, or monetary transaction. This might include the recording of hard assets such as physical property, cars, homes etc. or intangible assets such as currencies, patents, votes, identity, health data and many other forms of information.
This distributed ledger technology enables us to replace a multiplicity of private databases within each organization with one shared database that is trusted and accessible by all parties concerned. In this respect the blockchain enables trust between parties that may otherwise not trust each other, the result greatly strengthening our capacity for collaboration between organizations and individuals peer-to-peer without dependency on third-party centralized institutions. Likewise, they result in transparency and many other efficiencies.
This is of major significance as we currently have many centralized organizations that may be internally optimized and efficient but the inter-organizational space in between them is really inefficient with huge amounts of border friction, redundancy, arbitrage and resources wasted on competition, by enabling trusted inter-organizational networks these ledgers enable the formation of organization and collaboration where previously there was none, such as across whole supply chains, for different health care providers to collaborate around the patients needs or for different transport providers to coordinate in delivering an integrated logistics solution.
Likewise, the blockchain offers the possibility to automate the workings of these networks via what are called smart contracts. Smart contracts are computer code that is stored inside of a blockchain which encodes contractual agreements. Smart contracts are self-executing contracts with the terms of the agreement or operation directly written into lines of code which are stored and executed on the blockchain. Like normal computer programs, these containers hold algorithms that take an input of data and depending on the value of the input trigger certain events. For example, this might be a financial contract that takes as the input the amount of money in a person’s account if it is above a certain level then it increases the interest rate they earn on the deposit. Such smart contracts can be used for automating many basic operations on the network once again working to remove the need for intermediary third-party institutions, as smart contracts can be trusted, are tamper proof and execute automatically.
Much of the current discussion surrounding blockchain remains at the level of the technology and the possibilities of distributed ledgers as a shared trusted database enabling the collaboration between organizations with the resulting disintermediation of centralized institutions like banks and exchanges. However its implications go far beyond this as the blockchain concept is more than just a database or ledger; it is a new organizing paradigm for the discovery, valuation, and transfer of all discrete units of value and the development of distributed organizations via token markets systems.
A token is a quantified unit of value that is recorded on the blockchain, this value may be of any kind, it might be likes on social media, it might be a currency, it might be the integrity of an ecosystem or an electrical unit. Token economies consist of a network of independent nodes that act autonomously, but through incentive structures and the signaling systems of the market self-organize to create emergent coordination and thus a distributed management system. For example, we might have a clean air token, where anyone who provides a service that contributes to the maintenance and provision of clean air can earn tokens – by say planting trees – while those who pollute – by say operating a combustion engine – pay in air tokens. Thus instead of having a central authority and a clean air act, we have a token market that works to create signals that align people’s incentives with maintaining and growing the underlying resource.
Likewise, this same model can be applied to the management of technology infrastructure. As an example we can think of traffic control, we currently have traffic control systems in cities whose operations are monitored and optimized by a centralized control center. But in a world of autonomous vehicles and the blockchain cars could signal to each other peer-to-peer bidding tokens to see who gets priority. In such a way the system has dynamically allocated resources and self-organized via the distributed token network.
In short, it is not just an information technology but also an institutional technology in that it enables us to design incentive structures in the form of token economies and in such a way convert centralized organizations into distributed markets vai token economics. This is where things get complex as we move into the realm of designing economies and incentive systems for coordinating human activity in a decentralized fashion, something that could potentially enable the coordination of all human activity at a much larger scale than has been possible before.
The great design innovation of the blockchain is really its capacity to coordinate a network of autonomous nodes towards maintaining a shared infrastructure and this is done not just through innovations in information technology but also through the design of incentive systems which is traditionally been the domain of economics. Through adding a layer of trust and value exchange to the internet the blockchain merges our newly developed information networks with the institutional structures that sit on top of them in so doing it greatly strengthens the capacity of those networks as a new model for organizing society and economy.
By merging economics and technology it enables us to redesign institutional structures and ultimately reconceptualized how we organize virtually every aspect of our society, economy and even technology infrastructure based on networks of autonomous nodes that are incentivized to collaborate.
Of course, it does not do this alone such claims can be only realized in combination with other technologies and broader processes of change. As such the blockchain has to be understood in the context of a broader set of technological transformations taking place with the evolution of the internet. Most notably much of what the blockchain promises will only be possible given parallel developments in the Internet of Things, datafication, and advanced analytics, all of which are combining to form the next generation of the internet of which the blockchain will form the critical infrastructure.