INNOVATION

Blockchain Explained: What You Need To Know

This is how the technology works and why you should care.

03/08/2017 11:23 AM AEST | Updated 03/08/2017 11:25 AM AEST
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As emerging technologies continue to revolutionise the way we live and transact, concepts like 'cryptocurrency' and 'blockchain' are becoming increasingly relevant to our collective financial future.

Major banks are already talking about and beginning to use blockchain, a technology that could drive the digital transactions of the future. And it's become a major buzzword in financial circles around the world for its potential to change the exchange of value as we currently know it.

While the technology itself is in the very early stages of existence and is complicated to understand, businesses and entrepreneurs around the globe are looking at ways to effectively use it in the belief that blockchain could be the next big worldwide innovation.

So what exactly is blockchain technology and why is it important?

How Do You Use Blockchain?

Blockchain is a peer-to-peer technology aimed at simplifying financial transactions of value.

Think of it as a program like Uber -- except instead of taking taxis out of the equation to get you from place A to place B, you take can take out any third-party body, whether it be banks, governments or streaming services, in order to get anything from money to land titles to music royalties from person A to person B.

The plus side is -- all of the really technical, complicated 'nuts and bolts' of a blockchain process happens behind-the-scenes.

As Grantly Mailes, the CEO of Civic Ledger, a company that uses blockchain systems to solve public sector problems, told HuffPost Australia the entire process happens via a peer-to-peer app or a website accessible with an Internet connection and is as easy as pressing a few buttons.

"If you and I are wanting to exchange value over the Internet, at the moment we typically rely on a third party. There's a lot of value taken out of the system by these intermediaries," he said.

"If I can sell you a good and you trust that I've shipped the good, it allows for peer-to-peer trading in a trusted way without intermediaries who add friction and cost.

"Banks have been around for centuries to solve the trust problem between two people who want to exchange value, imagine now a world where we can do that without that bank."

So in simple terms, Mailes said if you want to give something of value to someone else using Blockchain, you open up your app (and there are many, including apps that work as 'digital wallets'), type in a unique, identifying code linked to the person you want to give it to and the unique code for whatever object of value you want to give and submit it.

The process than takes place and the value exchange goes through, but we can explain in a little more detail what actually happens for that to occur, below.

Blockchain Technology Explained: How It Works

In technical terms, blockchain is a peer-to-peer decentralised, distributed database known as a 'digital ledger' used to democratise the management of records and online transfer of objects of value -- the most popular of which at the moment is money -- from one person or group to another. It's comprised of permanent entries known as 'blocks' that are all connected, publicly monitored and unchangeable.

So what does that actually mean? Let's take the transfer of money between two people as an example.

Imagine every time you wanted to exchange funds, you wrote it down in a diary as a record of it happening and each page is a new transaction, but if you flick through the pages you can still see past transfers and they never get erased.

With blockchain, thousands of people all around the world all have a copy of that diary and can see and confirm that you have given money to someone else. They can't access the money, because it goes directly from your hands to the hands of the other person, but everyone knows it happened and can validate it.

It all happens online and the services of a bank -- which have typically been needed and paid for to witness, confirm and transfer digital money -- are no longer needed.

As the CEO of digital currency management company Bron.Tech, Emma Poposka told HuffPost Australia: "[It's a way to] have a currency that is decentralised and not managed by someone but at the same time managed by everyone.

"Currently, we have banks that are managing your account. They know how much money you have, they know how much money your friends have and, when you're transferring money with your friends, they are going to keep track of all your transactions.

"How do we do this without having a bank that would be in charge? Without having one single person managing the money?"

Blockchain is the answer to that problem.

"Blockchain is a ledger that you can put stuff in but it is very difficult to corrupt or delete," Poposka said.

"You have an account or an address for which you hold a private key, and someone else has [their own] public address for which they hold a private key.

"So, you know how much money I have and I know how much money you have and it's within the ledger and the moment we do the transaction, the entire ledger will be updated."

When it comes to the actual technology making the process happen, each diary page, or 'block', can include more than just one transaction of value and everything is written in codes (the transaction name, the money or other object of value and the online 'signatures' or identities of the people the exchange is happening between).

When you want to transfer something using a blockchain system, you identify the public address code of the person you want to exchange with, use the serial code for the digital object of value you want to exchange (for example, Bitcoin is digital money or 'cryptocurrency' written as code), and sign off on the deal using your own coded 'signature'.

The deal is then witnessed by the other people who have a copy of the block, they confirm the people on each side of the deal are who they say they are via their unique, identifying address code, and then the deal goes through -- and that happens for each transaction thereafter.

Without Banks, Where Is Your Money Stored?

As Mailes told HuffPost Australia, the biggest concept change that the average person needs to come to terms with when dealing with blockchain is the idea of tokenisation -- or turning the physical coins and notes currently used for currency into digital tokens.

"When you put hard currency, the coins and plastic notes, in the bank at least you can look at it and you know that it's there," he said.

"With cryptocurrencies, you get a digital currency and that's stored in a wallet [in a mobile app, for example] and it stores it along with your public key, your private key, and your balance details. It's stored there and you need to keep a copy of it because that's the only place it is stored.

"The app or the wallet is your bank account analogy and your fingerprint or your password to get into the app is just the same as your PIN."

What Impact Will Blockchain Have?

According to Mailes, while Bitcoin and the transfer of money is currently the biggest use of blockchain, it also has the potential to digitise and transfer pretty much anything and that could have huge impacts on the world within the next decade.

"Cryptocurrency now is beginning to be a digital exchange of value for all sorts of things," he said.

"There are two ways it will play out in the next three to seven years. First of all, it will probably become an underlying technology for the internet. People will use it without knowing that they've used it.

"Software vendors and governments and banks will begin to build blockchain-based technologies into the underpinnings of the Internet and people will use it in their daily lives and just not know."

Mailes said this includes countries going 'cash-less', where all currency can be used and transferred wholly online without a bank, tracking the shipment of goods without only courier companies knowing the identities of the people at either end, paying royalties to musicians or artists without money going to a streaming service such as Spotify, as well as eliminating developing world issues such as the transfer of land titles without a government paper trail that could potentially get lost.

"Governments are very keen to get currency exchange digitised and blockchain technologies or cryptocurrencies are one way to do that," he said.

"They'll want to do that because it prevents the black economy and if they can trade digital signatures, they can trace things such as terrorism.

"There'll be a greater exchange of value in the next five years using cryptocurrencies. In about the same time frame I see some lightweight financial markets emerging."

On top of this, Poposka told HuffPost Australia blockchain systems could be used to secure identification and reduce fraud by pulling identifying information from multiple platforms around the Internet where people have already named themselves, such as accounts with Facebook, Amazon or a bank, and inserting it into a blockchain system.

"Having the blockchain, what we do is, we create a wallet that is your identity and other people confirm your identity and we can see that from different data sets around the web," she said.

"With blockchain we have only one database that is shared by everyone and because it is a trust-based system, companies don't have to trust each other because no one has the power to change anything without everyone else seeing it."

Does Blockchain Have Any Problems?

In short, yes there are issues facing blockchain technology.

Most of the issues come as a result of the systems being so new to the world that developers are still working out effective ways to use it, and others come from simple human error.

For Poposka, one of the biggest obstacles to the technology exists in people losing or misplacing their online passwords -- something that could potentially allow another person to open your digital wallet or blockchain account if they had access to your unique code.

"Identity and key management is one of the biggest obstacles for blockchain or cryptocurrency transactions to become mainstream because people are used to losing their passwords or forgetting their security keys," she said.

"I think we'll still have, for many years to come, physical money and we'll still have to trust our government and banks, but blockchain relies more on a tech system and we should use it to improve efficiency."

What about getting paid in cryptocurrencies from work?

In short Mailes told HuffPost Australia that, while the transition to cryptocurrencies such as Bitcoin won't happen tomorrow, in the next few years you could receive payslips from employers using "smart contracts" -- think of them as a type of subscription service that knows when to begin a transaction.

"So, you have a fortnight of work, and at the end of the fortnight a smart contract would execute," he said.

"[The smart contract] would take some coins out of the employer's account and put it in the employee's account."

Poposka also said "mining a block" in a blockchain system, or enacting a transaction, generally takes quite a long time because the technology is so new, but that developers are actively working on solutions.

"It currently takes 10 minutes to mine a block, so unless we speed that process it up it won't become mainstream [technology]," she said.

"The blockchain transactions are slow that we do now on the open ledgers and can't become reality for 7 billion people [around the world]. Different organisations are experimenting with different technologies to make the blockchain faster."

And as Mailes believes, those transitions could end in very real changes for the everyday world we live in.

"In 10-years-time when we look back, it'll be like 2007 looking back at the Internet in 1997 and just imagine what happened in that time frame," he said.

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