How Does Blockchain Create Trust?


The first decades of the Internet brought us many inventions such as the World Wide Web, E-mail, or more recently the cloud. But with these great breakthroughs, came problems such as privacy and security. Because surfing the Internet does require a leap of faith especially when you interact with people you do not know or possible third parties.


In 2008, when trust in governmental third parties and banks was at its lowest, a person or group of people under the name Satoshi Nakamoto published a whitepaper describing a peer-to-peer electronic cash system using the new cryptocurrency Bitcoin. Readers may already be familiar with Bitcoin, but may not be familiar with the technology required for it to work: blockchain. Bitcoin uses blockchain like a website uses the Internet. To understand how Bitcoin and Blockchain can bring back trust, let’s take a closer look at what it is and how it works.



What is Blockchain and how does it work?

Blockchain is a technology, similar to a database, which stores information. But the comparison stops here. Indeed, with blockchain, the data is located in a network of personal computers called nodes, with no central entity like a bank or the government controlling it. It is distributed and public and so everyone can access it, use it and help run it. Since the same information is stored in all the computers in the network, it makes it very difficult for hackers to access or change the data.





But how is this information stored?

Let’s take the example of a financial transaction using Bitcoin. Imagine a huge spreadsheet or a ledger that contains a list of timestamped transactions. When you want to send money to someone, a message is sent to the network describing the next transaction to add to the ledger. To make sure that it is the true account owner that sends the money, the system requires a signature. To create the signature, the account owner has a private key (a very long code made out of letters and numbers) that goes through a cryptographic function and creates the signature. Each signature is specific to the owner and the transaction and cannot be used twice. The recipient can then check the signature to make sure of the origin of the transaction.


When a transaction with a valid signature is made, all the computer owners in the network, called miners, receive it and add it to the copy they have of the ledger. When using blockchain, it is vital to know which transaction goes first and ensure that all transactions are logged and tracked. To do that, all the transactions are first stored in a pool of pending transactions. Then a miner must add each pending transaction to the ledger by entering the transaction information and a random number in a cryptographic function called the “secure hash algorithm”. This algorithm creates a unique output, or “hash”, which is a certain length. All the miner has to do is enter different inputs until the hash produced is the right length. The transactions are added to the ledger in the order in which the miners produce the hashes. Only the hash appears on the public ledger and not the transaction information. Because the secure hash algorithm is a one-way function, it is impossible to find the input (transaction information and random number) if you know the output (hash). Each new hash added to the ledger in stored in a block and each new block created is linked to the previous one, creating a chain. But creating hashes requires large amounts of computing power and so for each new block the miners link, they are rewarded Bitcoin.





Of course, Blockchain can store more than just a list of transactions. It can also provide proof of existence for any document. However, the documents themselves are not stored in blockchain and are not open to everyone. Only the hash is stored in blockchain. Therefore, the existence of the document can be verified by the blockchain at any time and even if the document itself is destroyed.


Blockchain and its most famous application, Bitcoin, was designed to eliminate trust issues when making transactions. Indeed, when using blockchain there are no third parties involved in trying to keep our documents or credit card information safe and therefore no risk of having our data stolen. As we have seen, special algorithms protect every aspect of the system and therefore no trust is needed. Furthermore, imagine you can put all your data in a black box and decide to whom you give parts of the information: You could choose to give your doctor your medical records or a pharmaceutical company your feedback on their new drug in exchange for Bitcoin. Blockchain could be used in so many different ways for healthcare, finance or management.


While many people are getting very enthusiastic with the possible applications of blockchain almost as many are scared that it could have repercussions that affect the whole economy. But one thing is sure, if Blockchain is correctly used and well-developed, it could allow transparency, safety and privacy.


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