What's the Blockchain, and Why Does Bitcoin Depend On It?

By Kate Knibbs on at

It’s going to unshackle us from the oppressive dungeon of fiat currency! But also criminals and rogue cops use it to do nefarious drug stuff! Digital currency is often defined by its volatile hype cycle. And yet its most promising feature is incredibly mundane-sounding: a bookkeeping system called “the blockchain".

So what on Earth is it?

The blockchain basics

The blockchain is a simple digital platform for recording and verifying transactions so that other people can’t erase them later — and anyone can see them. “You can think of the blockchain of an ‘append-only’ ledger. You can only write to it, you can’t delete it,” Peter van Valkenburg, the director of research at Coin Center, told Gizmodo.

But it’s what the blockchain doesn’t have that makes it controversial, and prone to giving venture capitalists greed-boners. Bookkeeping tools generally require a bookkeeper, but with the blockchain, there is no head-honcho bookie. It’s a decentralised, crowd-powered spreadsheet, relying on cryptography instead of a central authority.

Fervent crypto-enthusiasts, never ones for ambivalence, say the blockchain technology Satoshi Nakamoto created to fuel Bitcoin has genuine potential to tip power-dynamics in banking, politics, the internet, and everywhere authorities, well, authorise things. Critics see it as either hopelessly impractical or a fast-track to a merciless, anarchic hellscape.

But how does it work exactly?

The blockchain is designed to make transactions safe and reliable even if the people doing them don’t trust each other.

Nakamoto’s blockchain mathematics is a solution to a famous game theory puzzle called the Byzantine General’s Problem, in which old-timey army officers are planning an attack, but they’re worried about traitors lurking in their midst. Trust no one! But, of course, an army needs to communicate to launch an attack. So the General needs to find a way to pass a message along that cannot be sabotaged.

This is where the blockchain comes in. Every single time you make a transaction on the blockchain, that transaction is sent out to many nodes in the Bitcoin network. Basically, everybody participating in the Bitcoin process also has a copy of that ledger and can check it for inconsistencies; it’s a decentralised ledger. The order of transactions is also verified by a cryptographic process that relies on the combined computational power of the crowd. So if you try to pass off a fake exchange, you’ll get caught because your fellow Bitcoin users can trace every alteration and exchange that goes down.

Bitcoin.org sums this up nicely in their introduction to Bitcoin:

The blockchain is a shared public ledger on which the entire Bitcoin network relies. All confirmed transactions are included in the block chain. This way, Bitcoin wallets can calculate their spendable balance and new transactions can be verified to be spending bitcoins that are actually owned by the spender. The integrity and the chronological order of the block chain are enforced with cryptography.

There are different kinds of blockchains, with varying degrees of complexity, so the maths underlying the crypto is always different. But the general principle — a decentralized group of machines capable of verifying transactions — is the same.

The greed of crowds

The idea of a distributed ledger is not new, but Satoshi put a spin on it: community members are incentivised to verify transactions because they earn Bitcoin for their efforts. People who are already “mining” Bitcoin are selected to have their machines join the blockchain and verify that nothing fishy is going down.

Bitcoin “miners” use computer power to solve puzzles; if they correctly solve a puzzle, they get Bitcoin as a prize. To make blockchain technology work, the Bitcoin community needs Nakamoto’s clever incentive programme. If you want to mine Bitcoin, you have to use a sliver of computational power to verify the blockchain when your turn comes up. The rules of the blockchain are baked into the mining software to make sure miners will check the ledger when it’s their turn.

It’s the perfect kind of crowdsourcing for libertarian fans of crypto-currency, because it’s entirely based on self-interest.

Transactions get verified frequently, and once they’ve been verified they’re set in a sort of digital stone. People have found all sorts of different ways to use Bitcoin for devious schemes, or hack cryptocurrency platforms. But none of them have involved destroying its foundation, the blockchain.

That doesn’t mean it’s foolproof. Interpol and Kaspersky Labs recently presented research about how people could theoretically insert malware into blockchain transactions. That’s brutal news for blockchain supporters, since the whole point is that the cryptography is solid enough that you don’t need to trust anyone.

From Satoshi to Samsung

With Bitcoin, blockchain technology is used to transfer money. But it has the potential to do a lot more: it will work for any process of verification, really, and can even be used as a communication tool. This is why companies, investors, and crypto-diehards are starting to see potential uses for blockchains all over the place.

True believers say blockchain technology could revolutionise voting systems and make notaries and banks redundant, although they’re still in the theoretical stages of spinning their ideas into reality. The tech is nowhere near ready for such widespread and intense application. But companies are working to steering this technology away from the crypto fringe.

IBM and Samsung are already developing a blockchain-powered backbone for Internet of Things products called ADEPT. These companies are taking the core ledger concept and turning it into a way to help devices communicate cheaply. Other projects, like Ethereum and Ripple, take the idea of the blockchain and also meld the concept for a wider array of applications.

Enthusiasts rattle off a long list of spin-off uses: micro-finance, vehicle registration, gun permits, wills, genome data, report cards, DRM; all would potentially be more secure if blockchains were used to verify them.

ADEPT is still in very early stages, and it uses a more complicated cryptography than the OG blockchain, but it’s an example of how established corporations are attempting to capitalise on the concept.

And, as with all new technologies with grand intentions, there are plenty of start-ups hovering. Namecoin is basically a blockchain-powered alternative to ICANN’s (crappy) domain registry system, and it plans to provide notary services in the future. Van Valkenburg especially likes BitMesh, a blockchain startup that wants to help people sell their extra bandwidth by establishing mesh networks that’d serve as local marketplaces and alternatives to only using big ISPs, and it’s easy to see why: if BitMesh can make its concept a reality, it’d give people a better, cheaper way to share internet costs.

Chain of fools or chain of gold?

There is a reason why people use banks, hire lawyers, and get notaries to make sure their documents are legit. Society is organised around the idea that there are authorities that can be trusted. And yeah, people are fallible and companies regularly have huge security breaches using current models. But evacuating authority from central figures and relying totally on a mathematic solution developed by a pseudonym who is more a symbol than a person is also rather terrifying.

That isn’t to say that the projects blockchain supporters are working on can’t succeed, or shouldn’t succeed. They are looking for better ways to make things known to be true; in the idyllic blockchain-managed world, we would inhabit a world where fraud was impossible. But it’s just important to note how much faith that world places in machine over man.

Art by Tara Jacoby