Introduction to blockchain

Before we explore the exciting world of blockchain technologies it is worthwhile thinking about how some secure systems, which are essential to society, work. 

Consider a bank and your bank account. You expect certain things from your bank; you expect them to look after your money responsibly, you expect them to keep accurate records of any deposits and any expenditure, you expect them to carry out any instruction you give them in a reasonable amount of time, and you expect that in the event of fraudulent transactions that they can be discovered and find out where the money has gone.

In essence you expect:

• Transparency – transactions are visible and can be checked to ensure no money goes missing.
• Security – fraud can be prevented, or at least detected.
• Immutability – your account records can’t be changed.
• Efficiency – transactions are executed in a timely fashion.

To achieve your expectations, your bank keeps a ledger. Think of it as a big book that has a new line each time you make a deposit or make a payment your bank. This line says which account the money has come from, where it should be transferred to and how much should be transferred.

The relationship between you and your bank is built on trust; you trust them with your money. Only your bank has access to the ledger and you trust them to keep it safe and up to date. Banks go to extraordinary lengths to ensure the safety of the ledger, spending millions on physical and cyber security. You have to trust your bank in the current systems! But, what if it didn’t have to be like that?

This is where blockchain comes in.

Blockchain technologies offer an alternative solution to the intrinsic need for trust. Rather than the ledger being owned by the bank, centralised, and under the banks control, blockchain enables the ledger to be distributed across a set of people. Each of them have a complete copy of the ledger. This distributed nature of the ledger introduces security as there is no longer just one copy, so we don’t have to rely on a single entity (like the bank). However, it introduces a few problems. The distributed ledger must be exactly the same across the set of people, and if one person decides to make a change to the records in the ledger, then the other people must be able to detect that change, and reject it.