Blockchain basics

Blockchain is a new technology for storing data and transactions. As the world becomes more digitalised, data can be anything from bank account details to GPS tracking coordinates to digital art and x-ray images. Similarly, transactions can represent payments, delivery confirmations and updates to health records.

Blockchain uses networks of computers to securely store data and validate transactions which reduces the risk of relying on any single company, central computer, or server to maintain the ‘source of truth’. Because of the way blockchain securely validates the data, data and transactions are censorship-resistant and difficult to change.

In more technical terms

A blockchain is a distributed, append-only ledger that is governed by a consensus protocol in a peer-to-peer network. The term “blockchain” comes from how the data is structured. Transactions are grouped and stored in “blocks” that are time stamped and cryptographically linked to secure the data. “Consensus protocol” refers to how the different computers in the network agree on which blocks should be added to the ledger. “Peer-to-peer” refers to a network of computers rather than a central computer or server.

When a block is filled, it is sealed with a cryptographic signature known as a ‘hash’ that is generated by an algorithm and based on the data in the block. A new block is then started, and the new block will begin with that same hash (signature) from the previous block to ensure that there has been no manipulation of the encrypted information. When that next block is filled, it is sealed with its own cryptographic hash, which is included in the first record of the next new block and so on, forming a chain of blocks – hence the term blockchain.

As an append-only ledger, blocks can only be added to a chain and removing or altering a transaction retrospectively from a blockchain becomes almost impossible. It is the global consensus mechanism and near impossibility of changing records retrospectively that ensures trust in the data, making blockchain technology exceptionally attractive for a range of applications.

As the largest application of blockchain, cryptofinance has attracted interest of the entire financial sector including banks, insurance companies, exchanges and clearing and settlement companies and governments. Deloitte’s 2020 Global Blockchain Survey revealed that nearly 40% of global respondents have blockchain in production, affirming blockchain’s maturity, and 55% of respondents viewed blockchain as a top strategic priority. In the same survey, 83% of respondents said that their organisation or project would lose a competitive advantage if they did not adopt blockchain technology (Deloitte 2020).

No introduction to blockchain would be complete without an overview of its origins and the first use-case in digital cryptocurrencies, as well as the building block of many blockchain applications, smart contracts.

Cryptocurrency is a form of digital currency that is typically blockchain-based, with all the security and validation features of blockchains. Digital currencies are not so new – the term is the blanket term used to describe ‘electronic’ money. It includes both virtual currency (e.g. in-game currencies such as Linden Dollars in the game ‘Second Life’ or World of Warcraft Gold in the World of Warcraft gaming franchise) and cryptocurrency, which can be regulated or unregulated and, as distinct from fiat money, can be issued by anyone with the means to do so.

Bitcoin is the first and most widely recognised cryptocurrency, although many more cryptocurrencies have emerged since Bitcoin’s inception. Bitcoin and other cryptocurrencies have in common that they are ‘tokens’ – forms of digital currency that have been designed as alternatives or competitors to fiat money and centralised, state-controlled payment systems.

Smart contracts are programs that are stored on a blockchain that ‘self-execute’ when the conditions embodied in its code are met. These actions could include releasing funds to the appropriate parties in completion of a transaction, registering a vehicle, triggering an insurance claim, or issuing a ticket. The computers (nodes) that make up a blockchain network recognise and validate that the coded conditions have been met, the ‘contract’ is executed and the blockchain on which the contract resides is then updated when the transaction is completed.

How does Blockchain enable DAOs?

Decentralised Autonomous Organisations (DAOs) use these fundamental elements of tokens and smart contracts to serve the aims of communities that have a common purpose. DAOs are communities of ‘people’ that may come together for a range of things – to pool resources to fund and support blockchain development, to collectively invest in art, or to serve some philanthropic or social aim, among many other things.

The key characteristics of a DAO that relate to blockchain are that the policies and rules of operation of a DAO are encoded in smart contracts, and that DAOs raise funds into their ‘treasury’ by issuing tokens (usually in return for fiat money or popular cryptocurrencies). DAO members create proposals about the future operations of the protocol and then come together to vote on each proposal. Proposals that achieve some predefined level of consensus on the blockchain are then accepted and enforced by the rules instantiated within the smart contract.

Ultimately, a DAO is governed entirely by its individual members who collectively make critical decisions about the future of the project, such as technical upgrades and treasury allocations.