How Blockchain Technology Can Transform the Economy

Blockchain technology has the potential to upend the credit card, banking, manufacturing, and voting industries.

By  Marcia Wendorf

Over the last several years, you may have heard the term, "blockchain," and you may know that it's a part of the cryptocurrency Bitcoin. You may also know that blockchain is some kind of a database, and that a lot of very smart financial people and tech types are looking into it.

What is blockchain?

The first mention of the term "blockchain" appeared in 2008 when someone writing under the pen name Satoshi Nakamoto, published a paper entitled, "Bitcoin: A Peer-to-Peer Electronic Cash System." This document described the basis for a cryptocurrency called Bitcoin, and it defined how a new type of database called a blockchain would store Bitcoin's transactions.

In this database, a set number of transactions are placed in something called a block. When a block is filled up, it is "signed" using a mathematical formula that factors in all of the block's transactions, and generates a unique signature called a hash.

When the next block of transactions fills up and is ready to be signed, the hash from the previous block is mathematically factored into the new hash, and so on. This is reflected in the chain part of blockchain's name.

Impregnable security

This unique hashing system gives a blockchain very high security because if one transaction in any given block is changed, the hash signature for that block will also change.

And that means that all of the hash signatures for every subsequent block will have to change as well. This high level of security means that the blockchain can be completely open to the public.

The blockchain is maintained by several decentralized entities known as nodes. A blockchain node's job is to validate blocks. When a new transaction block is created, each node on the network validates the new block by calculating its hash signature.

Then, each node compares its result with all the other nodes on the network. If a majority of the nodes have computed the same hash signature, the block is accepted as valid and placed in the blockchain.

However, if the nodes don't agree that the block has a valid hash signature, the block is simply thrown away. This system makes it extremely difficult to place a fake entry into a decentralized and public blockchain.

Use cases for blockchain

Let's say you go into your local store and make a purchase using your credit card. The credit card company approves your purchase, places the amount of the purchase into the store's bank account, then waits to receive a payment from you. If you don't pay in full, the credit card company charges you interest on the unpaid balance.

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