Blockchain will change the way we trust in business.
Commerce relies on financial institutions serving as third parties to process electronic payments. A financial institution holds certain identifiable information about the transactors and decides whether or not each party can be “trusted” to complete the transaction. The cost of mediation is passed to the transactors as “transaction costs.” Because there is a cost for each transaction to the financial institution, transaction sizes must meet a minimum size requirement in order for the financial institution to accept its role as mediator for the transaction. A certain percentage of fraud is accepted as unavoidable.
To verify “trust” in a transaction between two parties, blockchain services like Bitcoin create a “public ledger” (aka the blockchain) that is distributed on the network nodes (computers or devices) of participants. This creates a system where all transactions are publicly announced, and all participants must agree on a single history of the order in which the transactions were received.
Traditional banking achieves a level of privacy by limiting access to information to the parties involved and the trusted third party. This method is precluded by announcing transaction details publicly. Privacy can be maintained despite public announcement of all transactions. To verify an identity, participants “sign” a transaction with a digital signature and an “asymmetric key system.” A digital signature is meant to prove a message came from a particular sender; neither can anyone impersonate the sender nor can the sender deny having sent the message. When making an electronic purchase, the receiver is able to prove who requested the purchase. - Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System
With a symmetric key system, Alice first puts the secret message in a box, and locks the box using a padlock to which she has a key. She then sends the box to Bob through regular mail. When Bob receives the box, he uses an identical copy of Alice's key (which he has somehow obtained previously, maybe by a face-to-face meeting) to open the box, and reads the message. Bob can then use the same padlock to send his secret reply.
In an asymmetric key system, Bob and Alice have separate padlocks. First, Alice asks Bob to send his open padlock to her through regular mail, keeping his key to himself. When Alice receives it she uses it to lock a box containing her message, and sends the locked box to Bob. Bob can then unlock the box with his key and read the message from Alice. To reply, Bob must similarly get Alice's open padlock to lock the box before sending it back to her. The critical advantage in an asymmetric key system is that Bob and Alice never need to send a copy of their keys to each other. This prevents a third party – perhaps, in this example, a corrupt postal worker who opens unlocked boxes – from copying a key while it is in transit, allowing the third party to spy on all future messages sent between Alice and Bob. Alice and Bob need not trust the postal service as much. In addition, if Bob were careless and allowed someone else to copy his key, Alice's messages to Bob would be compromised, but Alice's messages to other people would remain secret, since the other people would be providing different padlocks for Alice to use. - Wikipedia
The first transaction in a block (1 megabyte of data) is a special transaction that creates a new coin owned by the creator of the block. There is no central authority that issues new coins. The steady addition of a constant amount of new coins is analogous to gold miners expending resources to add gold into circulation. “Once a predetermined number of coins have entered circulation, the incentive can transition entirely to transaction fees and be completely inflation free.” The number of new bitcoins created each year is automatically halved over time until bitcoin issuance halts completely with a total of 21 million bitcoins in existence.
Currently, the blockchain is being used to create a currency called Bitcoin that removes banking intermediaries and allows borderless and governmentally-autonomous commerce. However, this technology can be applied to any industry that relies on intermediaries to validate identities and establish trust. Medicine and finance are two industries that are ripe for this technology, as they rely on a number of intermediaries for transactions, and fraud is prevalent.
In summary, the blockchain creates a system for electronic transactions that doesn’t rely on trust. Using the “assymmetic key system,” transactors verify identities electronically, essentially eliminating the need for transaction intermediaries to verify the transactors. All transactions on the blockchain are publicly visible and verified through a distributed network. Invalid blocks are rejected by the network, diminishing the ability to commit fraud.
