Without a doubt, 2018 isn’t just the year of the cryptocurrency craze built on blockchain; this year, it seems everyone from venture capital firms to investment hobbyists wants to “put a blockchain on it.” If you’re wondering what makes blockchain—a decentralized, public ledger—such a revolutionary technology, my colleague Charlotte offers some strong insight into blockchain technology. But her post made me wonder: What makes blockchain such a sound technology that malicious actors and inaccurate data can’t corrupt it?
Blockchain’s security stems from how it integrates three well-established concepts:
- Peer-to-peer networks: In its simplest form, a peer-to-peer (P2P) network is created when two or more PCs are connected and share resources without going through a separate server computer. Every connected PC is both a server and a client. For instance, have you ever used…no, ever “known someone” who used BitTorrent to share music or video? BitTorrent uses P2P technology for distribution of information across nodes. But with a blockchain network, the nodes communicate via P2P technology and each node stores information about the blockchain locally in an equal, verifiable, and permanent way. And when everyone has every record, it’s near impossible to cook the books.
- Cryptography: The basis for modern encryption techniques used in most every digitized industry, cryptography helps ensure that transparency and privacy are achieved. In the case of blockchain, asymmetric (or public key) cryptography is used, meaning each party generates its own public-private key pair. Private keys are kept secret, while a public key can be freely distributed among parties. According to BlockchainHub, “Because of how a key pair mathematically works, it is impossible to decrypt a message which got encrypted with a public key. This message can travel securely to the owner of the private key and only he/she would be able to decrypt the message using the private key, which is associated with the public key (padlock).”
- Game theory: Roger B. Myerson calls this “the study of mathematical models of conflict and cooperation between intelligent rational decision-makers.” In the case of bitcoin and other cryptocurrencies built on blockchain, economic incentive encourages people to participate in the network and strive to be the fastest party to accurately approve transactions, resulting in crypto payment. And when there’s a reward for being the fastest accurate participant, people are incented to play by the rules. Sure, the type of zero-sum gamification in bitcoin mining may not fit scenarios like charitable foundations or crowdfunding. Nonetheless, the research firm Markets & Markets estimates gamification to grow to a $5.5B global market by 2018. After all, isn’t it human nature to want to compete and win?
When you put these three concepts together, blockchain has real potential to transform and strengthen how the world regulates and maintains administrative control in the digital era. Even better, the rising tide of blockchain enthusiasts has sparked new thinking around alternatives to blockchain itself. For many people who see omnipotent value in blockchain, I can only imagine their joy in perusing a growing market of decentralized ledger offerings. Rejoice!