The blockchain is a way to track and theoretically secure the movement of digital currency. Here's how and why it works.
What is Blockchain?
Published February 7, 2018
Onscreen : Cryptocurrencies: there’s nothing you can touch. Some say they’re prone to manipulation and can lead to speculative bubbles. Others say they could be the future of money. Either way, they all work through something called the blockchain.
Rob Baker : The blockchain represents all of the transactions that have happened in this network in chronological order. It’s a form of decentralized ledger technology.
Onscreen : In any payment system, you need an accurate and trustworthy ledger to keep track of who has what.
For example, if Bob transfers $10K to Sally to buy her llama, then $10K will be deducted from Bob’s account. He can’t double dip and transfer the same $10K to Dave in exchange for Dave’s donkey.
Traditionally, Bob, Sally and Dave might trust a bank to keep the ledger. But a blockchain ledger is distributed among thousands of personal computers.
Narula : This list is like a magic paper. So imagine that you had a sheet of paper and everyone had a copy of the sheet of paper. Whenever you wrote down a transaction on your sheet of paper it magically appeared on everyone else's.
Onscreen : Because everyone’s computer on the network keeps an identical copy of the ledger.
Narula : This is a way of running a database which no one actually owns and no one is in charge of.
Onscreen : So how does it work? When Bob transfers $10K to Sally in exchange for her llama, that becomes part of a “block” of information that’s added to a “chain” of transactions. Hence the name, blockchain.
The entire transaction history, as it evolves, gets encrypted and recorded on every computer in the network. Which, in theory, makes the blockchain secure. Because anyone trying to hack a transaction would have to do it on all computers in the network. Which is practically impossible.
In theory, if a computer does get hacked, any changes are visible to all, and detected immediately by the rest of the network. So if something doesn’t add up, the transaction doesn’t happen, and the hack fails.
But currently most users store and transfer their cryptocurrency via a third party company or “exchange.” Some of these companies have proven vulnerable, resulting in a few high-profile cryptocurrency thefts, mostly by hackers who stole cryptocurrency out of user accounts. Money was illegally transferred, even though the blockchain remained intact.
So what does all this mean?
Cryptocurrencies and blockchains are creating a financial system thatis decentralized and automated. This combination of accountability and transparency is why blockchains may be used for a lot more than money.
They may change how we prove ownership of land and property, providing a cloud-based record in places where it’s hard to keep paper documents safe.
They may change global supply chains by making them more efficient at tracking each item through its journey. They may lead to “smart” legal contracts that execute themselves (without lawyers) when the right conditions are met. Even digital IDs.
Exactly how cryptocurrencies and blockchain technologies will change our world remains to be seen. But we do know this: they’re already disrupting commerce, money, and the world as we know them today.
- Digital Production
- Bella Solanot & Ari Daniel
- Editorial Review
- Julia Cort & David Condon
- © WGBH Educational Foundation 2018
- Visuals & Videography
Greg & David Kestin
Noun Project | Creative Stall
- Sound Effects
- (main image: grid and blurred lights)
- Greg Kestin & shutterstock.com