Blockchain: The Technology Behind Cryptocurrency

If you ask the average person what cryptocurrency is, they will probably reply: “Oh, you mean Bitcoin.”

Yes, Bitcoin (which we will discuss at length in another article) is a cryptocurrency, but it can also be described as the first application of this evolving new technology called distributed timestamp that later became widely known as blockchain technology.

If you were to ask someone what social media is, would it make sense to hear the response, “Facebook”? Or worse, “the internet”? These answers sound ridiculous, right? Now you understand the reaction I have when I get the aforementioned reply to my question of what cryptocurrency is.

Facebook is a social media platform that operates on the internet. It is only one application on the internet; the internet can be utilized for a far-flung variety of purposes.

In the same vein, cryptocurrency is a field that operates on blockchain technology, and Bitcoin is one of the applications in that specific field of cryptocurrencies. If we want to apply that relationship metaphorically to social media, Facebook, and the internet: The internet is the technology, social media is the field, and Facebook is an application on the internet in the field of social media.

The history of the internet began in the 1950s, but the first workable prototype for the internet came about in the late ’60s and didn’t start becoming popular until 1991.

It is important to note that the majority of internet users — including myself — do not understand the technicalities of its exact workings and the details of the TCP/IP protocol, and yet there are more than 3.2 billion people currently surfing the internet on a daily basis.

It is essential to understand this key point, as the majority of people also find it difficult to comprehend what blockchain is. What is important is our ability to distinguish between blockchain technology and its applications, of which Bitcoin is one. It is also crucial to understand the potential value that blockchain technology could bring forth in our daily lives.

The history of blockchain is analogous to that of the internet. The concept of blockchain technology was first described in 1991 by Stuart Haber and W. Scott Stornetta as a system for documenting timestamps that cannot be tampered with or backdated.

Timestamps: The sequential numbering of events that are typically used for logging events.

This technology began evolving after 2009 when it was first conceptualized in the form of its first application: Bitcoin. Let’s discuss what blockchain is in a little bit more depth before getting into Bitcoin in another article.

What Is a Blockchain?

A blockchain is a distributed ledger system which holds all the transactions from the genesis of that network.

Ledger: The principle book or file for recording transactions.

In simpler terms, blockchain technology is a network in which anyone across the globe with internet access and suitable hardware and computing power can participate in. The participants of the network are the essence of the network’s functionality, as they process transactions through the verifying and timestamping mechanism. Each participant holds a copy of the complete ledger transactions and helps to solve mathematical algorithms that the network requires.

In return, participants, or “miners,” as they are called in the crypto space world, are rewarded simply by being part of the network.

This medium is a simple definition of what blockchain is, but it’s difficult to grasp the potential value of this evolving technology. If we explore the fundamental problems that blockchain solves, however, we will be able to understand the different and very useful applications that can be applied on top of blockchain technology.

  1. Double Spending Problem

Previously it was impossible to create digital money because anything digital can be copied easily; digital money, after all, is just another form of digital files. If we were able to copy digital money files multiple times and spend it at multiple places, then they will become worthless — they will lose the scarcity which gives money its value in the first place.

Therefore, for digital money to exist, there must be a mechanism which prevents the files from getting copied or tampered with.

Blockchain technology solves this problem through three key features:

  1. Since all participants of the network hold a copy of the entire ledger, the network can easily identify any tampering or counterfeit (duplication) of any of the existing files (e.g., digital money) and automatically block it from occurring.
  2. Because every transaction gets verified and timestamped on the ledger system, each is irreversible and there is a permanent record of the time that transaction occurred. This mechanism results in higher security and the immutability of the entire network. For example, if someone tries to make the same transaction twice (or more times) simultaneously, whichever transaction gets confirmed first will be included in the blockchain ledger, and the others will be discarded.
  3. As a result of the ledger’s global distribution, a successful attack on the network would have to target at least 51% of the entire network simultaneously in order to change any of the recorded transactions. This distribution of the ledger provides the network security and trustworthiness, because it would be nearly impossible to make a successful attack. Indeed, the amount of power required to make such an attack would be massive.

By solving this issue of double spending, blockchain technology made it possible for an application of global digital money to exist.

2. Peer-to-Peer (P2P) transactions

Blockchain technology allows for peer-to-peer (P2P) transactions to occur without a trusted third party or central authority present, through something called “smart contracts.”

A smart contract is all about conditional execution of transactions; they are based on the terms of agreement between buyers and sellers and self-executed by maintaining the conditions written into lines of code. These contracts are recorded on the blockchain network and cannot be tampered with, as explained earlier.

To explain further the potential of P2P transactions and how they could be used, let’s examine the following example.

When you are purchasing a property, which comes first: you handing a check to the seller as payment, or the seller transferring the ownership of the property to your name?

In either case, the buyer or the seller can take advantage of the other. If the buyer issued a check and gave it to the seller before the ownership of the property got transferred, the seller could take the check and never transfer ownership. Conversely, if the seller transferred ownership before receiving the check, the buyer could legally keep the property without paying the seller anything, since the ownership was already transferred to the former’s name.

Therefore, for any similar transactions to occur in any market without the full trust of the other individual, a trusted, independent third party needs to exist. In the property market, third-party companies are often referred to as escrow companies. Both the buyer and the seller trust the escrow to complete the transaction and switch ownership if certain conditions are met. The escrow will keep the interest of all parties protected while maintaining its neutrality, often in return for a base rate and a fee to complete the transaction.

The beauty of smart contracts is that it can do all of this without an escrow company or third party and at a fraction of the cost. Everything is computerized in a trust-less manner, as the distributed ledger network keeps records of these smart contracts while maintaining security and neutrality.

As a smart contract allows P2P transactions to occur without any intermediaries, the results are faster transactions and lack of costs associated with intermediaries while maintaining security, decentralization, and connection of global markets.

Homebloc

Homebloc is one of the burgeoning pioneers in this area. They utilize blockchain technology to provide a P2P platform in equity markets. One of their focuses is on the house leasing and rental industry. By providing a P2P platform, Homebloc will be able to cut out third-party agencies such as online travel agencies (OTAs) for short-term rentals and centralized platforms. This will significantly reduce the average transactional fees, currently between 10% and 22% in centralized platforms, for every customer that uses these platforms.

A report published by Allied Market Research forecast that the global market for OTAs is expected to generate 1.09 trillion U.S. dollars in 2022. Expedia alone reported revenue of 10.06 billion U.S. dollars in 2017, which qualifies it as a “large” enterprise. Homebloc will act as a key disrupter of this large industry by helping the markets become more efficient and providing a better customer experience, thereby solving many of the inherited characteristics of the industry.

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These are the fundamental problems that blockchain solves. By addressing these issues, this technology opens the door for a variety of applications such as Homebloc; on a large scale, it has the potential to disrupt various industries while bringing forth a much efficient system and security at many different levels.

After looking at the fundamental issues blockchain technology solves, we will discuss further some of the main applications that can be implemented on blockchain technology in another article. Specifically, we will discuss Bitcoin and the importance of such an application in our current economy.

Authored by Luayy Alkilani