Bitcoin and Blockchain; it both starts with the letter B.
Hey! Aren’t you the one who’s working with Bitcoins?
As I posted my first blog revealing my interest in blockchain technology, I have gotten a lot of response. All positive reactions. Probably because no one expected me to have developed an interest in this new disruptive technology, but also genuinely interested reply’s asking me about the project that I am working on. People contacted me by phone, email or a message on LinkedIn or another (social media) platform, but they also simply walked up to me while I was grocery shopping or working out in the gym. While I am happy to have sparked their interests in this technology, I am also very much aware of all the misinterpretations and misunderstandings regarding this hyped up subject.
Don’t get me wrong, I am not an expert on blockchain technology just yet, but I’ll definitely get there. In researching this technology myself, I have found that information is scattered and contradictory. The classes and seminars that are being offered in the Netherlands are either very simple (which is good for those who are completely new to the subject), focussed on cryptocurrencies, or they are targeting IT-specialists who already have several programming skills and experiences. YouTube offers a lot of informative video clips, there are hundreds of podcasts and even more whitepapers on all the new coins and applications that are being developed or launched. With all this information, the big question for many people is probably “where to start?”.
First, as the famous Simon Sinek says: start with “Why?”. Why is a cryptocurrency like Bitcoin and the blockchain technology invented? Then we can talk about the “How”. How does it work? And lastly, we’ll ask the “What?” question. What can we do with it?
What is the #101 on the B’s?
- Any payment through a communication channel needs a trusted third party like a bank. It is ‘trusted’ because it contains a lot of personal information about the people or businesses who exchange transactions. However, it consumes time, high costs and there is a significant chance of fraude as transactions can be reversed. What if we can exchange transactions peer-to-peer without the need of trust and thus a trusted third party/parties?
- In 2009 Satoshi Nakamoto published a whitepaper on Bitcoins, a cryptocurrency with an underlying transactional technology that eliminates a third party through which the transaction must take place (i.e. a bank), because transactions are based on cryptographic proof instead of trust.
- This transactional technology is called the blockchain technology, because: every transaction is recorded in a block that is validated (through proof-of-work) and timestamped (with a hash). The block is connected to the previous block and the following block, and is thus forming a chain of blocks. The hash of each block refers to the previous one and contains information about the transaction being made. Hence it is impossible to change a transaction at a later point in time, because that would change the hash, which then no longer fits in the chain.
- Although Bitcoins cannot be traded without using blockchain technology, blockchain technology is not only used for bitcoins or other cryptocurrencies. There are numerous ways in which the blockchain technology can be applied and will be disruptive in the way we exchange transactions in our personal and professional lives. For example, exchanging valuable information, tracking diamonds from mine to shop or even an online casino. More on these applications in another blog.
- Why is blockchain disruptive? Because it enables a peer-to-peer transactions for which no trust is needed (hence no need for a ‘trusted’ third party like a bank, government or other authoritative institute), as the miners of the system will validate the request before a transactions is recorded in a block and added to the chain. Transactions can be traced, but actors can also remain anonymous.
- Miners are the actors that validate a transaction made through blockchain technology. Before they can validate, they must resolve a complex mathematical puzzle (which consumes time and energy). When solved, a transaction can be stored in a block and added to chain if it is deemed a valid transaction. The miner gets rewarded with a fee in the currency that is used in that specific system.
- Because we no longer need a trusted third party, there is no need for a centralized system, storing all our (personal) data. A distributed system (a ledger in this case) is possible, in which all participants have access to and a copy of this ledger (transparancy), that is tracking all transactions in a secure and consensus based manner. (Follow this link for more info centralized, decentralized and distributed systems.)
- Transactions through this technology are (theoretically*) faster than transactions that have to go through third parties. The only time required is for the miners to validate a transaction, making sure that the same money is not spent twice, by which a block is added to the chain and currencies, goods, or services can be exchanged.
* theoretically, because the amount of time and calculating power it takes to validate a bitcoin transaction currently can take up to 15 minutes. Hence new crypto currencies are launched like Litecoins or Bitcash of which the transaction time is shorter. Scalability is currently one of the major challenges of Bitcoin as a currency and blockchain as a technology.
- What can we do with this technology, and how will it disrupt our way of doing business? It will be easier, faster and safer to exchange any type of transaction (currencies, information, commodities, etc.) as we can now do it peer-to-peer. Although it has almost been 10 years since Nakamoto’s paper was published, cryptocurrencies are now slowely being integrated as a payment method in day to day business and we are still at the beginning of developing the blockchain technology to its full potential. Currently, there are over 1,500 digital currencies listed on CoinMarketCap, with many more to come. Will they all be successful? No, they won’t. But we are still just scratching the surface of what blockchain technology can be used for and the acceptance of digital currencies in our daily lives.
- What can you do with cryptocurrencies and blockchain technology? Some say that the bitcoin is a hype, that the market will crash (even more than it already did) and that you’re probably too late to make a profit. But do you remember the days in which you only lived an offline life? The days in which you had to dial in to use internet? Do you remember the days in which you left your house without a phone and people were skeptical about every wanting or using a mobile phone? Now look at all the time we spent online on our mobile devices. But also think about the time it took for the general public to start using the technology on a regular and intens basis. As with any new disruptive technology, there are still a lot of possibilities yet to be explored. And if you’re interested in it, then start exploring, do research and start familiarizing yourself with it. Or just stand back and watch the show.
This is a very basic overview with info on bitcoin and blockchain technology as it was set up for bitcoin. There is much more to this subject than described above. But I do hope that you’ll now have a an idea of what the fuzz is about. Also, if you have anything to add, to correct or to ask. Please, feel free to do so.
To answer the question in the subtitle: No, I am not the one who’s working with Bitcoins. At least; not yet, it will be an optional method of payment for the clients of my company Nova Connect. I am however a blockchain enthusiast, probably because I have major trust issues. Just kidding, I love innovation, I love doing business and this technology offers a innovative way of doing business. So let’s explore…