Note: If you are looking for ways to get rich quick on ICOs and Bitcoin, this post is not for you — if you’re looking to learn more, understand the hype in normal people terms I’m starting a weekly newsletter. See a sample and sign-up here.
Now that that’s out of the way, this is the continuation of this post and why Bitcoin and misc. alt-coins, cryptocurrencies or digital assets, and blockchain are so important.
Here, I will cover blockchain and why prominent VCs such as Fred Wilson has been writing about it for six years, and why many other firms are co-investing in crypto ventures and how cryptocurrencies are no longer for terrorists, drug lords, human traffickers, and other not so kosher transactions we only see or hear about on the dark corners of the Internet.
I left off the last post with the question: If we can make free calls between Beijing and San Francisco, why do we need to pay to transfer currency between Beijing and San Francisco? I then took it a step further, to ask: In a world where middlemen can potentially take several paychecks worth of fees for an exchange of assets, why wouldn’t I find a way to cut out the middleman and directly transact?
Right now the public is focused on currency built on blockchain technology since it seems as though people are ‘getting rich quickly’ but blockchain is much more than currency (Bitcoin, Ethereum, and other alt-coins). What blockchain does, is it enables transfers of digital assets (in any form) in a safe, secure, transparent way with no middleman.
blockchain is much more than currency (Bitcoin, Ethereum, and other alt-coins)
Technologists are excited for the possibilities that instead of a middleman — in any industry from bankers, to real estate agents, suppliers and distributors — individuals and merchants who supply a product or service can directly deal with their customers looking to purchase the product or service offered. This is what is called a P2P (peer-to-peer) network. Decentralized is another term often used but it basically means micro-transactions are not regulated by those we have come to acknowledge as trusted parties to legitimize these exchanges of assets.
A world where everything is regulated is what we are ingrained to believe as ‘trust’.
We trust banks to handle our money. We trust fund managers to invest our money. We trust real estate agents and brokers when we look to buy or sell property. We trust companies like Amazon and Google to store our personal information and communication. The list goes on and on but in our daily lives, we know that anything we do with these established institutions, our information, money, assets, or what have you, are safe.
What if there is a way to safely and securely cut out the middlemen, have a new trusted method to transact, and most importantly: save on fees?
That is what blockchain can do. Bitcoin is just one of the solutions (currency) to the problem of cutting out the middleman (financial institutions). The reason why blockchain is safe and secure, is a bit complex, technical, and potentially boring but important to know in order to understand the value of blockchain technology and the things built on it — like Bitcoin or Ethereum.
The following is a chart I found from a report published here. All tech jargon aside, this is basically the flow of a transaction built on the blockchain:
What this illustrates, is the structure of the blockchain technology we currently cannot see with our two eyes like at a bank or real estate office.
I’m sticking with these two examples in order to keep things simple.
In order for a transaction on the blockchain to be valid, it goes through a process, exactly how a ‘normal’ transaction happens. In traditional validation processes, there are certain things that need to be checked off in order to legitimize any exchange of assets. But instead of one entity (the middleman — whether it’s a bank or real estate firm to follow the examples from above), there are many anonymous people solving complex equations to verify the validity of the asset transfer request. Currently, if we were to transfer money or buy or sell property, a person or people manually call different parties or look through records, forms and contracts are drawn with lawyers, and / or whatever else is required in the verification process for the transactor and transactee required by regulations.
On the blockchain, there is no manual checklist item to ensure a safe and secure exchange of assets, but instead, a process based on math is used for validity. Multiple parties are involved and validation is done in two parts.
How Blockchain works
(this is where it gets a bit nerdy — skip if you wish)
Simply put: There are people who run computers called miners, that receive a request to verify a transaction. These requests are called blocks. If the miner chooses to accept the block, they run the block against a complex computer program (kind of like descrambling government spy level cryptograms).
Once the block is validated, it is passed onto the middleman called a node, to add onto a giant, public ledger (blockchain database). In traditional real life ways, the middleman is usually a person or institution. In the case of blockchain, the middleman who pass the verified transaction data and the valid block data are anonymous and technologically driven within the blockchain process, so payments and fees are unnecessary.
When there are a certain number of blocks verified (multiple miners validating the blocks and nodes adding onto the chain), the transaction is deemed valid and only then, transactional exchanges happen.
Miners are rewarded with Bitcoin for their work. There is no central authority (government, regulatory entities, etc.) overseeing the process but blockchain uses a network of trusted people, with multiple layers of technologies to ensure a fairness in keeping the transaction and all the information stable, safe, and secure. There are also methods put in place to ensure one miner doesn’t have more authority over another, or technologies that makes sure all the miners validating blocks aren’t located in the same geographic area, and so on and so forth.
Do keep in mind, this is embarrassingly simplifying an extremely complex process, and a basic explanation for those looking for a primer on Bitcoin, blockchain, and crypto.
Why did I write this? Because as cryptocurrency and transferring of digital assets become more common place, hopefully these posts will help to understand why these technologies aren’t scary but more so, valuable, disruptive, innovative, and most of all: Exciting!
Next up: Smart contract governance and the promise of Ethereum.