“Every informed person needs to know about the Blockchain because it might be one of the world’s most important developments”— Leon Luow
Bitcoin and Blockchain technology have quickly poured into the mainstream, but its technical roots have caused many early adopters to use complicated jargon when trying to explain it. Let’s try to demystify it.
Some Background — Why Do We Even Need It?
It provides a trustworthy infrastructure for the transfer of assets.
As you all know, for the past two decades, the internet has impacted how our society shares and diffuses information. The internet’s infrastructure allows us to seamlessly share copies of our favorite files at the touch of a button. Great. But when it comes to assets and value, sending a copy while the sender has the ability to keep an original becomes an issue. Double spending is exactly what it sounds like, spending multiple times on one transaction (yes, it’s illegal).
The current system does not provide a trustworthy infrastructure when it comes to assets and the transfer of value, as there has never been a way to directly exchange value in the digital space without the use of intermediaries.
We rely on middlemen or intermediaries like banks, commerce platforms or governments to establish the element that allows our economy to function in a digitized space: trust. These third parties perform transactional logistics like authentication, record keeping or payment clearance to ensure that both parties in a transaction oblige to some pre-specified terms and conditions, and thus allowing the buyer and seller to remain confident that the transaction will execute in a secure and effective manner.
While these intermediaries are crucial to our digital economy, there are some major issues:
1. They use centralized databases which face high risks of being hacked
2. They exclude billions of people, who lack access to resources and capital, from the global economy
3. They charge transactional fees in the form of hefty commissions and timing inefficiencies
4. They undermine the privacy of the users when they track and use our data as a function of their marketing efforts
5. They have appropriated the largess of the digital age asymmetrically, as we have wealth creation but growing social inequality
What Is It, And How Does It Work?
After the financial crisis of 2008, an unknown person by the moniker Satoshi Nakamoto designed Bitcoin and its original reference implementation. Along with it, they devised the first blockchain database. The Bitcoin cryptocurrency and the underlying blockchain technology allows users to establish trust and transact without the need for a third party through a peer to peer protocol.
To put it simply, the blockchain connects millions of computers and servers are across the globe in order to create a global ledger (a massive, connected and decentralized Excel file). This ledger records each time a transaction takes place and digitally posts it across millions of computers using a high level of cryptography.
Once a transaction is posted, it is grouped into a block with other transactions which have occurred in the last 10 minutes and is then sent out to the entire network. Members of the network with high computing power, called Miners, compete to validate the blocks and are rewarded using digital currency (this us how the supply of digital currency changes on the blockchain).
The block is then time stamped and added to a chain in chronological order, creating a chain of blocks that show every transaction ever recorded on that blockchain. All these computers now have a copy of every transaction. If a single computer changes this information, the network will know that this change is inaccurate. These videos will probably help visualize the process:
Why Is It Important?
Now that we have a high-level understanding of how blockchain works, we can discuss why there is so much buzz around the technology. The creation of a vast global distributed ledger, running on millions of computers, and available to everyone, on which every kind asset from money to music can be stored, moved, transacted, or exchanged would remove the need for intermediaries and would create a native medium for value. As discussed before, transacting through intermediaries has its issues. Blockchain technology creates trust when we digitally transact with each other, giving the power back to the people while simultaneously removing that power from intermediaries who used to be a required third party when making transactions.
Four things to remember:
1. The network is constantly updated, giving every member the ability to prove ownership at any given time
2. Hacking attacks affecting corporations today would be virtually impossible on the blockchain, as hacking a single block would require hacking every preceding protected block in the transactional history of that blockchain across every ledger of the network simultaneously
3. Blockchain eliminates big fees and saves time with settlement by eliminating steps in the validation process
4. The technology is applicable anywhere that trading occurs, trust is at a premium, and people need protection from identity theft
In other words, while a lot of the focus is on disruption in the financial services industry, most industries could benefit from this technology. Jeremiah Owyang recently posted an excellent article giving a high level overview of potential applications:
This tech creates a fundamental shift in how we add value to a system. It creates the opportunity to build organizations, governments, and social networks never thought of before. The internet allowed people around the world to connect digitally. Blockchain allows those people to transact and pass data back and forth in a decentralized, more transparent, more secure way.
I encourage everyone to stay updated on the development of this technology by following the Blockchain Education Network and some other amazing resources out there:
YouTube Channels & Videos:
Bitcoin gives us, for the first time, a way for one Internet user to transfer a unique piece of digital property to another Internet user, such that the transfer is guaranteed to be safe and secure, everyone knows that the transfer has taken place, and nobody can challenge the legitimacy of the transfer. The consequences of this breakthrough are hard to overstate.” — Marc Andreesen