Blockchain – what is it?
For those familiar with it, it might surprise you to realize how few people have even heard of it. Blockchain is an extremely promising technology in our endless search for ways to increase computing power, speed and security. By eliminating the “middle man,” both security and speed are automatically increased, which by itself could be considered an incredible increase in computing power. Many startups are going this way. Banks, insurance companies, video games and more are either seriously considering it, or already using it.
In fact, most people who HAVE heard of blockchain probably automatically think of the bitcoin revolution. Indeed, if you Google blockchain, the very first place it goes, Blockgeeks, focuses almost entirely on bitcoin and other cryptocurrency.
That’s because the inventor of blockchain, a person or a group (no one knows but him… or her… or them…), known as Satoshi Nakamoto, is also the designer and inventor of Bitcoin. Bitcoin transactions are peer-to-peer, meaning there is no intermediary. The transactions are verified by network nodes. Then they are recorded in a blockchain.
But perhaps I need to back up just a little. What, exactly, IS a blockchain?
The short answer is, it is a public distributed ledger. Let me explain further.
A blockchain is an ever growing list of “blocks,” which are records that are linked to each other and secured using cryptography. When we first began to hear about it, this ingenious invention was almost exclusively associated with Bitcoin. However, that was just the beginning.
Blockchain is an incredibly secure and fast technology. Instead of copying information, an ongoing, “slow” and risky business, especially as hackers become ever more sophisticated, blockchain technology allows digital information to be distributed, rather than copied. There is no “maybe.” It is truly a revolutionary development. It has created the very backbone of a entirely new type of internet.
Here’s how it works for a typical Bitcoin transaction: Someone, somewhere, asks for a transaction. That transaction is then broadcast to a P2P network, which consists of computers that are known as nodes.
The network of nodes then validates the transaction, as well as the user’s status, using known algorithms.
A transaction that has been verified can involve cryptocurrency, such as Bitcoin, contracts, records or other digital information.
Once the transaction has been verified, it is combined with other transactions to create a new block of data for the ledger. That new block is then added to the existing blockchain. This process is completed in a manner that is permanent and unalterable. At this point, the transaction is complete.
Don Tapscott of the of Blockchain Research Institute said in an article he wrote in 2015, “At its most basic, the blockchain is global spreadsheet — an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value and importance to humankind: birth and death certificates, marriage licenses, deeds and titles of ownership, educational degrees, financial accounts, medical procedures, insurance claims, votes, transactions between smart objects, and anything else that can be expressed in code. This ledger represents the truth because mass collaboration constantly reconciles it.”
That is a stunning statement! Think what it will do just for contracts alone! Instead of having to check, double check and triple check everything before signing, vast amounts of instantly available information instantly verify or reject it.
Furthermore, Mr. Tapscott adds, “Some scholars have argued that the invention of double-entry bookkeeping enabled the rise of capitalism and the nation state… Today, the new platform enables a reconciliation of digital records — call it The digital Reconciliation. The Internet of Everything needs a Ledger of Everything. Business, commerce and the economy need a Digital Reckoning. Get ready for the World Wide Ledger. ” That should cause a chill to run down the spine of every nationalist and conspiracy theorist on the planet!
Like it or not, this is the technology that will kick down borders and open wide the doors for a single, world wide government that is able to accurately keep track of every citizen. The few who are not “in the system” might have trouble to access any services, including things such as such basics as food and medical care. In a world that has surpassed the 7 billion mark for population, many see a single, fully integrated and centralized world wide system as being the way to ensure everyone “plays nice in the sandbox” and has enough to eat, proper medical care, etc.
But let’s continue to look at what blockchain is…
Another way to look at blockchain is as a single, distributed database. It is the equivalent of a an excel document that is duplicated many thousands of times across a large network of computers. The entire network is designed such that this document is regularly updated. This is basically what the blockchain does.
All the information that is stored on a blockchain is part of a shared and constantly reconciled database. Since the database isn’t stored in a single location, the records are always public and therefore easily verified. Without a centralized version of the data, it is virtually impossible for hacker to corrupt, yet because it is hosted on millions of computers simultaneously, the data is readily accessible to anyone on the internet, from virtually anywhere.
What are some the advantages of blockchain technology?
Just as in the early days of the internet, we are really still learning about the possibilities opened to us from this technology. Still, we are already taking advantage of the things we know about.
One example is in the way we collaborate on documents. What we have been doing before blockchain required sending a document to someone, asking them to make revisions to it. Then we had to wait for them to send the revised work back to us before we could see the changes and, if necessary, make further revisions. Two different people in two locations, even on computers side by side in the same location, could not work on the same database at the same time, because traditional systems lock you out of editing until the other person logs out.
Banks work the same way. Every time a request is made to transfer money from one client to another, they must spend time and resources to coordinate, synchronize and check to make sure the transaction occurs exactly as it is supposed to. Every time an EFT is made, for example, the money is held by the originator until confirmation is received that the funds have been accepted.
Imagine how costly that time is over a single, 24 hour period for a typical national or international bank!
Blockchain technology eliminates a huge amount of this rather cumbersome process, because it uses a single transaction ledger with a single version of records on a single database that both parties have access to. This, in turn, greatly simplifies the coordination and validation process, saving time, resources and of course, money.
An analogy used by William Mougayar, author of The Business Blockchain, is the example of Google Docs. First of all, as pointed out by a user with the handle jodavaho on Hacker News about a year ago, in regard to the error by some that Google Docs are an example of blockchain technology, “It’s an analogy. If Google Docs used blockchain, it would be an example. Ant farms work (sic) like real farms does not mean real farms use ant farms.” So… let’s not get mixed up or start any urban legends!
However, the Google Docs analogy is a good one in helping us to understand some of the power of the technology.
Unlike in our document collaboration scenario described above, with Google Docs, everyone working on the document has access to it at the same time. Everyone sees the same version at the same time. This eliminates the potential for getting versions mixed up or losing track, as can so easily occur when documents must be sent back and forth for revision, updates, etc., each time requiring everyone but the active editor to be logged out.
But is it safe?
Because blockchain, like the internet, is not represented by a single machine or even a small group, but a vast network, it already has robustness built right in. It doesn’t matter if a server goes down somewhere, or even several servers. Blockchain, like the internet, itself, is comprised of a vast network of independent machines.
Due to the fact that identical blocks of information are stored across this network, the blockchain cannot be controlled by any one entity, nor can it have a single point of failure.
An excellent example is Bitcoin, invented by “Satoshi Nakamoto” in 2008, who released the first bitcoin software in early 2009. This digital currency’s blockchain has been running since then without any significant disruption.
Perhaps the biggest problem to date is the man who mined some 7500 Bitcoins in its infancy, but saw no real future in it. When his computer crashed, he removed the hard drive with his Bitcoin “wallet” on it, which he stored in a drawer for time, until he finally threw it in the trash. To his utter dismay, Bitcoin did, as everyone now knows, not only stick around, but grew exponentially. When he went to inquire at the landfill site his old hard drive went into, he discovered that it is buried about 2 feet deep in the UK landfill under an estimated 25,000 cubic meters of waste and earth.
In other words, along with a few hacked PCs and mismanagement such as the above mentioned heartbreaking story, any problems that have been associated with the Bitcoin blockchain are from human error and bad intention. Much like the internet, itself, the underlying technology has not been a problem.
Because the blockchain network exists in an ongoing and public state of consensus, automatically checking in with itself every ten minutes, it is at once both transparent and incorruptible. Using a self-checking digital system, the network reconciles every transaction automatically at ten minute intervals.
It is virtually impossible to corrupt any unit of information on the blockchain, because the power necessary to override the entire network to make the change would be astronomical.
Who controls the blockchain?
Therein lies one of the really interesting facts about this new technology, including its implications for commerce.
No one controls the blockchain. In other words, it is decentralized by design. The network operates under its own management, on a peer-to-peer basis. Bitcoin, which is now widely accepted by businesses around the world, is managed by its network, not by any central authority.
How powerful is this? A recent example occurred when China tried to crack down on users and control the cryptcurrency within their borders. This sent a brief ripple through the world, where we witnessed a brief drop in the value of Bitcoin. But within days, Bitcoin continued its meteoric rise. In other words, not even a country as powerful and controlling as China can control the blockchain.
Indeed, it is this very decentralized design that has not only allowed Bitcoin to become mainstream, but has now spawned hundreds of new cryptocurrencies and a new term: ICO (initial coin offering). By its nature, using blockchain technology, it is completely unregulated and often very risky. ICOs are becoming a favorite way of crowdfunding for things like capital for startups. When an ICO goes out, a percentage of the newly “minted” cryptocurrency is sold either for cash or other established cryptocurrencies.
As of August, 2017, more than 400 ICOs have been conducted. Ethereum, proposed by Vitalik Buterin in 2013, developed with crowdfunding in 2014 and live in 2015, has now become the leading blockchain platform for ICOs, accounting for more than 50% of market share.
ICOs continue to appear, at a rate of more than 20 per month, as of May, 2017. No one yet knows what will happen because of this or how it will affect the value of cryptocurrencies. ICOs are used for many very useful and commendable things, such as raising capital for corporate expansion and fundraising for charities, but they are also rife with fraud. Because of this, governments around the world are working hard to figure out how to regulate them. Does that mean that they will regulate blockchain technology, itself? Can they? Has any government successfully regulated the internet?
The reality seems to be that the only way to truly regulate blockchain, much like the internet, is to shut the power off. With smartphones, portable solar cells and satellite wifi available almost anywhere on the planet, “pulling the plug” is not very realistic.
Governments may be able to monitor the internet to an extent and crack down on people using it, but to actually control the blockchain seems like the idea of a politician, rather than an educated user.
Who will use it?
Because the blockchain has the capability of removing the middleman in financial transactions, it is almost a given that financial institutions will have to change the way they do business. After all, they are the single largest (and wealthiest) “middleman” in the financial world.
With blockchain, users can make transactions for almost anything on a peer-to-peer basis, without any kind of bank involvement. While banks may lose some of their turf as the middleman, many are now offering and trading in various cryptocurrencies. They are also taking advantage of the huge cost savings in data management and other record keeping. In fact, banks are scrambling to hire blockchain developers. Experienced blockchain developers are almost able to ask for any salary they like.
We have really only begun to see where the blockchain will take us. Some are calling this, likely rightly so, Web 3.0. The huge potential for new business applications is worthy of another article in itself, and likely more than one.
Will you use it? Perhaps you already are. Perhaps you are and don’t even realize it!
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