Blockchain in 60 seconds

We are told that blockchain is the next BIG thing - that it will disrupt governments, financial institutions, and the world generally. Nevertheless, what is it - exactly? That seems to depend on whom you ask. To some it is about cryptocurrencies like Bitcoin. To others it’s about eliminating intermediaries such as banks and trust companies when transacting business. For still others it is about speculation or making money by offering encryption services. Add to these varied perspectives a large portion of hype, and it is a wonder anyone can figure this out!

From https://www.garudax.id/pulse/can-we-reach-consensus-blockchain-robert-eriksson 

I offer this short post as an imperfect primer on blockchain - from someone who has struggled to unravel the truth behind the enigma of blockchain technology.

What is a "blockchain"?

While people use the term "blockchain" as if there were just one, in reality there are many. A blockchain is simply a database made up of "blocks" (a collection of one or more records), which are then encrypted and "chain"ed together in such a way that a change to any single block can be immediately detected. Blockchain databases are intended to store data that, once written, should never be changed - such as entries in a bank ledger (think Bitcoin transactions). A blockchain database is not appropriate for data that changes frequently - such as an organization's internal databases for CRM or financial accounting. Moreover, adding records to a blockchain database is not free, as a 3rd-party (referred to as a “miner” in the blockchain universe) needs to expend significant effort to encrypt the data before it is written to the database. For those just a bit technically inclined you will find an excellent explanation of blockchain databases here.

So why do we need yet another database?

While blockchain's origins are somewhat uncertain, the story is that a programmer (or group of programmers) angered by the devastation of the financial meltdown of 2008 decided to create a way that individuals could conduct financial transactions without banks. To accomplish this, someone or something would need to play the role of trusted intermediary that banks play today. Enter the blockchain database. Designed to be tamper-proof; anything written to a blockchain database can be trusted to reflect the truth. 

Not only would the blockchain database be encrypted and virtually unalterable, there would be multiple copies on computers around the world. Therefore, if one copy were tampered with or became corrupted, it would immediately be detected and replaced with one of the remaining intact copies.

The net result is an encrypted, unalterable, distributed record of transactions that is more reliable than the single database at your bank!

Enter Bitcoin

Bitcoin is an alternative currency (referred to as a cryptocurrency in the blockchain universe) that relies on the Bitcoin blockchain (just one of the many blockchain databases available). Bitcoin transactions do not require a bank or a government to guarantee them because the blockchain database is tamper-proof. At first bitcoin was used by individuals who wanted to escape government scrutiny - for valid or nefarious reasons. More recently, Bitcoin has become mainstream - used by regular folk and legitimate businesses.

The miners

This is an odd term - and one that took me a while to understand. When you hear that someone is mining a cryptocurrency, what he or she is actually doing is searching for the magic bit of data (referred to as an encryption key) to encrypt the next block in the chain. Because finding these keys is computationally intensive and requires a lot of expensive computing hardware, those wishing to write a new block to the chain compensate miners with cryptocurrency. This is the reason adding records (blocks) to a blockchain can be expensive.

And the speculators

While Bitcoin and other cryptocurrencies were originally intended as a medium of exchange, the number of coins in circulation is limited. This means that it not only serves as a currency, but also behaves like a stock, which can rise and fall in value. As of this writing, a single Bitcoin was trading at about $4,600. 

Contracts for the people

Although Bitcoin and other cryptocurrencies have attracted most of the attention and speculation, blockchain databases can be used for much more than exchanging value. In fact, it may be the more mundane uses that turn out to be the most important! For example, in many parts of the world, there are no reliable records of land or property ownership. Where governments cannot be relied upon to maintain such records blockchain databases can fill the need. Ethereum is a blockchain database designed not for currency, but for storing contracts in a secure and reliable way.

Bankers running scared

Cryptocurrencies and blockchain contracts have the potential to significantly reduce, or even eliminate, the need for traditional banking in our daily lives. This point has not been lost on financial institutions and governments, who are scrambling to find ways to coopt and regulate these technologies lest they be disintermediated. One example of blockchain's superiority is in international funds transfers. Prior to blockchain, it could take days or even weeks for banks in different countries to clear a transaction. With blockchain, the same transaction can be accomplished in seconds and without the risk of human error.

Governments too are concerned. Important powers of all governments are to issue and regulate currency and to levy taxes. Blockchain circumvents these powers. Transactions conducted through cryptocurrencies do not rely on government-issued currency, and any profits made may not be visible to taxing authorities. 

And yet more speculators

Blockchain startups have invented a new way to raise capital, called an "initial coin offering" or ICO. This is sort of a cross between an IPO and a Kickstarter campaign. Instead of shares in the company, the startup is offering some amount of its cryptocurrency in exchange for dollars. So far, these ICOs have skirted SEC regulations by treating the coin exchanged for dollars as a sort of "thank you gift". However, the SEC is looking into whether and how these ICOs should be regulated. In the meantime, ICOs are raising millions in cash with little regulation, with investors betting on healthy returns as the new coins increase in value.

Pulling back the curtain

On its face, blockchain technologies appear to offer secure and reliable peer-to-peer commerce and record keeping free from government oversight or the need for financial institutions or other intermediaries. This is true in part, until one must leave the blockchain universe and re-enter the world of tangible things and real people. It is instructive to note that cryptocurrencies’ values are still reported in currencies backed by governments (dollars, yen, etc.) - because ultimately those who hold them want to be able to buy things in the real economy. Moreover, even though blockchain-based contracts cannot be altered once recorded, they still must be interpreted and executed by humans in the real world.

This leaves us where?

So, depending on who you’re listening to, blockchain is a way to conduct business without the need for or scrutiny of governments and banks, a way to make money "mining" for the next encryption key, a speculative investment, or a way to provide secure and reliable records of all types at a much lower cost, and without the need for financial institutions or governments.

While speculation on cryptocurrencies and ICOs will undoubtedly mint many new millionaires, it's my belief that this last use - to enable secure and reliable contracts between parties without the need for a central "trusted authority" will, in the long run, be the most significant and transformational aspect of blockchain technologies.

with Onur Tezic