The term “blockchain” has become something of a buzz word in the financial space as well as other sectors of the economy. It can be likened to the terms “cloud” or “virtualization,” which was a lot of hype that was understood by relatively few people not so long ago. But the concept of the blockchain is incredibly simple.
Blockchain is simply a ledger of records. Usually these records are called transactions and blockchain is very much associated with the transfer of cryptocurrencies, which is linked primarily with finance. But this is just a convention.
Blockchain is used as a public ledger of records, and these records can be any type of data, which is of special significance. To sum up what the blockchain is, is that it is an online, public, encrypted database of records/transactions/agreements.
What is the Blockchain?
The blockchain is incorruptible, transparent and bypasses censorship. It is a list of records, called blocks, which are linked and secured using cryptography. One of the hallmarks of the blockchain is that the record-keeping process is decentralized, making it perfectly suited for the recording of events and records.
Blockchain was the first technology to solve the double spending problem of digital currency, where there was no way to verify how many times a single unit could be spent.
The data is not kept on a single server by a single entity. It is distributed across thousands of computers across the world, each with a record of the blockchain.
Needless to say, this is infinitely safer than one centralized point of failure, with one database kept in one or two servers/computers. Decentralization is the core tenet of blockchain technology and it was created as a direct response to financial centralization, released in 2009 shortly after the banking crisis crippled the Western world.
Usually data is recorded electronically by particular institutions. These institutions include everything from insurance companies to government agencies to hospitals.
Millions of institutions across the planet are currently holding data for their clients, customers or patients. If you go from one insurance company to another, from one country to another, or from one hospital to another, there is generally no way to access all of the necessary data. In many instances it involves duplicate data which is inefficient.
And along comes blockchain. Think of a worldwide insurance database, a worldwide government database, and a worldwide hospital database. All of the data is there, transparent and accurate, online.
Only those with the appropriate permissions could access the data. These technologies and protocols have to be developed on the blockchain platform but are well within reach if enough consensus is attained.
This is largely what the hype about the blockchain is all about. It is a game changer in every sense of the word and is disrupting everything.
There are risks like everything else, but the technology is nothing short of revolutionary. It would obviously raise the question with regard to people who do not want all their insurance, taxation or health data on an online database, which comes with its own flaws.
But blockchain is nothing short of innovative and the blockchain ecosystem is a living embodiment of the words “free market.” There will be options, choices, protocols and measures to suit all preferences and there are millions of developers innovating and designing all manner of applications and platforms on the blockchain.
The issue of course lies in actualizing the potential of the blockchain. All the ideas are great, but they will most likely take 5 years minimum before the technologies are implemented and adopted wide scale, and it is a constantly changing sphere.
But there is no doubt the blockchain is revolutionizing the way that we live. Just think about how much different life is now that everybody has a smartphone, and these phones have been around for a mere decade. The potential of the blockchain reaches so much further.
The blockchain has many other uses aside from large-scale data management. Let’s say you want to make a bet with somebody that it will rain tomorrow for $100.
You set up a contract using code on the blockchain and tomorrow the script will check several data sources and automatically send the money to the winner of the bet. While this is a small-scale example, think of the applications in terms of futures contracts, interest rates, derivatives and pretty much any other condition you can think of.
There is no need for an intermediary and no trust issue; once the conditions are set there is no chance of a third party making an error or stealing your money. And there is no risk of the counterparty not paying if he or she loses the bet. It is held in escrow by the technology.
Wills would be automatically executed with the script, the funds going directly to the recipient’s wallets. Scripts could be run to automatically send 5% of earnings to those in need, without costly charities which take a significant cut. Intermediaries of all kinds have been rendered obsolete.
Where did Blockchain Come From?
Many people confuse Bitcoin with the blockchain. Bitcoin and the blockchain were invented together. Bitcoin was initially put forward by Satoshi Nakamoto in 2008, the online identity of the person who designed Bitcoin and created the original reference implementation document.
Many speculate that it was most likely a group of engineers who invented Bitcoin and then distributed it to the online community, though none can say for certain.
The name of the paper putting forward the concept was “Bitcoin: A Peer-to-Peer Electronic Cash System” and in January 2009 the first Bitcoin software that launched the network enabling the Bitcoin tokens to be transacted was released.
The underlying infrastructure that Bitcoin operated from was called the blockchain. It is the blockchain that has gotten the world interested, more than Bitcoin.
People started to realize that the underlying blockchain technology could be used for so much more than financial transactions. And other cryptocurrencies started to get built using the blockchain. As of 2018 all major financial institutions are looking at ways to integrate blockchain in some fashion.
Satoshi Nakamoto set up a Bitcoin forum and a site called Bitcoin.org, as well as other websites. In mid-2010, he handed the project over to Gavin Andreson who he had worked with on the development of the project since 2009.
Nakamoto then vanished without a trace, leading many to question the identity of the mysterious blockchain inventor. Prior to this time, he had made all the changes to the source code himself.
Bitcoin and the blockchain was initially set up in response to the financial system. Nakamoto made commentary on the fractional reserve banking system and even left a message on the first mined block on the blockchain which reads “’The Times 3 January 2009 Chancellor on brink of second bailout for banks.”
How Blockchain Works
We know that blockchain is a list of records that is continuously growing, each block/record secured and linked by cryptography. How the cryptography works might be a little more intricate.
Each cryptocurrency has its own blockchain, and its own software. And as such, each blockchain can run a little differently (or, in most cases, a lot differently). What is common to each of them is that they are all simply a ledger of records of some sort. The main theme being that the blockchain has to record transactions correctly, which all do.
When you send Bitcoins from wallet address A to wallet address B, this sends a signal to the Bitcoin network. You have an outstanding transaction and miners group your outstanding transactions with a bunch of other transactions in a mining block.
These Bitcoin “miners” then solve a computational puzzle in order to validate the whole block of transactions. The answer to this puzzle is included in the block and is then validated by other miners when solving other puzzles. All the pieces beautifully add together.
In order to solve the puzzle, the miners continually guess a number, much like cracking any encryption. This uses an awful lot of computing power and energy.
There is no way of knowing which number will work. If the answer to the puzzle is within a certain range, it will solve the puzzle. This number is between 0 and 4,294,967,296 for Bitcoin miners.
The first miner to get a number within this range announces his or her success to the network. The miners then check that the solution is correct, and the block is then added to the chain.
All the miners leave that block and work on the next one. A miner is a computer that cracks cryptographical functions, obviously with a human at the helm.
As a reward, the miner gets a certain amount of Bitcoin. While the rewards can be generous running a node can get very costly and there is a lot of luck involved. It is just guessing numbers using computing power. This type of blockchain validation is known as Proof of Work (POW).
It is the most commonly found form of blockchain methodology. It takes an average of 10 minutes to complete a block. This 10-minute slot is by design so there is a steady release of Bitcoins, controlling the rate of inflation.
This POW method has its advantages and its disadvantages. The rewards incentivize miners to solve these puzzles which adds protection. They validate the system.
POW systems are vulnerable to a 51% attack if a certain entity owned over 51% of the mining nodes and started rewriting the blockchain. Bitcoin miners now have 13,000 times more computing power than the world’s biggest 500 supercomputers. In other words, it would be extremely unlikely for this to happen.
However, what could happen is corruption at the level of the mining pools, if they gather their resources together. From this perspective the argument has been made that the Bitcoin blockchain is possibly centralized at the mining level, and a core feature of cryptocurrencies is that they are decentralized, so no group has too much power.
Some also worry that mining will become centralized in areas where electricity becomes cheap, such as in China. POW requires enormous amounts of computing power and advanced hardware.
Many studies have indicated that the electrical cost of running and maintaining Proof of Work networks like Bitcoin is as costly, if not more so, than powering millions of homes across the United States.
In sum, proof of work is simply a system where miners prove they solved the puzzle. It does not have to be any more complex than this and it is not necessary to delve deeper.
Proof of Stake (POS) is the alternative to POW. POS operates on the principle that the larger the stake somebody has in the cryptocurrency, the more likely they will be to behave in an optimal manner, as they have “skin in the game.”
These blocks are not mined but are “forged” in a pseudorandom manner. The POS system is typically when coins are pre-mined. But this raises the issue as to who the pre-mined tokens are given to.
POS is used by Nxt, Peercoin, Neo, Pivx, OkCash BlackCoin, DASH and Gridcoin, among others. Ethereum is planning on moving to a POS from a POW. POS can also suffer from a “Nothing at Stake Attack,” which is too technical for this article.
Both systems involve validating that the transactions on the blockchain are correct. There are also a number of hybrid systems involving both POS and POW.
It is very difficult to avoid centralization at some level, whether it be investors, miners or core developers, and it can be said that all cryptocurrencies suffer from centralization to a degree, as one group usually has more power than the others.
Blockchain Changes and Hard Forks
One of the issues with the Bitcoin blockchain is that of scalability. In the Bitcoin blockchain, each block has a limit of 1 MB.
With widespread adoption, this proved to be insufficient and it resulted in slow transaction times for Bitcoin. This also resulted in large transaction fees for Bitcoin, ruining one of the core features which made it superior to the traditional banking system.
To combat this dilemma Bitcoin decided to adopt a technical feature known as Segregated Witness instead of increasing the block size. This has not worked because many Bitcoin wallets are not SegWit compatible, meaning that the feature is not being used, fees are still huge and Bitcoin transactions are still slow.
Because Bitcoin decided to opt for SegWit instead of increasing the block size, a rogue developer decided to build an alternative blockchain leading to the creation of Bitcoin Cash (BCH).
There is something of a battle going on between the two coins, as well as Bitcoin Gold, another Bitcoin derivative. This has led many to question the authenticity of Bitcoin itself, as though there are only 21 million billion, there are also 21 million BCH and 21 million Bitcoin Gold.
The blockchains are the same until a certain block, and then it splits into two separate blockchains with the old and the new currency. This is extremely confusing and complex to non-technical individuals.
Many believed that BCH would peter out, but its price has gone up since launching. This is because, simply put, it is cheaper and faster than Bitcoin, and vendors in China are not overly concerned about ideological concerns and the mechanics.
They just know that BCH is faster and cheaper. People respond to incentives, and it would not do to dismiss BCH out of hand like so many did.
However, most large-scale institutional investors are going to go to Bitcoin first. As well as this, software is being developed that is SegWit friendly which should see increased interest and adoption of Bitcoin and its corresponding blockchain.
At the time of this writing, Coinbase and Blockchain Info are implementing SegWit compatibility, and currently only 12% of Bitcoin transactions are Segwit compatible. But when it gets fully adopted, the fees are expected to be close to zero, and fees have already fallen.
What is surprising is that all users have to do to avail of lower fees right now is to switch to a SegWit-compatible wallet, which few have done.
A hard fork on a blockchain is not that uncommon. Ethereum went through a hard fork and created a “new” currency, and the “old” currency is known as Ethereum Classic.
What is interesting is the naming, as in the case of Ethereum, it changed the original code but kept the original name. What Bitcoin Cash developers are arguing is that they have the original code, so they are the original Bitcoin, and refer to Bitcoin as it is commonly known as “Legacy Bitcoin,” much like Ethereum Classic.
How Can Blockchain Be Used in Business?
The blockchain applications are limitless. At this stage, it is about adoption and integration. Running a business with a currency that can go up or down 50% in a month might make for a strange balance sheet. Cryptocurrencies themselves are too volatile at the present time.
However, there are many local stores in certain areas which accept Bitcoin, and there are no small number of applications to make it easy to accept Bitcoin as a medium of payment. It usually involves no more than simply swiping your smartphone on a screen. In this sense, it is easy to currently accept Bitcoin directly as a form of payment for goods and services.
Only a small percentage of customers are going to pay in this manner. The difficulty will arise in terms of adjusting the balance sheet for taxation and regulation if you are accepting Bitcoin or any other cryptocurrency, and this will quite quickly get messy. And there is not an awful lot of expert cryptocurrency experts out there, the industry still in its infancy.
Goods can currently be bought on Amazon with Bitcoin and there are a number of large holiday and flight operators that accept Bitcoin. PWC, one of the top 4 accounting firms in the world, recently announced it was accepting Bitcoin payments for its services, which is of massive significance in terms of Bitcoin adoption.
Once cryptocurrencies are recognized as legal tender and businesses know where they stand, it will allow for seamless integration. Many people get lost with regard to which cryptocurrency will take the lead, and this could be confusing as there would be people using all different kinds of different currencies.
What would happen is that a business owner would have a preferred currency and the buyer would have a preferred currency. The cryptos would simply be swapped real time or swapped to fiat through an interface such as ShapeShift or Changelly.
Aside from simply accepting cryptocurrencies as a form of payment, there are a myriad of other ways through which blockchains can apply to businesses. If all transactions are recorded and put into the blockchain, this will allow for automated taxation. No more money spent on tax accountants.
This could be a huge relief to many businesses. In terms of inventory supply, a script could be written to order more of a certain product when a specific number has been sold. Paying employees is another great way to make use of the blockchain, especially international employees. It would be done quickly and cheaply.
Bitwage, which claims to be the world’s first cryptocurrency-based payroll service, states that it can “circumvent the costly fees associated with transferring money internationally, as well as the time it takes for such funds to move from bank to bank, payments made via Bitcoin can save both money and time for employers and employees alike.”
The Future of Blockchain
While blockchain technology is often called disruptive, it can also be called foundational. Even though it may destroy many industries, in most cases it will simply make them adapt to modern times using more sophisticated technology.
Existing industries will get better, quicker, cheaper and offer more services. The process of blockchain adoption will be gradual and steady, though it could be adopted quicker if regulatory authorities work hand in hand with the advances in blockchain technology.