If you scour the web for information on blockchain technology, you may find that a lot of beginner’s articles still overwhelm you with technical jargon and rapidly introduce new terminology without adequate explanation. While bitcoin is perhaps the most known example of a blockchain, there are numerous others. At its core, a blockchain is a database, or ledger, combined with a peer to peer payment system. That certainly doesn’t sound ground-breaking or revolutionary, now does it? Of course not. Databases have been around for years and are used in innumerable industries by countless individuals, groups, companies, and more. And we’ve all used electronic payment methods for years. But to a large extent, these are created and stored on central servers where one or a limited number of entities controls access to and modification of records. Transactions must pass through a central authority. Transactions and records fall under the jurisdiction of the database or ledger owner, be it a government, private company or other. Transactions and records are essentially owned by someone else, controlled by an entity not always trustworthy or benevolent. Transactions are secured by trust in the central servers and the entities involved; trust in all parties involved in creating and supporting the software, maintaining the hardware, entering the transaction records, accessing the transaction records, regulating the industry, governing the industry and on and on. Seemingly endless trust lines with multiple potential points of failure, all centralized and sometimes subject to arbitrary geopolitical rules.
All of that changes with a blockchain. In basic terms, a blockchain is a database running continuously and simultaneously on many computers distributed throughout the world using open source network software. This results in a series of permanent records, or blocks, written to a database, or ledger, as a progressive series, or chain. Once written, the records cannot be erased or undone. No single entity controls the chain of records; it is distributed throughout the entire network of computers. In addition, the records are encrypted, and the encryption methods used are generally considered unbreakable by anything short of a quantum computer, which doesn’t yet exist.
A key feature of a these records is permanence, or immutability. Once a transaction is recorded and confirmed by other nodes, it cannot be modified in any way unless there is network consensus that the record is incorrect and in need of revision. This is exceedingly rare because it requires the entire blockchain be rolled back to that point, and there must be network consensus to do so. The process of doing this creates a fork in the chain, a topic of a future article. Basically, a fork results in two new chains that share a common ledger up to the point of contention, at which point two ledgers can result. If only one receives the majority of network node support, the other fork often becomes meaningless and fades away. The previous transaction ledger is unaffected by this. Rarely both forks receive support going forward, and future transactions occur on both chains.
How does cryptocurrency fit in?
The blockchain beginner often really wants to read about cryptocurrencies built using the technology. Blockchain transactions must be validated and confirmed by the rest of the decentralized network before they are written into the permanent ledger. The network nodes must reach a consensus about the details before validating the transaction. To do this, each computer on the network runs software written specifically for that blockchain. The network software used to create and maintain a node is open-source and available to anyone. Anyone can download the source code and create a node. Of course, there must be some type of incentive to entice individuals or groups into running these network nodes, and there must be some method for allowing peer-to-peer transactions. Public blockchains are therefore created with accompanying digital currencies or tokens. These digital encrypted instruments are usually referred to as cryptocurrencies, with the most recognized being bitcoin. However, there are over 900 other cryptocurrencies at the time of this writing. While most are decentralized like bitcoin, a few are centralized, such as Ripple’s network for rapid, inexpensive interbank financial transactions. Some are mined with rewards created on a pace that slows over time based on the original algorithms. Others are pre-mined, meaning that all of the available coins were created at the start of the blockchain. Some currencies are not so much transaction currencies but rather programming platforms for construction of transaction systems. Ethereum is probably the most recognized of these. NEM, NEO, and IOTA are other examples. Many believe these types of currencies will power the next internet revolution-the Internet of Things (IOT) where all devices are connected and communicate, where transactions occur rapidly and inexpensively without user intervention unless needed.
What are blockchains used for?
Blockchains can take the place of any centralized database or financial record, with the advantages stated above. No individual or group can manipulate transactions because no individual or group controls the transaction ledger. While the decentralized nature of the blockchain may be its key strength, it is also critical to remember transactions are public, permanent, encrypted and immutable. These five characteristics form the basis for many compelling use cases. Many predict we will see legal contracts, real estate transactions, property ownership records, medical records, insurance contracts and payouts, and of course financial transactions including the buying and selling of goods all performed on a blockchain. Automakers are incorporating blockchain tech into self-driving cars because of the rapid transaction speeds and near-zero cost of performing transactions. Medical device companies are exploring incorporating the technology into heart monitors, diabetes pumps, and many other devices. Worldwide logistics will improve. Global commerce will grow. Other uses will certainly be developed as things progress. Think back to the internet in 1995. Many things we routinely do every day online in 2017 couldn’t have been imagined by most in 1995. Many feel blockchain technology is likely to see the same progression over the next 10-20 years.
Specific blockchain uses
For a more concrete example, let’s look at the home buying process as it exists in 2017. After looking at numerous houses, a buyer finally decides on a property that meets his or her criteria. The buyer makes an offer through a real estate agent to the seller. Often this includes a deposit towards the purchase price. Once terms are agreed, the buyer must apply for financing through a traditional bank and wait 45-60 days. During this period, the bank performs credit checks, account reviews, property land record reviews, investigates legal records of the buyer and seller, employment records, and so on. The cost of these services usually runs in the thousands of dollars and is often charged to the buyer. Now imagine that your entire credit history is securely stored on a blockchain and encrypted with your very strong private key. The entire history of the property is recorded on a blockchain in a similar fashion. All previous purchases, sales, liens, legal issues, land registry information and so on are all right there available to anyone to research. And this information can be retrieved in seconds for minimal cost. Because it is encrypted, no one can access it without authorization. Because it is stored on an immutable ledger, there are no concerns about the accuracy and authenticity. So why pay thousands of dollars to a bank or lawyer for a title search and title insurance? It would no longer be necessary to pay for these intermediary services when accurate information is available with a few key presses.
Going one step further, using a blockchain such as Ethereum allows one to create contracts between parties that automatically execute when conditions are met. These conditional smart contracts can be structured so that funds are released from one party to another once the previously agreed upon contract terms have been met. Eliminating the middle man in most transactions will result in significant savings of both time and money. The Ethereum network is currently in its infancy, and many predict big things will be built on the platform.
We are still in the infancy stage of development for blockchain technology. No doubt there will many bumps in the road as the field advances. But there will certainly be many exciting new products and services built on blochain and cryptocurrency architectures. Be sure to check out our discussion threads in our Beginner’s section for more.