What is a Blockchain?
Blockchain technology is not as new as most people might think. While there could be arguments on the true origination of Blockchains, we will use the initial release date of Bitcoin, January 2009. Bitcoin is not “the” Blockchain though. It’s transferred on top of a Blockchain, which is very important to remember.
Before we get into what a Blockchain is though, let’s figure out why they are important. If Blockchains weren’t important we wouldn’t need to know what they are after all.
Important Note!There are MULTIPLE Blockchains. Some articles talk about limitations of “the” Blockchain, but this is not accurate. Think of it in terms of cars. KIA and Ferrari both make cars, but the engines/frame/etc. are customized to fit their purpose. Ethereum is a Blockchain and is slightly different from Bitcoin’s Blockchain. It is built to have different features when compared to Bitcoin’s Blockchain. You cannot transfer Bitcoin on Ethereum’s Blockchain, just like you can’t drop the Ferrari motor into the KIA. Be careful when people say “the” Blockchain without designating Bitcoin, Ethereum, Waves Platform, Rchain, etc.
What are some of the benefits a Blockchain offers that make it important?
- Consumer Banking – There are no overdraft fees because it is impossible to transfer more than what your Wallet has. Transactions are being posted 24/7, so there is no cut-off time for deposits or withdraws. There is more than just a password between your account and a hacker. A private key file must also be present when signing a transaction and transferring from your Wallet. Wallets will be covered in a future post, so stay tuned!
- International Transfers – Fees become almost non-existent and transfers happen within minutes from your own home. There is no need to go to a bank or fill out wire forms and pay high fees.
- Transparency, Transparency, Transparency – Transactions can be seen on any Block Explorer (more info coming soon!). The transparency allows anyone to see where a local government or charity group is spending their money. Audit teams will benefit greatly because it cuts out any ‘accidental’ or ‘forgotten’ accounting entries.
- Trustless Exchanges – Payments over a Blockchain are verified through the use of algorithms and the consensus of all nodes connected. This means someone cannot send you money that bounces a few days later. They can make a transfer right there on the spot, and if it failed you would know they did not have the money. The real star here though will be Smart Contracts because they can act as an Escrow. Each party can send their end of the bargain to the Smart Contract, which will verify the assets are as expected and then pass them on to the new owner. It can just as easily return the assets to their original owner if the other person does not hold up to their end of the deal. So, what is a Smart Contract?
- Micro-Transactions – A La Carte purchases can become even more ‘micro’. Don’t want to pay $10 a month subscription to that site? That’s fine, you now have the option to pay $0.05 for each article you want to read. A music artist can sell their songs without needing a middle-man. This means as soon as a user clicks download, your account instantly receives its money. This also allows the artist to essentially be paid in real time, without waiting 2 weeks or a month for a paycheck. Go ahead, send me a couple wei or satoshi and see how easy it is! Don’t know what those are? Check back soon!
- Security – A Blockchain is distributed across a network of nodes, which means 1 central body does not maintain it. Because of the Blockchain’s distributed nature, fraudulent transactions are almost impossible. The distributed nature of a Blockchain also means that any malicious attack would need to gain control of 51% of the network (more info coming soon!).
The simplest explanation is that a Blockchain is a distributed database. A Peer-to-Peer (P2P) network of computers, called nodes, maintain the Blockchain by storing a copy of that Blockchain’s records. The nodes will verify transactions as they are presented on the Blockchain. This ensures no ‘over-drafting’ or double spending. If the nodes agree a transaction is valid, it executes, then combined with other transactions, and stored in a ‘Block’. This block is then appended to the Blockchain (name make sense now?).
Real Life Example:
John wants to send Brittany 1 Bitcoin. When John initiates the transaction, the network of nodes ensures the transaction is valid through the use of algorithms. If the nodes agree that John has 1 BTC to send and the wallet address for Brittany is valid, it will process the transaction. This would likely finish in ~1 hour since it is on the Bitcoin Blockchain. Better than waiting 2-3 days with the current banking systems right?
These transactions do not have to be a transfer of a Cryptocurrency though. A Blockchain could allow any asset that has been made digital to be transferred. This allows a Blockchain to provide benefits to transfers of Real Estate, Automobiles, Music, Art, etc. A title or deed could be in your hands in ~1 hour after buying a house or paying off a car loan. No more waiting weeks for a bank or intermediary to process everything and send it your way.
Important Note!Transaction times will vary depending on a few different factors, which are beyond the scope of this post. The current goal of a lot of Blockchains is to speed up the process as much as possible, resulting in near instant transfers. Sometimes it may take minutes and sometimes a few hours. Either way, it is still better than waiting 2-3 days for a bank to ‘post’ your transaction.
Blockchains are the next up-and-coming technology that will take Globalization to the next level and revolutionize multiple industries. Currently you will likely hear about transfers of Cryptocurrencies. As time goes on it will not be uncommon to transfer a variety of assets on a Blockchain (titles, stocks, bonds, deeds, songs, etc.). This post was meant to provide a very general idea of what a Blockchain is without going into to much technical jargon. To get a similar introduction to the fascinating world of Cryptocurrencies be sure to check out this post: What are Cryptocurrencies?