If you are reading this, prepare to learn the basics of blockchain in less than 5 minutes. Also, I’m quite impressed that you still don’t know what it is. Get it together.
Blockchain is a virtual ledger. That’s it, quite literally.
Virtual: existing or occurring on computers or on the Internet
Ledger: a book or collection of accounts in which account transactions are recorded
How did this form of virtual ledger become to be known as the “fifth evolution” of computing? To understand this, let’s look at four of the key elements proposed by the technology.
1.- Immutable ledger - Data is safely stored and time-stamped
Blockchain records data in batches, called “blocks”. Data that is added in a defined timeframe is registered in a specific block. After the data in that block is validated, it is “closed” and all recorded transactions living in said block are sealed, time-stamped, and future transaction can only be registered in subsequent blocks. To understand the value of immutability, think of the way cryptocurrency uses blockchain for a second – to record money transactions. Imagine the value of a technology that can track the life of money: where it is, where it has been, and what has happened through its existence, without the risk of the historical record being corrupted. “Ok, the record history can’t be corrupted. What about the block validations? How can blockchain enforce the accurate validation of the current blocks?” You may ask.
2.- Decentralized - No central authority
There are different protocols to validate blocks in different blockchains, but they all strive to have some degree of decentralization. This means that transactions are not validated by a central authority but distributed among a network of independent and autonomous parties. One of the main objectives of decentralization is to provide security against corrupt actors trying to validate illegitimate data transactions. An update is only added to the blockchain once a consensus has been reached among all the participating parties on the network. In a centralized structure, think most traditional corporations, if the central authority is compromised, the whole system is compromised. In a decentralized structure, if one party acts against the wellbeing and proper functioning of the ledger, the network can still run reliably and uninterrupted thanks to the rest of the network participants. There are different incentives for the validating parties to act in accordance with the blockchain validation protocol, and to ensure that no fraud is recorded into the ledger. The main two today are “Proof of Work” and “Proof of Stake”, more on that on later posts.
3.- Peer to peer network - No intermediaries
Given the decentralized nature of blockchain, participants can interact with each other and carry out transactions without the need of an intermediary. Where’s the value here? A simple example is peer to peer lending. Imagine a platform that connects lenders with borrowers, no traditional bank involved. Think about how much lower the rates could be, simply by discounting compliance, infrastructure and client servicing costs incurred by traditional financial firms. Not only that, but because the blockchain is an immutable ledger, lenders could have immediate access to the credit history of the borrowers in the platform. No need for an extensive due diligence to approve a loan. It also allows for a much broader coverage. Think of people in sub-developed places of the world, big banks don’t have interest in opening branches in many of these locations. With blockchain, all anyone needs is access to internet.
4.- Distributed – Multiple storages
While traditional firms store private data in a single place, blockchain stores data in a distributed network. In a centralized storage structure, data is vulnerable to an attack of a hacker. If the attack were to be successful, the hacker would possess full custody of the stolen data and would be able to modify it to their desire. With a distributed storage, hackers would not be able to take control over the stolen data. The ledger’s history would still be recorded in other nodes in the network and a modification would be easily identified and disregarded. Think about a hacker trying to get access to Bitcoin’s ledger to forge an allocation from “X” account to “Y” account for $1M USD worth of Bitocin. Because the ledger is also stored by plenty of other network participants, the fake allocation would not be validated simply because it does not match the rest of the ledgers. Remember, consensus is needed to approve any given block.
Important note: blockchain is NOT Bitcoin. It is true that Bitcoin uses blockchain technology to run, but just like Usain Bolt uses a pair of Nikes to run and you wouldn’t say that Bolt IS a pair of shoes, you shouldn’t say Bitcoin IS blockchain.
Done! Now you know the basics about blockchain. If you still don’t see blockchain’s potential, hang in there. The next post will be all about the main industries being revolutionized by blockchain. Maybe then you can understand how this technology is changing the world as we know it, and you might even find your industry of interest right there.
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