Disclaimer: This article is intended for beginners and is by no means a full explanation of the blockchain. Instead it is meant to provide a starting point for those familiar with the word and want to learn more. Definitions could be argued but for the purpose of the audience analogies are used to describe examples of how it can be implemented.
There is a technological advancement so powerful that influences the basic pillars of our society. A technology so powerful it that it fundamentally changes the way our economy, governance systems and businesses function. Something which could change our conceptual understanding of trade ownership and trust.
This technology already exists and is called Cryptocurrency.
People think of bitcoin as virtual money or a transaction system, but if you look closer you see that the monetary aspects are only the tip of the iceberg that is because bitcoin is a ground breaking technology for which money is only one of the possible applications.
Money Exists To Facilitate Trade
With an interconnected economy worldwide today, trade has become increasingly complex throughout the centuries. Trade is recorded in bookkeeping, this information is often closed to the public. For this reason we use trusted third parties to facilitate and prove our transactions. Examples of such trusted third parties are governments, banks, notaries, accountants and the paper money in your wallet.
This brings us to the essence of bitcoin. Bitcoins underlying protocol enables a network of computers to maintain a collective ledger via the internet. This ledger is neither closed, nor in control of any single third party. This information is all available in one public and decentralized ledger. Decentralized meaning it is distributed across the network. This underlying protocol is what is known as the blockchain.
In the blockchain all transactions are logged; time, date, participants and the amount of every single transaction. Each node owns a complete copy of the ledger protected by asymmetric cryptography. The transactions are verified by what is known as miners who maintain and power the ledger. The mathematical principles also ensure that these nodes automatically and continuously agree on the current state of the ledger, and every transaction in it.
If anyone attempts to modify or attack a transaction then the nodes will not come into consensus and will refuse to validate the transaction to the global ledger. Every transaction (at least on the bitcoin’s blockchain there are various kinds) is public and thousands of nodes unanimously agree that a transaction has occurred on a certain date at a certain time. It is as if there is a notary present to check each transaction. This is an effective way to allow people to have a single accessible source of truth.
“Blockchain - Single shared source of truth.”
The blockchain ledger does not care whether a bitcoin represents a certain amount of euros or dollars. In fact you can register anything of value, such as property or documents on the blockchain.
A bitcoin is divisible into 100 000 000 units. Each unit is identifiable and programmable. This means that users can assign properties to each units. They can be programmed to represent a cent of a euro, a share of an organization, a kWh of energy or eve a digital certificate of ownership. Because of this, the blockchain is much more that just a digital currency as it can represent various kinds of data.
Example Uses Case
1. The blockchain allows us to make our currency smarter. For instance imagine a healthcare allowance that can only be used to pay for healthcare services from certified parties. By programming the rules of use into the currency or token, allows you to bypass the bureaucratic processes required ergo compliance upfront. You could even include a set time-frame in which said currency is valid for and is returned to the provider if not used. This stops allowances from being hoarded or misspent.
2. A company can better control spending the same way by programing budgets for salaries, machinery materials, and maintenance. This way the respective money is specified and can not be spent on things other than it is meant for. Automating such matters leads to considerably less bureaucracy which saves accountants, controllers and the company itself a lot of time.
There are private blockchains which are not open, but for the sake of simplification we will stick to discussing the bitcoin blockchain. As an example the programmable open character of bitcoin allows us to completely innovate and rebuild our financial sector and the administrative processes. We can make them more efficient and transparent.
But there is more…
Our economy will be dealing with an increasing number of machines which actively participate in our economy. Some which are already here. Think of a vending machine or drone delivering packages. These machines are unfamiliar with the concept of trust. Or my personal favorite a self driving car which runs Uber services while you are asleep (we’re still a while away from that one though). However, the blockchain is no stranger to trust. Using the blockchain protocol, the machine can be 100% certain it will deliver the correct package to the right recipient and know for sure it has been paid for. The machine can also use the ledger to keep track of its supplies to understand when to resupply.
Here is an illustration to help you understand how it works
So how should you think about the blockchain?
Blockchain technology is difficult to understand because it incorporates four different areas:
- Game theory
- Economic Monetary policy
- Computer networking and data transmission
Instead of trying to see it as a single protocol or tool it is better understood as a paradigm shift that opens markets and renders middlemen providing a trust-based service redundant. It is time to discuss this new technology publicly and critically to understand its potential applications.
Originaly transcripted from DutchChain with added personal notes.
Disclaimer: This is not financial advise.