There’s no doubt that the 21st Century has given rise to the technological age.
Words like ‘crypto’, ‘bitcoin’ and ‘blockchain’ have become part of people’s common vocabulary and everyday dinner conversations.
It almost seems like every week, we’re watching a new tech innovation move from the realm of obscurity to become a ground-breaking media sensation.
Over the past few years, we’ve seen headlines like:
A decade ago, these headlines would have been nonsensical. But blockchain technology has truly splashed into the mainstream with a speed that we haven’t seen since the dotcom era.
It has infiltrated every industry — from agriculture, to education, to finance. And it has fundamentally revolutionised how these industries do businesses.
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But even though it’s everywhere — and investors have been quick to jump on the blockchain hype-train — there’s a lot of misunderstanding about the origins and functionality of blockchain. Although many of us have a vague idea about what blockchain does, few have the deep understanding that enables smart investing.
Since you’re here, you might be wondering, what is blockchain technology? How is it different from cryptocurrencies? And what, if anything, is it used for? If so, this is the article for you.
Origins of the blockchain
There’s a reason that blockchain and cryptocurrency are usually mentioned together. And it’s because their public debuts occurred at the same time.
When Satoshi Nakomoto created bitcoin in 2008, blockchain was released as the technology used to run it. It acted as a ledger, or a record, of all the transactions that were made with bitcoin. Much like your bank would do, it displays who has transferred money to whom, how much was spent, and validates that the transaction has taken place.
Put simply, you can think of it as a really long online spreadsheet.
If a person buys a cup of coffee, that transaction is recorded. Then, when the coffee shop transfers that money into their bank account, that is recorded too. The same happens when the money is transferred to staff wages. Everything is recorded in one giant ledger.
However, while this sounds like something you only need a bank for, there are a few key differences which imbue the blockchain with its revolutionary potential.
Functionality of the blockchain:
Unlike a bank, the blockchain is a third party that isn’t owned by anyone. It’s a peer-to-peer network that records every financial transaction between the people that are using it.
So, instead of having a corporate entity confirm that a transaction has taken place, confirmation rests on the collective agreement of everyone on the blockchain.
For example, if you have been involved in a transaction, you and the other people who were also involved confirm as such. Then, if enough people have confirmed the transaction, the entire blockchain network (which is made up of ‘nodes’ or computers connected to the blockchain network) will give it the greenlight, and it will be imprinted on the ledger forever.
To explain the nodes a little more, they are computers that provide an extra layer of security. For a new transaction to be added to the ledger, the nodes have to solve complex mathematical algorithms automatically.
This ensures every transaction — every block — adds to the previously confirmed blockchain. If the transaction is fraudulent or inaccurate, it won’t be confirmed or added to the ledger.
By using these nodes which are checked by real people, this takes away the need for a third party like a bank or a clearing house. This means the flow of money and record of transactions is able to occur without influence or interference.
Considering the global financial crisis and everything we have uncovered so far in the Royal Banking Commission, there is a definite upside to removing the banks.
Moreover, what makes blockchain so revolutionary is that the ledger is public. Anyone has the alibility to read it whenever they like. You can see the long history of financial transactions, and pin point the origins and pathways of every dollar.
Now, that’s not to say that the blockchain takes away your privacy. Quite the opposite, in fact.
On the blockchain ledger, all of the transactions are encrypted. This means all of the transactions appear anonymous.
Take buying a coffee for example. The people verifying the transaction know that it took place, but they don’t know that it was you and they don’t know that it was at a coffee shop. Your digital identity is always encrypted and anonymous.
As the ledger has no central authority, confirming the transactions can take place transparently and efficiently. It occurs at a low cost, at high speed, and maintains everyone’s privacy.
To summarise, the blockchain is a ‘chain’ of ‘blocks’. Each block is a transaction that is recorded on the ledger. It contains the date, time, the anonymous participants and the amount. All of these things together are called a ‘time-stamp’.
In order to effectively confirm every single transaction, every single block must be able to be traced back to the genesis, or original block. In other words, the ledger must always be a giant chain through which the flow of money can be traced back all the way to the beginning.
The best thing about blockchain is that the whole system is self-checking and self-regulating. You really can’t defeat the power of mathematics and the distributed ledger system.
As the efficient, private and low cost functionality of the blockchain is very appealing, it’s no surprise that industries across the globe are looking to implement the technology in their own businesses.
Corporations, cryptocurrencies, banks and governments are all experimenting with blockchain technology as a way to manage assets, transfer payments and shuffle money all around the world.
There is also potential for blockchain to go beyond finance. For example, there has been talk of its ability to revolutionise voting, supply chains in agriculture, healthcare records, transportation and insurance.
The decentralised nature of the blockchain makes it one of the best technologies to remove the inefficient and unreliable third-party systems that are currently in place.
So although blockchain started out mainly as a cryptocurrency network, the possibilities of it branching out into new industries grow every day.
As such, it’s good to stay updated with the latest blockchain news, which you can find here on Markets & Money.
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