What is the Blockchain?
- The Blockchain is essentially a database that stores information in blocks that are chained together
- The blockchain can be used for any type of data but the most common use today is for transactions
- It’s different than a tradition database in the sense that no one group or user has control over the database, rather all users collectively retain control (aka. Decentralization)
- You might hear buzzwords like Bitcoin and Ethereum today, but these crypto currencies are essentially a blockchains developed for different purposes.
Example of Traditional Finance vs. the Blockchain
- For example, think of the blockchain like a traditional bank. With a bank, if you want to send $10 to your friend, you can instruct your bank to send $10 to your friend. Your bank will validate that you have $10, and process that transaction on your behalf. Once processed, your friend will see the $10 in their account.
- But with the blockchain, rather a traditional bank processing your transaction and keeping a ledger on how much money you have in your account, the processing of your transaction is replaced by “validators” who are people in the blockchain that makes sure you have the $10 and your chequing account is your wallet address on the blockchain.
Example of a Transaction in the Blockchain
- A new transaction is entered
- Transactions are grouped together in a block and transmitted to a network of computers scattered across the world
- Network of computers compete with each other in solving an equation to win the opportunity to validate the transactions
- The computer that solves the equation first will then confirm the validity of the transaction. The blockchain will reward the computer with crypto currency.
- Once validated, the blocks are chained together creating a long history of all transactions that are permanent (aka. The ledger)
- The transaction is complete
Blockchain beyond Finance
- Most people are familiar blockchain with the use case of transaction money securely from 1 person to another, but blockchain can be leveraged to be use to transact anything
- NFT is a key example. Wikipedia definition of NFT is a non-fungible token is a unique and non-interchangeable unit of data stored on a digital ledger. This is currently prominently used for digital art. I will cover NFT and digital assets in a later article, but what you need to know is that NFT acts as a record of ownership for any asset (digital or not).
- The point here is that the blockchain can hold any type of information securely
- You can leverage the technology for personal verification, real estate transactions, voting and much more
Benefits to Blockchain
- Decentralization: no centralize authority with full power and therefore enables trust in the system
- Improved security: data on the blockchain is stored across a network of computers, making it nearly impossible to hack
- Reduced costs: blockchain helps businesses cut costs by eliminating middlemen — vendors and third-party providers — that have traditionally provided the processing that blockchain can do
- Speed: blockchain leverages the network of millions of computers which in scale has more processing capacity than Google, Microsoft and Amazon combined.
- Transparency: public ledger that allows anyone to view the history of an account or details of a transaction
- Immutability: On the blockchain, all transactions are timestamped and date-stamped, so there’s a permanent record. This enables a secure, reliable audit of information.
Risks to Blockchain
- Adoption: Blockchain-based applications require everyone within the process ecosystem to use the system. That in turn requires everyone to make the investments in the technology implementations and process changes that go along with the move to the new blockchain-based application.
- Regulation: There is a fear that blockchain and cryptocurrencies have the potential to destabilize the global economy. China is a key example of a country that has completely banned cryptocurrency. As there is more adoption of the blockchain, expect more government involvement in developing laws and policies to regulate the industry.
- Volatility: Blockchains heavily rely on “validators” in the network. These validators are incentive by the crypto currency the blockchain produces as rewards. If there are significant volatility in the value of the crypto, it becomes increasing difficult to attract validators to the platform.