Blockchain is a new technology that has been getting a lot of attention from the media. This post aims to give you an idea of what blockchain is and how it works so that you can make better decisions for your business.
1: What is blockchain, a.k.a. distributed ledger technology (DLT)?
Blockchain is a decentralized ledger of transactions, or put — an open record of sorts that shows all actions from any particular account in one place. To add a new transaction to the chain, someone has to approve it by running complex algorithms, so people who want in on that action somehow need to be rewarded for their efforts. That's where cryptocurrency comes in — as an incentive against people adding onto the chain and making an effort.
Being decentralized allows other users to verify transactions and then store them into their ledger copy — a process known as consensus. Comparatively speaking, this means there's no centralized version of events that could be exploited — although some say blockchain is prone to 51% attacks, which would alter transactions on a single account.
2: Where did blockchain come from?
Although it's debatable who came up with the idea first — whether it was Bitcoin inventor Satoshi Nakamoto or another person/group — the core technology underpinning cryptocurrencies has been around for roughly 30 years.
In 1990, Stuart Haber and W. Scott Stornetta laid down an early blueprint of how a blockchain could work (although they didn't call it that) as a way to timestamp digital documents so no one could tamper with them without being detected. It wasn't until 2008, when Nakamoto started laying out their vision of a cryptocurrency that the pieces began to fall into place. Refer to RemoteDBA.com for more.
3: How does blockchain work?
When someone wants to add a new record (or block) — say, for example, I just sold you $100 worth of Bitcoin after one week, the system will take that transaction and broadcast it so other users can verify where I got those coins from (by checking my public wallet address). That group would then agree on whether or not they saw the same transactions as me and come to an average consensus over who has more power in this particular network — hence why mining pools are considered important.
For all of these actions to be conducted without a centralized server and yet still maintain security, Nakamoto introduced a few concepts to the cryptocurrency world in their original 2008 white paper. These included hashing, which scrambles data into an unrecognizable string of numbers and letters; public and private "keys," which act as passwords to any given transaction or account (the latter being something only you know); and signatures, where each person's identity is verified thanks to one more cryptography methods such as triple-entry accounting or RSA.
4: How does blockchain make money?
Since blockchain should theoretically reduce the need for intermediaries like banks — since people could transfer funds without going through anyone else — how does it make money?
Well, quite simply, blockchains are incentivized by tokens (or coins), which were initially introduced as a way to fund the development and early growth of any given blockchain.
If you remember, miners are rewarded for doing their job, which is making sure there's enough consensus over who has what power at any particular moment in time — so they get paid in cryptocurrency.
5: Isn't Bitcoin a bubble?
Since its launch nearly a decade ago, the price for Bitcoin has skyrocketed from pennies to thousands of dollars per coin within only 7 years (establishing a total supply of 21 million BTC). The same can be said about other coins like Ethereum or Litecoin — although there are currently less than 100 different cryptocurrencies available on various markets.
However, since these prices keep rising exponentially (which people call a bubble), some predict that these currencies could crash and burn anytime soon. One reason for this is that the currencies still have a massive overhead in mining operations, so many early adopters became millionaires thanks to Bitcoin or any other digital token.
6: How will blockchain change the world?
Even though there's been little mainstream adoption of cryptocurrencies or blockchains in general, that hasn't stopped organizations from using them — mainly financial institutions like banks.
Many companies are now looking into how they can use blockchain technology to improve their business practices — whether creating new supply chains (like shipping goods from A to B) without paperwork involved or decentralized marketplaces where people can buy products directly from creators and manufacturers.
Since these systems have no particular owner or central authority, anyone can manipulate them in many different ways — which is why there's been so much interest from well-established companies looking to improve their security features.
7: Where will blockchain be used?
One of the most direct benefits of decentralized ledgers is that it allows for the direct peer-to-peer transfer of funds (or anything else) between two parties without going through banks as a middleman. It has given rise to platforms like BitPesa, allowing people from any country to send money across borders without high fees or additional taxes.
Another example would be DentaCoin — an ICO project which claims it found a way to save you money when you go to the dentist.
And as for supply chains, companies like VeChain and OriginTrail have created platforms where people can track any item from the factory floor to your dinner plate.
8: What is a smart contract?
They don't require third parties to help facilitate transactions between two or more people. So if you want to buy something from another person, it's as simple as sending them some coins via your wallet app and waiting for them to send back whatever they promised.
However, what happens when things get complicated? If I ordered an expensive desk from Overstock, how do I know that once I've sent payment, they'll send me the desk I've ordered and not, say, take my money?
To answer that question, smart contracts were invented. These computer programs use blockchain technology to automatically check if whatever deal you've agreed on is being upheld — so either the product (or service) gets delivered on time or your payment is returned. You can think of them as "if-then" statements where certain conditions must be met before transferring funds from one party to another.
9: Isn't Bitcoin anonymous?
Though it may sound like all transactions made over blockchains are completely anonymous and untraceable by default (which isn't true), people have found ways to track specific tokens across networks thanks to services like OnChainFX.
All transactions are stored forever on the blockchain (as long as at least one person has a copy of it). Someone with enough computer resources can theoretically follow any coin from address to address — and since most wallets don't come with built-in privacy features, this could lead to problems in the future.
Suppose you're worried about your personal information. In that case, you should look into using codified, zero-knowledge proofs that encrypt data without revealing anything about who is sending and receiving money. There's a few different variations available for developers right now — mainly ZCash, MimbleWimble, and Monero.
10: What will happen when Bitcoin runs out
The only real reason people are interested in Bitcoin is because of the possibility of making a quick buck by buying it when prices go up and selling when they go down. However, the problem with this strategy is that once all 21 million Bitcoins have been mined, the supply will stop growing altogether. It means that there's a good chance that people will stop using BTC as an investment vehicle and start using it to make purchases.
Of course, there are over 1,500 different cryptocurrencies out there right now, so I wouldn't worry about the fact that BTC won't be generating any more money anytime soon — you'll easily find something better for your needs.