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Blockchain Series Part 1: What is Blockchain?

April 30, 2018

In part one of our new series “Will Blockchain Disrupt the Global Economy,” we delve into the basics of blockchain technology and how it affects business and personal transactions

Blockchain is the new break-through technology that is poised to change the next decade of business more so than the social web, big data, the cloud, robotics or even artificial intelligence. What is this technology exactly? In one sentence blockchain is an algorithm and distributed data structure for managing electronic cash and contracts without a central administrator, and was originally created to support the Bitcoin cryptocurrency, as you’ll see in our recent blog, “Bitcoin: Should I Consider an Investment?.

This blog is the first of four that will summarize how current transactions will likely be revolutionized by this technology. So what exactly does this new technology entail? Read on.

Blockchain for beginners

To help explain, think of how a bank statement presents transactions. There is a beginning and end balance. In the middle are a bunch of debits and credits. Imagine a system like that, a ledger system, but public, protected by secure keys. Instead of your bank and the opposite bank trying to match settlement terms, the transactions are verified by other computers that solve complex math problems to confirm its accuracy and verify its privacy and protection from tamper. The computers are then awarded currency tokens for their efforts.

This verification is called cryptography.

Bitcoin became the first mainstream crypto currency to develop this technology; a chain of blocks, where the blocks are the debits and credit activity and the chains are the beginning and end balances. Each block starts where the other left off. For example, your beginning January bank balance of $2,000 matches your December end balance of $2,000.

If your beginning balance is off, you know there is something wrong (since you last checked). A block is closed and a new one opens once the computers solve their math problems, which takes a specific amount of time (minutes) as determined when the technology was created.

Each block details encrypted transactions over a certain course of time. During this time, computers work hard as a community to protect the data and verify the accuracy (no double payments, no tampering, etc.—also known as mining). The computers come to a majority-rule decision on the accuracy, then chain the block, and so begins the next block. A copy of the whole entire chain of blocks is then stored on each computer (hence the term, decentralized).

Is there risk of fraudulent activity through blockchain?

It is very unlikely*. The blockchain was set up to deter fraud; If someone wanted to alter a transaction fraudulently, they would have to go to previous blocks, tamper, and devise a way to make the chains link properly.. and they would have to do that to 51% of the computers.. at the same time. A pretty difficult feat, even for a talented fraudster. Thus the blockchain allows a more trustworthy atmosphere for transactions (one does not need to worry about a bank being inaccurate or a seller not holding up their end of the deal.) The fragile leg of trust that holds the economy up is no longer needed because tamper resistant un-manned algorithms are verifying and recording transactions permanently.

The benefit of blockchain technology:

The blockchain centralizes all transactions—thus minimizing the theft of cash, retail merchandise, and intellectual property, because in 2018...

  • Assets are harder to safeguard (i.e. pictures and music can be copied millions of times).
  • Banks and commerce sites are prone to attacks and designate vast resources to allow for the proper checks and balances of their websites (i.e. a debit to your bank account means you cannot spend the same money again, meaning you have a lower bank balance).
  • Banks and commerce companies need to communicate with each other and keep separate records of the same transaction to verify it is accurate and true.

Blockchain 2.0

Now that you have a better idea of what the Bitcoin blockchain does, it is time to get more technically imaginative. Other technologies like Ethereum allow for putting what is known as “smart contracts” and titles to assets into the blockchain. Stay tuned for part two where we dive into this topic—in the meantime, contact us with any questions.

*If you are interested in holding crypto coins please perform diligent research of the risks. Although the blockchain is secure, exchanges that the public is able to purchase from and hold coins in their custody are susceptible to risk. Large holders keep their assets offline in hardware wallets or on paper in safe deposit boxes.

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