What is blockchain technology?
By now, we should be getting our heads around the fact that blockchains aren’t used solely to mine cryptocurrencies. We know that blockchain technology has many applications in the modern world as well as huge potential for the future. In Blockchain Technology: A Beginner's Guide, we’ll look at some of the key terms and uses of blockchains.
So, first things first, what IS blockchain? One way of understanding it is to picture it as a giant logbook (digital, of course). Another way to think of it is to envision an enormous cobweb that is even more intricately interwoven than you would normally expect to see. These concepts work well when you put them together. Blockchain technology is an interconnected web of computers (also called “nodes”) which all hold identical copies of information. This information can be public, private or a mixture of the two. It can be added to, but not easily edited/removed making the system an incredibly reliable and secure place to store information or wealth etc. The records are permanent and synchronised, verified by the network’s participants.
What is blockchain used for?
Blockchains have a number of current uses and can potentially be used for even more in the not-so-distant future.
Mining for Cryptocurrencies:
This is the most well-known application of blockchain technology. The best-known currency mined in this process is the bitcoin, but altcoins (everything that ISN'T bitcoin) such as Ether and Litecoin are gathered in the same fashion.
As we've been discussing recently, blockchains can be used to execute self-fulfilling contracts. These smart contracts hold both parties accountable by only completing the terms of the agreement once both parties have fulfilled their end of the bargain.
Peer to Peer file sharing networks remove the need for centralised databases and heavy storage areas. IPFS (Planetary File System - a P2P hypermedia protocol to make the web faster, safer and more open) is an innovative system which puts this into practice.
Many online retailers now accept cryptocurrencies, and blockchain technology allows transactions to take place transparently, efficiently and fairly. It can also be used to transfer ownership rights and intellectual rights etc.
Preventing Voter Fraud:
With concern around election-rigging on the rise in many countries, this is a future application that is currently in development.
Blockchain technology has the ability to provide an almost "unhackable" electronic vote-counting system. This system could secure an election during voter registration, could account for the voters' identification and ensure votes cannot be tampered with at a later date.
In the same way blockchain acts as a public ledger for cryptocurrencies, it would also create a permanent and public ledger for votes as tallied—promising a future of equitable democratic elections around the world.
What key words do I need to know?
There are many terms and phrases floating around with relation to blockchain and it's often hard to determine what they mean. So let's take a look at some of the more common ones, here.
A package of data that carries permanently recorded data on the blockchain network.
Creates an alternate version of the blockchain. From this point, there will be two blockchains running simultaneously on different parts of the network.
A type of fork that renders previously invalid transactions valid, and vice versa. A hard fork requires all nodes and users to upgrade to the latest version of the protocol software.
Miners produce all the digital currency available to the market using software to solve mathematical problems. They both confirm legitimate transactions, (blocks) and create new bitcoins, adding new blocks to the chain approximately every 10 minutes.
A computer that forms part of the blockchain network. These store and distribute, in real time, the updated copies of the transactions that are carried out. Each time a new block is generated and added to the general ledger, a copy is also added to all the nodes in the network. All the miners are nodes, but not all the nodes are miners.
Works as a bridge between the real world and the blockchain by providing external/additional data to the smart contracts.
Encodes business rules in a programmable language onto the blockchain and is enforced by the participants of the network.
Previously valid transactions are made invalid, but invalid ones remain so. This fork is essentially backward-compatible and requires most miners to upgrade in order to enforce.
What are the pros and cons?
|Valuable things can be transferred safely and confidentially, avoiding tampering||The anonymous nature of blockchain makes it possible for people (e.g. scammers and hackers) to abuse the system|
|Transactions are verified by the Peer2Peer network which operates on a global scale||It's safer than traditional contractual/transactional methods but hacking and data manipulation is still possible|
|Cryptocurrencies aren't susceptible to "freezing" in the same way as banked money in the case of economic crisis||Cryptocurrencies are still young and many retailers/offices etc remain trading solely in traditional currencies|
|The need for intermediaries (middlemen) such as lawyers, bankers etc will be reduced||These middlemen are currently prolific and there could be great resistance and a negative economic impact from them no longer being necessary|
|Transactions are not able to be reversed or undone||Transactions are not able to be reversed or undone|
Is blockchain for me?
If at least four of the following conditions apply, then blockchain has strong potential to provide a solution for you:
- Multiple parties share data – multiple participants need views of common information
- Multiple parties update data – multiple participants take actions that need to be recorded and change the data
- Requirement for verification – participants need to trust that the actions that are recorded are valid
- Intermediaries add cost and complexity – removal of ‘central authority’ record keeper intermediaries have the potential to reduce cost (e.g. fees) and complexity (e.g. multiple reconciliations)
- Interactions are time sensitive – reducing delay has business benefit (e.g. reduced settlement risk, enhanced liquidity)
- Transaction interaction – transactions created by different participants depend on each other.
Have we missed any fundamental must-know facts? Let us know what you would have liked to know when you were starting out in the world of Blockchain, Bitcoin, Smart Contracts etc in the comments section below.