Why all the hype around Blockchain, and what really is it – in layman’s terms?
You’re not alone if your eyes glaze over with incomprehension at the mention of “Cryptocurrency,” “Blockchain,” “Bitcoin” or “Peer to Peer Electronic Cash System.” It’s not that you don’t find it interesting, it’s just that it seems like the Blockchain concept is up there with quantum mechanics and string theory – a mystery, wrapped in an enigma, riding on a unicorn!
An analogue analogy
Conceptually, Blockchain technology is just a new way of maintaining ledgers. Imagine that a bank maintained a single ledger listing all its customers, their accounts and the corresponding balances. Every time a customer wants to pay someone, they notify the bank, who updates the ledger by subtracting currency from one account and adding them to another.
The big difference between Blockchain technology and existing methods is that in the Blockchain, this ledger is not maintained centrally by one authority, but by many people instead. Let us call the people who participate in maintaining the ledger, peers.
Each peer has their copy of the document with the full ledger, which includes all owners, their accounts and the corresponding balance. There is no longer one single paper document on which the true ledger is written, every peer owns a copy.
With every transaction, all peers would have to update their ledger copy because every peer should have the same information. But in order to ensure that all the peers have the same ledger, they would need to meet and agree to update the ledger, before signing each other’s document. If this sounds like a nightmare of brain-rending tedium, that’s because it probably would be – had it not been for Blockchain technology.
Blockchain to the rescue
Blockchain technology enables peers to efficiently maintain an up-to-date ledger. That’s as close to the rim of this technological rabbit hole we’re going to go – the nuts and bolts of how it does this is incredibly complex, so for the purposes of this article, the system works by magic (don’t worry, we’ll explain how it actually works in a future post).
Blockchain and cryptocurrencies
Bitcoin and other cryptocurrencies are the reason for which the technology was created. Whenever you send someone a Bitcoin, it doesn’t physically move from you to them. Rather, the distributed agreement about the ownership of bitcoin is updated. Your account balance is reduced and the recipient’s balance goes up.
It’s not just Bitcoin, you know!
Although commonly associated with the virtual currency Bitcoin, Blockchain technology has many other applications, of which Bitcoin is simply the first and best-known. In fact, Bitcoin is only one of several hundred applications that use Blockchain technology today.
Blockchain’s massive potential lies in it’s use of disintermediation and encryption. It is simply not possible for someone to tamper with a vast public ledger because all the successive lines have been encrypted, validated, and then distributed to a multitude of computers across the network.
Blockchain can potentially replace traditional intermediaries such as bankers, notaries, or tech specialists with computer code. The rules are now part of the technology – no longer made, monitored, and enforced by a trusted, centralised, third party but by computers running a mathematical formula. The idea is that the code itself will verify that the two parties making a deal are trustworthy before approving any transactions.
Here are other current applications of Blockchain:
- Document validation for KYC purposes
- Online designers control their work by setting their rules and prices
- Improve transparency and outcomes within the insurance industry
- Online bookmakers provide trust and security
- Peer-to-peer storage systems
- A distributed, open, and transparent database aimed at the music industry
- Low-cost, cross-border payments for banks
Brave new world
Blockchain is undoubtedly changing the world as we know it, with applications reaching beyond digital currencies and money transfers into electronic voting, smart contracts, and digital property and health records, as well as proof of ownership for digital content.
Driving a fundamental shift from the Internet of information to the Internet of value, where assets can be exchanged instantly – Blockchain promises to usher in a new global economy of immediate value transfer, where big intermediaries no longer play a major role.