Blockchain 101 – An explanation for Blockchain beginners and why the Blockchain is important
Over the last several centuries, there have been innovations that defined a generation or time period. There was the printing press, the industrial revolution, electricity, the automobile, Internet, and now there is (we think) the blockchain.
Blockchain technology is a concept that is very simple on the surface but one that will have serious ramifications on finance and economics but also on the wider world. If we’re being totally honest, the real ramifications that the Blockchain will have on our society are hard to predict at this point – but it is not difficult to understand what blockchain is on a basic level.
In the most simplistic terms, blockchain technology is about keeping a ledger of the transactions which have taken place. Ledgers are basically a record of what has occurred and who has ownership of what. The actual idea of a ledger is not complex or difficult to understand; it is the novel use of ledgers which makes for the most interesting applications of blockchain.
Normally, you would think of ledgers as being a single record that someone keeps which tells them how much money they have or what their inventory is. It is their record to manage. They keep track of the inflows, outflows, and any other changes that occur to the balances relevant to them. That is a ledger in the most basic sense.
Applying that at a higher level, you can have centralized ledgers. These occur when you have a single authority such as a financial institution or government agency keep track of all transactions. By centralizing this process, they can manage and interpret the interplay between different balances. We see this when a tax authority is able to audit a business or individual, and we also see this take place when someone wants to send another person money. Centralized systems make management of transactions easier.
What blockchain technology aims to do is increase the efficacy of these systems by making it possible for these ledgers to be managed in a decentralized manner. This means there is no single authority keeping track of all the transactions. Instead, you have a network of computers which work together to create a record of all the transactions that have occurred and the resulting balances. The resulting record of all transactions and balances is referred to as the “blockchain”.
At this point, you must be wondering what the advantages are to establishing a decentralized record of all the transactions that occur on a network. Why is this any better than a centralized method? The main answer to this is in security. When you have a single “chokepoint”, a hacker can target that and do massive damages to the system. But when you have a million different “nodes” on a network, this is impossible. No hacker could target all these nodes at once, and the information is therefore secure and more trustworthy.
The issue here is most centralized organizations don’t want all the data to be available to everyone at once, so the innovations with blockchain technology end up being pushed forward by the users of the system, since many of the benefits go to them, rather than the incumbent firm.
But let’s go more into the reasons why a decentralized ledger can benefit society. Think about the ledger as a memory. Your memory is helpful, but not always perfect, and for the same reason, blockchain technology can benefit your network.
Using the memory analogy, oftentimes there will be situations where two people have conflicting memories. In these cases, you need a reliable mechanism for determining what the correct memory is. Blockchain handles this issue by having kept a record of all the records that have occurred and being able to handle any reconciliation issues that may occur between two parties. Blockchains can resolve all of these issues by giving an impartial record.
Our memories are also limited in size and can only store so much. As a large network of computers, a blockchain doesn’t have these same sort of limitations and is technically infinitely scalable. The more computers join the network, the higher the storage capability of the system. Another problem solved by blockchain.
The most important thing that blockchain does is create immutable transactions. Once updated into the network, a transaction is impossible to reverse or tamper with, because you have millions of nodes which are storing the entire record (or ledger). In this way, the entire system becomes totally transparent and trustworthy.
This transparency is why a decentralized ledger is superior to a centralized version. As a user of a bank, you have to trust the bank when they say how much money you have. If you disagree, there is very little you can do. They are essentially in control. When you have a blockchain, you can trust the system way more easily because there is no way it could have been tampered with, and not motive to do so either.
In the end, the result is a level of social scalability never before seen. The requirement for “trust” in a faith-based sense goes down as transparency goes up. You can entirely depend on the system without worrying about its being tampered with or any other negative outcomes.
Normally, when you want to perform business with someone new, you need to build a relationship. These relationships are founded on trust that neither party will act poorly, and everything falls apart otherwise. In the case of blockchain technology, both parties can trust in the system and perform business in good faith. This makes it possible for you to do business with anyone in the world without the worry of being ripped off.
In practical terms, this allows, for example, you to do business with someone in Kenya pretty seamlessly, without any centralized third parties (like banks). In fact, there is a world where the blockchain completely replaces our existing financial institutions entirely. The Blockchain also has the potential to revolutionize almost any industry – for example, it’s conceivable that a specific application of the Blockchain could be used to completely alter the way that the shipping and logistics industry works.
Knowing all of this, it is clear blockchain technology has some very potent use cases available to it in the future. It can enable an entirely new way of doing business, and it’s likely that eventually nearly every industry will be disrupted by its application.