Blockchain Basics: An Introduction

At this point, the exploding value of bitcoin, ethereum and the cryptocurrency market has caught most people's attention. Every major news outlet is covering this market's meteoric rise along with the debate over whether or not these currencies are here to stay or are destined to implode. With high profile people like JP Morgan's Jamie Dimon calling bitcoin an outright "fraud" that is only useful to "drug dealers and murderers", and Nobel prize winner Joseph Stiglitz saying it "ought to be banned," people are trying to figure out if they should invest their money or avoid it like the plague.  

While the bitcoin debate and the rise of the cryptocurrency market has been fascinating to watch unfold, they may be distracting everyone from what is arguably the more interesting story: the blockchain technology that powers bitcoin and all cryptocurrencies has the potential to be the most disruptive and game changing innovation since the invention of the internet.  Whether you realize it or not, every government, financial institution and major corporation have dedicated teams researching blockchain technology's implication on their future, and there are thousands of talented developers and entrepreneurs around the world pouring their resources into every kind of blockchain startup imaginable. So what's the hype about? 

What Is Blockchain?

Simply put, blockchain is a new way to keep track of who owns what.

A blockchain is a continuously updated digital record that chronologically and publicly keeps track of transactions. A network of thousands of computers all over the world use cryptography to verify the validity of each transaction within the network before permanently adding them to a publicly viewable ledger of every transaction that has ever occurred. Since this ledger is distributed on computers all over the world, it can't be hacked or corrupted.

The bitcoin blockchain is the world's first and most popular blockchain network and keeps track of who owns bitcoin, but blockchain technology can be used to track the ownership of any digitized asset- i.e. data, title to real estate, company shareholdings and even the ownership rights for art and music. Furthermore, it's possible to digitize, or "tokenize", any physical asset from a house, to a car, to a pair of shoes, making this technology applicable to just about any transaction imaginable. 

How It Works- A Bitcoin example

Let's say Jake wants to send Terri 1 bitcoin. Jake will go to his computer and enter Terri's internet address with the command to send 1  bitcoin. This transaction is then broadcasted to the network for approval. Once the network approves of the transaction, it is placed in a "block" with other newly approved transactions and added to the permanent "chain" (ledger). The public ledger will now show that 1 bitcoin has been transferred from Jake to Terri; if Jake tried to send the same bitcoin to Jeff, the network would see that he had already sent it to Terri and the transaction would be rejected. (Note: while transactions are listed publicly, no personally identifying information is shown- it's just a string of data that only Jake and Terri would recognize).  

The Internet of Value

Blockchain is revolutionary because for the first time in human history, we can transact value from person to person over the internet, outside of centralized intermediaries like banks and governments. In traditional financial transactions, a third party or "trusted middleman," like a bank or clearing house, sits between parties in the transaction; these middlemen facilitate the transactions and extract large fees to do so, while sometimes taking days or even weeks to complete them. Blockchains replace the middleman by facilitating transactions through its automated decentralized network of computers and placing them on a permanent, public ledger that can be trusted by all parties.

Blockchain has been referred to as "the trust machine" because it removes the need for trusted third parties and replaces them with math and cryptography. An online merchant today may not accept a payment from a customer in Nigeria because they may not trust the customer's bank. If they were accepting payments over the blockchain, they wouldn't care where the customer was from because it is not possible to process fraudulent transactions through the blockchain. This simple example illustrates blockchain's potential to hyper-connect the world through commerce like never before, and effectively do for money what the internet did for information.  

Here's a couple of real world use cases: 

• International Remittances- Every year, people who've emigrated from their home countries send back 5 billion dollars to family members around the world. The only option these people have is to go through middlemen like Western Union that channel funds through an antiquated financial system that can take over a week to get the money from A to B; what's worse is that the fees can be as high as 20% and are levied on the poorest nations in the world. If sent over a blockchain, funds can go from the sender to the receiver in seconds at a fraction of the cost. 
• Real Estate-  Real Estate transactions involve a sea of middlemen and blockchain has the power to disintermediate them all - banks, lawyers, brokers and title companies. To buy and sell real estate, a title insurance company must be obtained to manually confirm that the seller actually owns the property and is free and clear of any liens; for their work, title companies command a hefty percentage of the final sale price. If the ownership history of the property were stored on a public blockchain, the expensive manual process of identifying past owners and liens can be automated and completed in seconds, saving the buyer and seller thousands of dollars. By tokenizing the ownership rights to the property and transacting it over the blockchain, the process for selling a house starts to look more like sending an email than the complexity of commission-seeking lawyers and brokers that it is today. 
• Foreign Aid- Currently, funds donated for disaster relief have to go through a chain of middlemen, subject to high fees, and corrupt foreign governments before getting to their intended destination. For example, after the 2010 earthquake that devastated Haiti, $500M in relief was donated through the Red Cross; it was later found that a significant amount of the funds were either completely misspent or ended up in the pockets of corrupt government officials. Every transaction sent through a blockchain receives a timestamp and is recorded to the public ledger - this adds accountability and transparency to the process by enabling the Red Cross to track when funds arrive and where or to whom they are allocated. With blockchains, the Red Cross and its donors will be able to track their funds much in the same way that a Domino's customer can track their pizza delivery from the Dominos oven to their front doorstep. Transacting money and property is just the tip of the iceberg; blockchain technology also has application in identity management, supply chain management, voting and government to name a few. And what's really exciting is that this technology is still in its infancy and, just as the most ambitious thinkers couldn't predict how the internet would change the world, it's too early to truly foresee the impact that these innovations will have. 

Coming soon, to an economy near you

At this point, chances are blockchain hasn't made a huge impact on your day-to-day life; however, if you take a look at the companies that are making big bets on the technology, that is very likely to change. Microsoft, IBM, JP Morgan Chase (despite CEO Jamie Dimon's denouncing of Bitcoin), UBS, Barclays, Santander, HSBC, Deutsche Bank, Credit Suisse and the Nasdaq stock exchange - all of them are aggressively developing and implementing blockchain solutions into their businesses.  

Blockchain adoption is not only limited to the heavy hitters of the tech and financial worlds, but governments as well. The United States, the Russian Kremlin, Singapore and China are all examining how blockchain can improve efficiency and cut administrative fat. 

Why They're Interested

The reason that they're all hopping on the blockchain bandwagon isn't because all of these companies and governments are super stoked about bitcoin (quite the opposite). It's because they see the potential for private blockchains to eliminate inefficiencies, streamline operations and save them millions of dollars. Corporations also know that if they don't implement this technology, they're in danger of being replaced by competitors that do.   

As I stated earlier, blockchains are good at keeping track of who owns what, and are not limited to just currency - in a business sense, the "what"  can be anything from corporate data to raw materials. Here are some basic examples of how governments and corporations will utilize blockchain technology: 

• Supply Chain Management- The bitcoin blockchain is a complete record of every bitcoin transaction ever made. For supply chains, replace the bitcoin with potatoes, bananas or whatever materials you're moving and you get a perfect record of every movement throughout your supply chain. A company like Taco Bell can use a blockchain to track the movement of all the different ingredients coming from various suppliers; in the event that one supplier distributed lettuce contaminated with salmonella, they can search their blockchain to quickly identify the contaminated lettuce and remove it from circulation. 
• Data Security- Currently, most companies store all their data in one centralized database; essentially, all a hacker has to do is breach one firewall and all of that company's data is stolen (think recent Equifax & Yahoo breaches). Blockchains allow companies to break their data down into smaller pieces and store it on thousands of computers all over the world. This is a more secure way to store data because hacking into thousands of computers simultaneously is much more difficult than hacking into one. Additionally, not having a central point of failure means that worrying about a data storage facility burning down is a thing of the past.
• Trade Settling- If you work on Wall Street, you're familiar with the term, T+2, or trade date plus two days. This means that exchanging shares from party A to party B takes two days to settle because there are a series of departments and institutions that each have to sequentially process and account for different parts of the transaction. Blockchain, through the use of "smart contracts," will enable the automation of these manual administrative processes turning T+2 into T+0. 
• Audit & Accounting- Blockchains automatically create permanent audit trails of whatever information they process, so there's potential for companies and governments to eliminate hours of administrative data management and audit processes. If two departments or companies transact over the blockchain, they don't have to each individually do their own audit and reconciliation since blockchains create a shared, unalterable record of what happened. 

Stay Tuned

While I have no idea what will ultimately happen with bitcoin and the broader cryptocurrency market, I can confidently say that blockchain technology is not going away; in fact, many are predicting that 2018 is the year that this technology moves from being experimental to being used broadly in the real world. How it all unfolds will be fascinating to watch.

So... that's my spiel on why I think blockchain is pretty important and why you should too. In case that didn't do it for you, I'll leave you with a few quotes that I've come across that got me jazzed up about blockchain initially: 

“The technology most likely to change the next decade of business is not the social web, big data, the cloud, robotics or even artificial intelligence. It’s the blockchain technology behind digital currencies like bitcoin”

— Don Tapscott

“Over the next 20 years, our money will be coded- broken down into 1s and 0s and wrapped within powerful tools for encryption. We’re still only beginning to discover the possibilities that digital currency will open up. But the code-ification of money, market payments, and trust is the next big inflection point in the history of financial services. Understanding what it means for you and your business will be important regardless of whether you are a plumber or the CEO of a Fortune 500 Company. ”

— Alec Ross- Industries of The Future

“I believe that the blockchain is, even now, ushering in a new economic and social paradigm that will rival, if not exceed, the impact that agriculture had in human society.”

— John McAfee

Up next... the bitcoin story. 

If you found this to be informative, please check out my website - www.cryptoambit.com