Cryptocurrencies (digital money), like bitcoin, are now possible because of a new technological innovation called blockchain.
Blockchain was invented by a person (or group of people) known by the pseudonym, Satoshi Nakamoto. To this day the inventor of blockchain has remained anonymous.
Blockchain allows digital information to be publicly verifiable, decentralized and incorruptible (not copied or altered).
Since its creation, Blockchain has evolved into something with enormous potential. The tech community has found other uses for this game-changing technology beyond its original intended purpose for digital currency. We are already seeing blockchain implemented in many other industries including Energy, Healthcare, Government, Security, IoT, Supply Chain & Logistics, Banking and Financial Services, Real Estate, Risk Management, and Insurance.
How does bitcoin relate?
To comprehend blockchain, it helps to understand bitcoin.
Bitcoin is a new digital currency that was created in 2009. This digital currency allows people to make transactions between one another without a middleman. This means there is no need for a bank to conduct transactions, which makes it a very disruptive concept in banking and finance.
Bitcoin’s popularity has grown over the years and can now be used to shop online, buy video games, pay for services, book vacations and much more. Because of the rally bitcoin has had in the last few years, there’s significant hype and talk surrounding bitcoin as a currency. But there is much less talk about the technology that makes bitcoin so powerful – blockchain.
It’s important to remember that bitcoin and blockchain are not interchangeable. Bitcoin is a currency whereas blockchain is the technology behind what allows bitcoin to function as a currency. The blockchain is the infrastructure.
What is blockchain – in plain English?
If person A wants to purchase a car from person B, the traditional way of conducting this transaction is by using a trusted 3rd party, such as a bank, to mediate the transaction and exchange funds. But with Blockchain, it allows person A to pay person B directly, effectively eliminating the need for a trusted third party. The transaction is recorded across a network of computers that verify it happened, creating a digital ledger of the exchange.
The blockchain is composed of a network of computers (or nodes: anonymous members of the network) that verify the validity of each transaction before they are recorded in the digital ledger.
Each new transaction is linked to all the previous existing transactions on the digital ledger. Since each record is saved in a chain of digital blocks, it is essentially a chain of transactions listed in chronological order. This is where the name blockchain comes from.
Blockchain was originally developed as part of the inner workings of bitcoin. However, since blockchain technology is open source the code can be tweaked and used for a variety of applications beyond currency. In the future, we will likely see blockchains being used in many digital and physical asset transactions and in various industries where they can benefit from this open, decentralized database technology.
Why Blockchain was invented
In the 1990s cryptographers were very interested in creating a new digital currency. However, there were several problems which made a decentralized digital currency nearly impossible at the time. Two particularly challenging problems existed that cryptographers dubbed the Double-Spending Problem and the Byzantine Generals’ Problem.
These issues perplexed even the world’s top cryptographers. Then, it seemed out of nowhere, in 2008 an anonymous cryptographer (or group of cryptographers) under the pseudonym of Satoshi Nakamoto, released a paper describing bitcoin & blockchain technology. He then released the first bitcoin in 2009. This new blockchain technology aimed to solve these complex problems and it appeared to have done so successfully.
Blockchain was the technological innovation that made it possible for this new type of digital currency to exist. Even though blockchain was initially part of the bitcoin infrastructure, the blockchain technology is open source, allowing endless possibilities for use in new cryptocurrencies. Many industries are recognizing its potential and starting to utilize blockchain for other purposes beyond these cryptocurrencies.
Blockchain and the Double-Spending Problem
Blockchain was an ingenious answer to some very complex problems facing cryptographers in the 1990s surrounding the creation of a digital currency. One significant problem it helped to solved is referred to as the Double-Spending Problem. This addressed the issue of spending the same coin more than once, which could happen in theory since a file can be digitally copied.
“The blockchain itself does not prevent double-spending; instead, all transactions posted to the blockchain are verified and protected through a confirmation process. “
This allows full transparency, limiting the ability to double spend.
How can you create a digital currency that can’t be easily counterfeited?
A digital currency, after all, is just a digital file; it’s just a set of 1s and 0s. It is very susceptible to unauthorized duplication. If you have a digital dollar, not verified and controlled by a bank, it is possible for others to duplicate that dollar and expand the money supply. With duplication, this one dollar could be spent thousands of times.
It’s similar to how CDs are ripped and MP3 songs are shared with millions across peer to peer networks (i.e Napster, LimeWire). Look at all the DRM (encryption) protections they started to place on music files for preventing the copy and distribution of MP3 files. More often than not, these attempts failed. Hardly any means to prevent duplication of any digital file, whether it be an MP3 song or software, has worked. Hackers and pirates always seem to find a way to crack the encryption.
The argument is that it would be the same case with a digital currency: it’s just too easy to duplicate a digital asset. Without a central authority’s intervention, it would be too easy for tech-savvy people to strip any protection from the digital file and create copies for themselves and for distribution. This, in turn, would cause an instability in the money supply. A lack of trust in the currency would arise and it would likely cause hyperinflation.
Previously, the double-spending issue was solved by a 3rd party institution like banks. Banks are the trusted 3rd party to mediate all transactions (for a fee) so that we can have trust that no dollar could be spent twice by the same person. Without a central authority like a bank, a digital currency was never possible. Until now.
Blockchain created an open, decentralization database (digital ledger)
After blockchain was introduced, the use of bitcoin was made possible without the mediation of banks. This mediation is brought about by technology and a community of miners, which results in a completely decentralized system.
The Blockchain can be used as a public ledger that can automatically record and verify large amounts of transactions. This type of automatic record keeping doesn’t rely on a single 3rd party, which is why people call bitcoin revolutionary due to its decentralization.
Instead, Bitcoin relies on a network of nodes (miners) that verify transactions; it depends on a community rather than a central authority like our current monetary system relies upon.
Other businesses that can use blockchain technology
Blockchain was able to solve many problems associated with a digital currency. But these benefits of blockchain can be explored and utilized in multiple areas of business.
- Publicly distributed database (digital ledger)
- Incorruptible (no single point of failure)
Other industries that could benefit from implementing blockchain include:
- Payments and money transfers
- Supply chain management
- Car Sales
- Networking & IOT
- Stock Market
Whether or not cryptocurrencies stand the test of time and become universally accepted, we do know that the technology that made it possible, blockchain, is here to stay.
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