What is Blockchain? and Why does it even matter?
“Bitcoin is a technical tour de force.” - Bill Gates, Founder of Microsoft
“You can’t stop things like [Blockchain]. It will be everywhere and the world will have to readjust.
World governments will have to readjust” - John McAfee, Founder of McAfee
“[Blockchain] is a remarkable achievement... the ability to create something that is not duplicable in the digital world has enormous value” - Eric Schmidt, CEO of Google
Lazy? Skip all the words and watch a video:Click here to display a video
1. Why Blockchain Matters
2. A Deeper Introduction
Or - Just Read This Introduction to Understand:
In one sentence:
'Blockchain is revolutionary because it allows strangers to interact safely without an trusted 3rd‑party'.
Instead of trusting an intermediary, people can trust computer code.
That’s it, basically. But,
the technical, political, economic and societal implications of this are vast.
Let’s look in a little more detail.
Blockchain allows universal agreement over who owns digital information.
This was never possible before - if I copy your laptop’s hard drive, we both own the information equally. If I publish a video on the internet, you can download, and hence own, a copy of, it. The copies are identical.
Consider this: Your bank, PayPal, or VISA - centralised financial intermediaries - continuously maintain a record of how much money you have in your account, the payments that come into your account, and the payments that leave your account. This record they keep is called a ledger.
We trust our bank, and PayPal, and VISA, to maintain this ledger accurately. And they do, pretty well.
Blockchain, in its original application (Bitcoin), is simply a ledger, like the one at your bank.
But unlike your bank, it’s not centralized - the information isn’t kept in one place, nor owned by one entity.
It’s also not decentralized - the Blockchain ledger is not divided into multiple places.
Instead, it’s distributed - everybody on the network maintains a full and complete copy of the entire ledger.
In the case of Bitcoin, that means the ledger is simultaneously and identically kept by 6000+ volunteers around the world, each on their personal computers. These volunteers collectively create the network, which is used by millions of people.
There are a fixed amount of electronic tokens (eg, Bitcoins) in the blockchain system, and this distributed ledger is simply a continuous record of who owns which token.
Every transaction that occurs, since the beginning of time, is recorded publicly in the distributed ledger. People aren’t identified, they have a pseudonym.
(Other financial blockchains have actual anonymity (not just pseudonymity) but that's another story.)
So consider. In a blockchain:
- Every transaction that ever occurs is public - meaning anyone can verify that it actually happened.
- Every transaction that ever occurs is permanently recorded - meaning I, and you, can rely on the system over time.
- Nobody can edit, hack or destroy the blockchain ledger, because it’s kept simultaneously on 6000 different computers. To change an old transaction (eg. if I tried to claim ownership of the tokens I used to pay you last week), I would have to change more than half of these computers (3000 different machines) all within ten minutes, which is the interval at which the blockchain is permanently updated with new information.
This is revolutionary. Before, we needed a trusted 3rd party to maintain a ledger - someone like our bank, PayPal or VISA - but now we don’t.
Using the blockchain, I can send money directly to you, with no intermediaries, and the most secure database in human history will verify publicly that this transaction has correctly occurred.
So you see, even if I copy your hard drive, I can’t own your bitcoins. The Blockchain specifically records that they belong to you.
So why does this matter?
Well, compare a centralised database (i.e. an intermediary) with a distributed database (a blockchain):
- A centralised database is vulnerable to hacking, data loss, and theft - even big companies like Dropbox, Google and the NSA have been hacked, it can’t be assured not to happen.
- The blockchain can never be hacked or lost, as to hack it would require hacking more than half the network (3000 targets, not 1 target), simultaneously, and all within 10 minutes. Similarly it can never be lost, because if one of those 6000 computers goes offline, 5999 other computers still maintain the network.
- A centralised database is slow. Sending money internationally, for example, can take up to 7-10 days as different centralised databases in different banks are consecutively updated.
- The blockchain is extremely fast. Only one transaction needs to occur to transfer money, or ownership of information, anywhere in the world, and it’s usually completed within one hour.
- A centralised database is expensive - for example sending money internationally via payment networks can cost 8% to 12%. Whenever an intermediary exists (or when many exist), each can take a fee.
- The blockchain is extremely cheap - when you directly transfer ownership of money,
tokens, or information, to somebody; you only pay a fixed network fee, currently equivalent
to £0.04 = 4 pence. Even if you’re transferring ten million pounds worth of value, you’ll
only pay 4 pence to do so.
(The network fee goes to those 6000 volunteers as payment for maintaining the network.)
- A centralised database cannot facilitate micro-transactions - because it’s not economically viable. For example, it’s not economically feasible for a record company to make a royalty payment to an artist every single time a song is played. The value changing hands might be $0.000005 per song, whereas the cost of centralised payment might be $2.00. And how do you even pay someone $0.000005?
- The Blockchain is ideal for micro-transactions - Because it’s extremely fast and extremely cheap, artists on the Blockchain can be compensated with royalties immediately, the moment a song is played, not several months after. Microtransactions also open up entirely new opportunities for value exchange that were previously unfeasible, such as insurance on low-value items.
- A centralised database is only available in the developed world - approximately 3 billion people across the world simply don’t have any access to bank accounts, or even formal documentation. This means they can’t make any digital payments, can’t buy insurance, and have no official property rights.
- The blockchain is open to everybody with internet access - irrespective of who they are. Blockchain can bring financial services, proof of identity, property rights and efficient payment to the literally billions of people on Earth that don’t currently have access to such liberties. The economic value this will unlock is almost unbelievable.
- A centralised database can be edited or censored by the people that own the database. That might be a bank, private company, hackers or an intrusive government.
- The blockchain cannot be censored - once information (a transaction) has entered the blockchain, it is there in that form forever, and kept this way by every node in the entire network.
But how will this affect me?
Blockchain is already affecting your life, likely without you even realising it.
The Financial Industry is currently re-organising its infrastructure to deeply integrate Blockchain technology. This will mean that soon, international payments will settle extremely fast, and you’ll know where your money is.
And not just money - the New York Stock Exchange is integrating a Blockchain right now to facilitate its share trading. Most of what a stock exchange like the NYSE does, is maintain an accurate record of who owns which piece of information (here, which stock), and facilitate transfers of ownership - these functions are exactly what Blockchain is perfect for.
On a personal level: you'll see blockchain-based money be increasingly used for quick, cheap and easy payments between you and your friends.
Online, you’ll be able to support the artists you enjoy by easily donating fractions of one dollar, or fractions of one cent - when millions of people are doing this, creating art becomes a viable business again, and you can have a real relationship with your artists.
Business Supply Chains will become completely transparent - with blockchain technology you can be certain that your Fair-Trade food is actually  Fair-Trade, and you can trace your clothes back to the exact factories that made them to ensure you’re supporting ethical labour standards.
You’ll know that your prescription medicines were synthesised by reputable manufacturers, and you’ll know they actually are what they say on the box. You’ll know that the diamonds in your jewellery were mined and imported ethically and legally. And this transparency will gradually expand to all goods.
Free Speech will be preserved, and accessible to all. Publishing platforms like steemit.com run their own blockchains - meaning that a) once published, content can never be edited or removed, and b) publishers can be financially compensated for their work - in Steemit’s case, automatically.
Democracy will be resilient - because Blockchains which validate your individual identity will be used for voting, preventing election fraud or manipulation of votes.
Middlemen will disappear, so things will get cheaper. It’s not just Payment Processors. Any intermediary that deals in trust, and charges money for it, will be replaced with a Blockchain based solution.
Uber will no longer take centralised fees on rides, you can directly pay the driver. eBay will no longer take centralised fees in auctions, you'll directly pay the seller. Spotify will no longer take centralised fees on music, you'll directly pay the artist. Dropbox will no longer take centralised fees on digital file storage, because you'll securely store your files in a distributed way across a network of personal computers.
Blockchain is so cheap, these middlemen will become irrelevant.
Legal contracts can self-execute, without enforcement by laywers. This is a more advanced application of blockchain technology, called a Smart Contract. The idea is that not just tokens, but whole computing programs can run on distributed blockchains - everywhere at once, un-editable - meaning two companies can write an agreement in computer code that will automatically allocate money when certain conditions are fulfilled - like a self-enforcing legal contract. No more late payments, far fewer legal suits - you don’t need humans to enforce a contract anymore, computer code can do it for you.
The implications of this technology go further even than this, increasingly pushing our world towards the (historical) domain of science fiction.
Companies without directors? Your money and information completely out of reach of private companies or intrusive governments? Total financial privacy and secrecy? All these things are visible on the horizon that we’re moving towards.
And Blockchain is the invention that will power them all.
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