Chapter 4 Blockchain Explained

We've now reached the technical part of our program. What exactly is a blockchain? A blockchain is a relatively new kind of database that has become the trendy solution for storing digital information. They have become the infrastructure for an entirely new decentralized economy. 

In general, talk of infrastructure is boring. Just ask Congress. Bridges, roads, power etc. Infrastructure only makes the news when it screws up. (See Texas and its fickle power grid or Flint Michigan and its water troubles) But without infrastructure, none of our modern metropolis' would be possible. 

In order for a thriving digital economy to emerge, it must have a reliable backbone supporting it. That is the role of a blockchain. Lets break down the term blockchain. As it goes with crypto, there is no block nor chain in a blockchain.  But it got that name over time because all of the transactions coming onto a network were grouped into blocks of data and then chained together using sophisticated math, hence blockchain. This process makes it near impossible to alter older records, preserving the security of all transactions on the network.

A blockchain is a database that is managed on a peer-to-peer network of computers, which are referred to as nodes. It can also be described as a distributed ledger: a decentralized way to chronologically document transactions. Each participant in the network has access to the entire blockchain and its history. When a transaction is recorded, the accounts of all the participants are updated with the information. Transactions are grouped together in blocks, each of which is then linked to the one that came before it. The result is a chronological record that is basically impossible to tamper with, alter, or falsify.

How it works.  If two parties agree to a transaction, this information is broadcast to the computers (nodes) of the peer-to-peer network, where it is then validated. Once the transaction has been verified, it is added to a block together with other transactions. This block is then hashed. Every block contains a reference to the hash of the block that came before it. This guarantees the position of the block in the chain and ensures that it cannot be tampered with. The new block is then permanently added to the blockchain and distributed to all its participants. The transaction is now complete.

Blockchain offers transparency:  Whenever a transaction is conducted as part of a blockchain, it is recorded and visible to all participants. Blockchain participants can be, but do not necessarily have to be, anonymous.  Even though each user has a unique Bitcoin address, a pseudonym can be linked to their personal information in different ways. A simple example would be a user providing their home address to receive a delivery paid for with a crypto transaction.

A blockchain in many ways is a digital accounting system. Similar to infrastructure, accounting only makes the news when it screws up. Who had ever heard of Arthur Anderson before the Enron scandal? Similar to accountants, blockchain activity is boring and tedious. Ever meet an exciting accountant? Me either. I could try to spice up the topic of an endless ledger of assets and debits but what's the point? Its a database. It lacks personality and pizazz. And that's the point. Its not supposed to be exciting. Its the behind the scenes nuts and bolts of the digital currency world. (though blockchain technology is being used for much more that cryptocurrency)

Born from the seeming endless fraud of centralized systems, the blockchain was designed strictly to prevent data tampering, making it near impossible to cheat or hack the networks.

Most traditional databases used to keep financial records are centralized and maintained by a central institution. Bank of America, for instance, is responsible for keeping track of how much money is in all of its customers’ accounts. With a blockchain database, the ledger is kept and updated communally by all the computers that are hooked into the respective network, with complex tedious computational proof of work required for a transaction to be added to the blockchain.

Is this really necessary? Ask those who invested with Bernie Madoff or Enron or Worldcom or AOL or Freddie Mac (and I could go on)

The original shared nature of the Bitcoin blockchain was useful for virtual currency because the creator of Bitcoin wanted to create a currency with no central authority involved. Because the records are kept communally, no one computer or institution is in charge. If any one computer keeping the records is hacked or knocked offline, the other computers can go on without it.

In its infant stages, the blockchain was the key to cryptocurrency's future. Soon after, the decentralized digital technology began to show immense promise as a database to manage and facilitate a variety of critical functions, from a digital wall street to housing one's personal medical history and financial history, all in one safe, secure unalterable encrypted space.

Obviously replacing existing well established databases would take time and improvement in the user experience to say nothing of the daunting issue of scaling. But we're only a decade into blockchain technology with the possibilities limitless, hence the investment/speculative side of the Crypto/blockchain technology. Will blockchain technology reign supreme as the future database for the digital world? Nobody really knows for sure, but as of right now, the cybersecurity qualities of blockchain technology are highly attractive to countless firms, investors and governmental agencies worldwide.

Again, predict the future in technology at your own peril.

I got an email from an AOL account the other day. Almost fell off my stool laughing. Of course, nobody was laughing about AOL in the 1990's, especially if you owned stock in it. But AOL wasn't able to predict the future, missing the move to wireless. As did Compuserve and Earthlink and countless other high-flying early internet giants that act as punchlines now. Undoubtedly, the painstaking archaic computational slog of the original Bitcoin blockchain was not designed for simple easy widespread access and utility. As Crypto continues to scale up, so will the need to improve its computational abilities. (See smart contracts). But I'm confidant it will.

Do you need to know the programming technology behind blockchain to trade and invest in Crypto. Thank god NO. Imagine if you had to know web development to post a status update. The algorithms used to effect the complex computations of blockchain equations are above our pay grade. What's important is that there is a permanent unalterable record that is public and accessible to all, kept on various computers throughout a network.

That said. Its important to know how they are managed and that those who update the blockchains are on the up and up. With roughly 10,000 different cryptocurrencies in existence, doing our due diligence remains critical to all investing opportunities. 

How are blockchains created one might ask and can I make my own blockchain? Of course. But it would take extensive technical training in coding skills and a fundamental understanding of blockchain technology, but anyone can become a cryptocurrency creator. As stated earlier. Anyone can develop their own currency. But its not money until we convince others of its worth as a store of value. But the programming skills required to create a new blockchain are available to everyone and an exciting new career possibility in this fast growing space.

The future of the blockchain involves smart contracts. Smart contracts allow a network to be programmed to complete certain types of computing tasks automatically and instantaneously, with every computer on the network completing the tasks simultaneously to ensure they are done correctly. This would reduce/eliminate the tedious proof of work aspect of the original blockchain technology. The Ethereum blockchain is already implementing smart contracts, with most new upstart cryptocurrencies likely following suit.

Now its time for some fun. Its time to discuss the most exciting innovation in the crypto space, the emergence of DAOs, Decentralized Autonomous Organizations and their exciting role in the growing world of cryptocurrencies.



 







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