why is blockchain important

Why is Blockchain Important?

Author: 
Kyle F.
Date: 
August 05, 2018
Read time: 
7 minutes
decentralization
distributed ledger
security

Blockchain is important because it brings trust to peer to peer networks. A primary reason banks exist is to act as a trusted third party to transactions. Let’s create an example. If the existing economy had no banks, and instead was driven by peer to peer trading, who would ensure that both parties in the trade are trusted? If I trade you salt for sugar, how do I really know you are not ripping me off or giving me fake sugar? The answer is blockchain technology. Using blockchain technology we now have an objective, trusted third party to facilitate our transactions.

Blockchain technology gained popularity due to its role as the underlying technology in Bitcoin. Many people fail to distinguish the difference between Bitcoin and blockchain.

In this article, we will dive into exactly what blockchain means and why it is not the same as Bitcoin. In the end, you will gain a comprehensive understanding of blockchain and all of its disruptive implications.

Blockchain is important because it brings trust to peer to peer networks. A primary reason banks exist is to act as a trusted third party to transactions. Let’s create an example. If the existing economy had no banks, and instead was driven by peer to peer trading, who would ensure that both parties in the trade are trusted? If I trade you salt for sugar, how do I really know you are not ripping me off or giving me fake sugar? The answer is blockchain technology. Using blockchain technology we now have an objective, trusted third party to facilitate our transactions.

Blockchain technology gained popularity due to its role as the underlying technology in Bitcoin. Many people fail to distinguish the difference between Bitcoin and blockchain.

In this article, we will dive into exactly what blockchain means and why it is not the same as Bitcoin. In the end, you will gain a comprehensive understanding of blockchain and all of its disruptive implications.

 

What is blockchain technology?
 

The blockchain was conceptualized in 2008 along with the launch of Bitcoin by Satoshi Nakamoto. Satoshi Nakamoto is an anonymous figurehead that may represent one person, or a group of people. No one knows for certain.

The blockchain is simply a distributed ledger that is best used in a decentralized fashion. The blockchain grows as a chain-like structure made of different blocks. Each block holds information describing the block that comes before it in the chain. This information is in the form of a cryptographic hash, which can be understood as a unique ID in the form of a text string that is generated by taking into consideration the following variables:
-  the timestamp of the current block,
- the list of transactions,
- an identifier of the previous block, and
- a variable called nonce).

What is a nonce? Just an acronym for “number used once”, a random number used to control the difficulty of  the cryptographic puzzles. In short, its value is automatically adjusted to make sure that miners are required to work for 10 minutes to find a new block.

The importance of this logic is that it provides an environment which is immutable. Immutability simply means that nothing can be modified. Since all of the blocks are linked together, then no information in any of the previous blocks can be altered without changing all the later blocks. Should a malevolent person try to make such a change, it would be rejected by the majority of nodes. In summary, the blockchain provides a historical transaction ledger which cannot be changed or corrupted.

The applications of blockchain stretches far beyond the monetary use-cases like with the case of Bitcoin. Blocks on the blockchain can hold any type of information, making blockchain technology very versatile and useful. Car titles, medical records, and more can be stored in the blockchain database. Blockchains can be valuable in virtually any situation where keeping a secure, transparent, and tamper-proof record in a decentralized manner is important. Some more use-cases include:

  • Making voting more transparent
  • Creating different financial instruments
  • Keeping record of physical products
  • Digital identity systems

To reiterate the technical reasoning, information stored using a blockchain data structure is tamper-proof, as changing one block would require changing all the blocks after it. If one past block is changed, the hashes of all subsequent blocks are modified as a result. Thus, it is impossible for a change in any block to pass unnoticed.
 

What actually stops anyone from rewriting the entire blockchain and making all sorts of changes?
 

The answer is simple. To ensure that blocks cannot have their data changed, the blockchain protocol requires that the network participants, known as nodes,  must agree on the next block to be added to the chain. This process is called consensus.

Source: Simply Explained - Savjee Youtube Channel 

 

Consensus mechanisms and mining
 

Bitcoin uses a Proof of Work scheme to achieve consensus amongst the network.  Proof of Work creates a race amongst miners to “find” the next block. We use “find” in quotes because really what is more literally occurring is that the miners are constantly computing to be the first one to solve the next block, which is a correct hash that is mathematically linked to previous blocks. The first miner to solve the answer (the hash) and have it validated by the network is rewarded in Bitcoin. Since many distributed nodes are working to solve these answers, it is not possible for one node to propose a fake block to the network. All of the other nodes would not validate the block, thus the block would not be added to the blockchain. This is where a 51% attack can come in to play. If a group of miners dominates the network, then they can propose a block and validate it all amongst themselves, tampering with the blockchain.

 

How is blockchain being used by Bitcoin and other cryptocurrencies?

Blockchain gained popularity as the technology used by Bitcoin (and later on by most of the other cryptocurrencies) to keep a secure and decentralized ledger of transactions.

Bitcoin’s blockchain is decentralized. It is made of a network of miners and nodes that record transactions and add new blocks to the blockchain. These miners are required to solve complicated mathematical problems, under Bitcoin’s Proof of Work consensus mechanism. The answer to these problems gets included in the block that is added to the blockchain. With Bitcoin’s architecture, new blocks are getting added approximately every 10 minutes.

 

We’re witnessing the creative destruction of financial services, rearranging itself around the consumer. Who does in the most relevant, exciting way using data and digital, win.  - Arvind Sankaran

How blockchain is changing finance

 

Source: Quartz
 

The rise of cryptocurrencies is often compared with the rise of the internet of the early 90s. It is expected that digital assets like Bitcoin will change the way we make everyday payments.

Many blockchain enthusiasts believe that the  technology has the power to improve the existing financial world by providing banks and institutions with secure, auditable, and immutable records for bookkeeping.

By using blockchain technology, banks can change the current mechanism for international transactions, which are slow, antiquated, and expensive. If banks are able to make transactions between each other using blockchain technology, it could lead to much faster and cheaper international transactions.

Many banks are also developing their own blockchain based projects. The most popular example of a bank adopting the technology is J.P Morgan, who has two blockchain projects named Juno and Quorum.

Cryptocurrencies that are targeting the financial world
 

One notable example of cryptocurrencies that are targeting the financial world is Ripple, a crypto that is working with banks and other financial institutions toward the goal of building the “Internet of Value.” The project aims to provide a bridge currency that financial institutions can use to settle cross-border payments.

Stellar is a cryptocurrency that aims to connect banks, payments systems, and people in order to help them move money quickly and reliably, at almost no cost. It also provides a convenient way to exchange national currencies for the native coin on the network: Lumens. This means that Stellar can be used as a replacement for existing money transfer options like bank transfers and specialized service providers like Western Union.

Due to its open and decentralized nature, blockchain technology can serve as a solution bringing banking services to millions of people who are currently unbanked.

Source: Future Thinkers Youtube Channel 
 

Possible uses of blockchain technology in the finance sector
 

There are many additional uses that blockchain technology provides the financial sector in addition to its role in money transactions. As it can be used to record any type of information, blockchains can be used to store deeds, rental agreements, equities, bonds, contracts, and titles.

Blockchain-based technologies like Ethereum are making it possible for anyone to tokenize  any physical asset. Tokens can be used to represent ownership in the same way that shares of a stock represent ownership of a company. For example, if several individuals share ownership in a restaurant, they could elect to tokenize that restaurant using blockchain technology. By doing so, they could vote on important matters without even having to meet in person. Additionally, you can tokenize physical products as part of a manufacturing supply chain, gold, silver, and other assets.

Why blockchain is important

Bringing trust to a decentralized network is groundbreaking. There is a constant flow of new technologies that are made possible by the invention of the blockchain. Like many other ideas that have revolutionized our world, the applications of blockchain stretch far beyond what we can imagine in our current day.
 

The change that cryptocurrencies are making in the world
 

Bitcoin and the cryptocurrencies that came after it are changing the way we view and use money by removing the middlemen (banks and money transfer services) bringing financial power back to the people by allowing us to create a peer to peer economic system. To fully appreciate the magnitude of this change, we must consider the possibility of middlemen to act in their own self-interest to the detriment of the people that trust them. Blockchain technology removes the need for trusted third parties in many processes and industries that have relied heavily on them for hundreds of years.
 

Blockchain technology and democracy
 

Blockchains also provide transparency. Transactions are public and freely inspectable, thus it is virtually impossible to hide anything. This aspect of the blockchain can be used to provide better transparency for institutions and significantly reduce the possibility of corruption and misuse of funding.

The transparency that blockchain technology provides can also make democratic processes, such as elections, significantly more secure. Having unchangeable records makes voting manipulation much more difficult for hackers.

 

Blockchain technology is decentralized

Blockchain technology is also decentralized, which means there is no central point of failure and it displaces middlemen. Middlemen can be banks, supply chain checkers, medical record companies, and more. Ultimately, decentralization makes blockchains more efficient and secure than traditional solutions for data keeping.

In summary, blockchain technology makes it possible for us to have a democratic, decentralized, and transparent store of data that requires no trusted third-parties. It completely removes the need to trust organizations, institutions, governments, and people. Blockchain technology will become increasingly important as it gains wider adoption; learning all about it today will pay dividends in the future.

To learn more about how the blockchain works and the importance of decentralization, take our free, interactive course.

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