In the past year, you’ve likely heard the words blockchain, Bitcoin and cryptocurrencies frequently bantered about. In 2017, Bitcoin and blockchain were among the most searched subjects on the internet as reported by Google.
Blockchain has become a big topic among companies, technologists and investors. On the financial news networks, commentators regularly talk about these topics both in a positive and negative fashion. Some say blockchain technology and cryptocurrencies like Bitcoin will change our world in profound ways; others say the whole topic is a giant sham and will eventually implode.
So what are blockchains, Bitcoin and cryptocurrencies and what is all the fuss about?
Although the blockchain topic is complex, in its basic form, a blockchain is an encrypted digital ledger that keeps track of data on a platform that is decentralized and distributed among a network of computers called nodes. The network is maintained and secured by operators called miners that for a fee secure, update and maintain the network. The structure and operation of a blockchain network makes the data on the blockchain network impervious to hackers.
The first successful longest operating blockchain protocol network is Bitcoin, a cryptocurrency invented by a person or group working under the name Satoshi Nakamoto.
In response to the financial crisis of 2008, Satoshi Nakamoto sought to create a currency and store of value that operated outside the financial system based on an open source encrypted public network that could not be controlled or corrupted by any financial or political authority.
On Oct. 31, 2008, Satoshi released to the world the Bitcoin white paper which set forth a system of electronic transactions that didn’t rely on a trusted third party intermediary. In Jan.2009, the first Bitcoin transaction took place. The Bitcoin blockchain protocol described in the Satoshi white paper is the genesis of every blockchain application currently in use today.
To appreciate the potential of blockchain applications, it’s important to understand how a blockchain like Bitcoin works.
The core of a blockchain, such as Bitcoin, is a digital ledger where metadata is stored. In Bitcoin’s case, its ledger keeps track of user balances using debits and credits. But any type of data can be stored on a blockchain database.
Databases are the core application of virtually all computer and internet applications. Unlike most central databases, the unique feature of Bitcoin and other blockchains is that an exact copy of the database is distributed across a vast network of computer systems called nodes can number in the hundreds of thousands to millions depending upon the size of the network.
The genius of the Bitcoin blockchain protocol is that roughly every 10 minutes the blockchain database is updated with new transactions by miners who compete to create a new block of data containing updates to the blockchain database. The miner who solves a complex mathematical formula to complete a new block is rewarded with a combination of newly minted Bitcoins and transaction fees.
The new block of updated data is added to the existing blockchain database and an updated version of the blockchain database is copied instantaneously across the entire Bitcoin network. In addition, the entire Bitcoin blockchain database is encrypted with the most advanced form of encryption technology called SHA-256 that requires an encrypted private key to unlock and transact information on the blockchain. This system of an encrypted distributed blockchain makes the data stored in the blockchain highly secure and impenetrable to hacking and unauthorized access.
Whether you believe in the future of Bitcoin or not, the Bitcoin blockchain protocol has unleashed a global tidal wave of potential disruption and rethinking of how future financial and technological systems could work. Highly secure distributed blockchain databases could create a whole new paradigm shift in technology in much the same way electricity, telephones, radio, TV, computers, cell phones and the internet did in the past.
This new blockchain technology, and future evolutions of it, will likely underpin technologies such as autonomous vehicles, robotics, the Internet of Things, artificial intelligence and social media; and could dramatically change financial services, currencies and investment markets. We could be looking at the next big advancement in technology, and that’s why everyone is talking about this thing called blockchain.
William Small, JD, CCIM is the Manager of Zenith Blockchain Technology Fund, LP, an investment fund focusing on emerging blockchain technology investments. For more, contact him at 970-925-3866, or at email@example.com.