So what is this mysterious tech. that is driving BitCoin and hipsters world round?
Let’s get some definitions out of the way from Investopedia, the real MVP.
What is a ‘Blockchain’
A blockchain is a public ledger of all Bitcoin transactions that have ever been executed. It is constantly growing as ‘completed’ blocks are added to it with a new set of recordings. The blocks are added to the blockchain in a linear, chronological order. Each node (computer connected to the Bitcoin network using a client that performs the task of validating and relaying transactions) gets a copy of the blockchain, which gets downloaded automatically upon joining the Bitcoin network. The blockchain has complete information about the addresses and their balances right from the genesis block to the most recently completed block.
BREAKING DOWN ‘Blockchain’
The blockchain is seen as the main technological innovation of Bitcoin, since it stands as proof of all the transactions on the network. A block is the ‘current’ part of a blockchain which records some or all of the recent transactions, and once completed goes into the blockchain as permanent database. Each time a block gets completed, a new block is generated. There is a countless number of such blocks in the blockchain. So are the blocks randomly placed in a blockchain? No, they are linked to each other (like a chain) in proper linear, chronological order with every block containing a hash of the previous block.
To use conventional banking as an analogy, the blockchain is like a full history of banking transactions. Bitcoin transactions are entered chronologically in a blockchain just the way bank transactions are. Blocks, meanwhile, are like individual bank statements.
Based on the Bitcoin protocol, the blockchain database is shared by all nodes participating in a system. The full copy of the blockchain has records of every Bitcoin transaction ever executed. It can thus provide insight about facts like how much value belonged a particular address at any point in the past.
The ever-growing size of the blockchain is considered by some to be a problem due to issues like storage and synchronization. On an average, every 10 minutes, a new block is appended to the block chain through mining.
A common function of Blockchain technologies is BitCoin.
What is ‘Bitcoin Mining’
Bitcoin mining is the process by which transactions are verified and added to the public ledger, known as the block chain, and also the means through which new bitcoin are released. Anyone with access to the internet and suitable hardware can participate in mining. The mining process involves compiling recent transactions into blocks and trying to solve a computationally difficult puzzle. The participant who first solves the puzzle gets to place the next block on the block chain and claim the rewards. The rewards, which incentivize mining, are both the transaction fees associated with the transactions compiled in the block as well as newly released bitcoin.
BREAKING DOWN ‘Bitcoin Mining’
The amount of new bitcoin released with each mined block is called the block reward. The block reward is halved every 210,000 blocks, or roughly every 4 years. The block reward started at 50 in 2009, is now 25 in 2014, and will continue to decrease. This diminishing block reward will result in a total release of bitcoin that approaches 21 million.
How hard are the puzzles involved in mining? Well, that depends on how much effort is being put into mining across the network. The difficulty of the mining can be adjusted, and is adjusted by the protocol every 2016 blocks, or roughly every 2 weeks. The difficulty adjusts itself with the aim of keeping the rate of block discovery constant. Thus if more computational power is employed in mining, then the difficulty will adjust upwards to make mining harder. And if computational power is taken off of the network, the opposite happens. The difficulty adjusts downward to make mining easier.
In the earliest days of Bitcoin, mining was done with CPUs from normal desktop computers. Graphics cards, or graphics processing units (GPUs), are more effective at mining than CPUs and as Bitcoin gained popularity, GPUs became dominant. Eventually, hardware known as an ASIC, which stands for Application-Specific Integrated Circuit, was designed specifically for mining bitcoin. The first ones were released in 2013 and have been improved upon since, with more efficient designs coming to market. Mining is competitive and today can only be done profitably with the latest ASICs. When using CPUs, GPUs, or even the older ASICs, the cost of energy consumption is greater than the revenue generated.
DEFINITION of ‘Double-Spending’
The risk that a digital currency can be spent twice. Double-spending is a problem unique to digital currencies because digital information can be reproduced relatively easily. Physical currencies do not have this issue because they cannot be easily replicated, and the parties involved in a transaction can immediately verify the bona fides of the physical currency. With digital currency, there is a risk that the holder could make a copy of the digital token and send it to a merchant or another party while retaining the original. This was a concern initially with Bitcoin, the most popular digital currency or “cryptocurrency,” since it is a decentralized currency with no central agency to verify that it is spent only once. However, Bitcoin has a mechanism based on transaction logs to verify the authenticity of each transaction and prevent double-counting.
DEFINITION of ‘Paper Wallet’
A paper wallet is an offline mechanism for storing Bitcoins. The process involves printing the private keys and Bitcoin addresses onto paper. Physical wallets, also known as “physical Bitcoins,” are considered one of the safest ways to store Bitcoins provided certain security precautions are followed. Images of physical Bitcoins are commonly seen in media coverage in innovative styles, mostly with a ‘new look’ of the coin and the private key printed either on paper, plastic, or metal.
What is ‘Bitcoin’
Bitcoin is a digital currency created in 2009. It follows the ideas set out in awhite paper by the mysterious Satoshi Nakamoto, whose true identity has yet to be verified. Bitcoin offers the promise of lower transaction fees than traditional online payment mechanisms and is operated by a decentralized authority, unlike government issued currencies.
There are no physical Bitcoins, only balances associated with public and private keys. These balances are kept on a public ledger, along with all Bitcoin transactions, that is verified by a massive amount of computing power.
BREAKING DOWN ‘Bitcoin’
Bitcoin balances are kept using public and private “keys,” which are long strings of numbers and letters linked through the mathematical encryption algorithm that was used to create them. The public key (comparable to a bank account number) serves as the address which is published to the world and to which others may send Bitcoin. The private key (comparable to an ATM PIN) is meant to be a guarded secret, and only used to authorize Bitcoin transmissions.
In March 2014, the IRS stated that all virtual currencies, including Bitcoin, would be taxed as property rather than currency. Gains or losses from Bitcoin held as capital will be realized as capital gains or losses, while Bitcoin held as inventory will incur ordinary gains or losses.
The independent individuals and companies who own the governing computing power and participate in the network, also known as “miners,” are motivated by mining rewards (the release of new Bitcoin) and transaction fees paid in Bitcoin. These miners can be thought of as the decentralized authority enforcing the credibility of the Bitcoin network. New Bitcoin is being released to the miners at a fixed, but periodically declining rate, such that the total supply of Bitcoin approaches 21 million. One bitcoin is divisible to eight decimal places (100 millionth of one bitcoin), and this smallest unit is referred to as a Satoshi. If necessary, and if the participating miners accept the change, Bitcoin could eventually be made divisible to even more decimal places.
Style notes: According to the official Bitcoin Foundation, the word “Bitcoin” is capitalized in the context of referring to the entity or concept, whereas “bitcoin” is written in the lower case when referring to a quantity of the currency (e.g. “I traded 20 bitcoin”). The currency can be abbreviated to BTC or, less frequently, XBT. The plural form of the word can be either “bitcoin” or “bitcoins.”
So now that we have a general understanding of what these terms mean and how they interact (again Investopedia you the real MVP). We can look at actual business applications.
The Forbes article “Looking to integrate Blockchain in your business” possess some really cool Q&A’s:
What are all the industries that the blockchain threatens to disrupt?
The industry that is the most popular right now in terms of activity and thinking is financial services. One, because the very definition of the blockchain touches everything that a bank does in terms of money, movement of assets and contracts.
The second one is government services. All of those services where you have to go somewhere like the county or the motor vehicle department and then stand somewhere to make a transaction could be done with the blockchain — land registry and anything to do with registration of titles and licenses and property ownership, motor vehicle registrations. Blockchain has an embedded trust component so you don’t need to show your face to prove who you are. With blockchain, why not offer everything online?
Another industry would be health care. One of the applications in health care would be the medical record. We could use multi-signatures [a technique in which transactions can occur only when a certain number of authorized people have signed off] to authorize others to access your entire or just certain parts of your medical record. Or maybe you could share your data as a patient in an aggregate manner, in a way in which it is still anonymous and private. The blockchain ensures the data is encrypted and only available to those who have a right to aggregate it. The blockchain could also verify that a particular procedure has taken place.
Other industries could include real estate — doing escrow or title insurance. When you buy a home, you have to pay $300-$400 to an escrow agent so they can clear the title for you, but really, all they do is go to the county office and make sure there’s no fraud on the title history. The blockchain can do that because it can store the history of who owned a particular house since it was first built, and that record is stored in a way that cannot be tampered with. With a blockchain, when you time stamp a particular document or service or ownership, that time stamp cannot be changed. That is the key difference between a blockchain and a database. In a database, you can erase a record and change the value and no one would know you did that because not all databases have an audit trail — you have no history of what was changed when it was changed. But that’s a basic, basic, basic element of a blockchain. So every time there is a new state, you don’t erase the previous state, you add a line below it like a ledger. You don’t erase the previous line and replace it. Then you have a good truthful, historical record of anything.
The last example is the energy sector. There’s a street in Brooklyn where neighbors are buying and selling energy from each other in micro transactions using the blockchain as a platform — a few cents here and a few cents there. The blockchain is a very efficient mechanism for conducting micro-transactions. If you were to do micro transactions on the order of a few cents here and there a hundred times a day on a credit card, it would not be cost-effective.
How will this affect the average consumer over the next few years and in the future?
Applications and services will use the blockchain in the background and we may not know, in the same way that, today, you may not know there’s a database in the background — you don’t know and you probably don’t care.
You’ll also start to see a number of services in the area of trust. In the same way we Google today to find information, we’ll perform the equivalent of Googling to verify records or identities or the authenticity of something or the rights or ownership of something or that work was done or that a title is valid and not fraudulent, to verify contracts. Anything that has a trust-based component — we’ll be able to check it on the blockchain. There will be identity certification services for everything. So for the average consumer, it will provide a new level of freedom.
I say the blockchain is about the three T’s — trust, truth and transparency. And that’s what the blockchain will enable us to get better visibility on — knowing what has happened, when something happened and how truthful it is.
What recommendations do you have for the workers whose industries and jobs will be disrupted, such as those in financial services or government?
If you’re an intermediary and you’re providing a service that provides a trust component, look at how the blockchain will perform that function you’re currently providing. It doesn’t mean you’ll be out of work. If you’re proactive, you can be the one offering that service. If you’re an escrow agent, maybe you can offer that blockchain service — instead of charging $300 and spending 2 hours, maybe you’ll charge $50 and spent zero time on it — so what you’ve lost in revenue, you’ve gained in time. You’ll be a new kind of intermediary rather than being completely wiped out.
I’m not saying all intermediaries will be replaced. Look at how the Internet threatened newspapers. Not all have gone away, but those that were more proactive were still able to survive and thrive.
Where is the blockchain in development now?
We are still in the very early days of its expected maturity. The blockchain is a software platform and environment, a set of capabilities that software developers can utilize so they can write this new breed of applications that are decentralized and living on the blockchain from Day 1. By way of analogy, today, Java is one of the most popular programming languages for the web. If you want to write an application, you most likely write it in Java. The advent of Java in the ’90s was a key moment for the web because it allowed developers to write applications on the web and not worry about what kind of computers they were running on because Java was neutral — it worked on everything. Today, there’s more than 10 million Java developers. By comparison, developers that have done something on the blockchain today is only about 5,000, so we’re still in the very early stage of developers understanding how to program a blockchain.
Also, the platforms themselves — if you think of Ethereum and Bitcoin as platforms and the vertical solutions, even the consortium solutions like R3CEV and Digital Asset Holdings [private blockchains that have been built by specific companies] — they’re all in their early, early iterations of the product cycle. They are not mature and are still being developed, so that presents a challenge. There might be some challenges in using the technology to its fullest extent. But my prediction is that by 2018-2019, we’re going to start to see a lot more maturity and resiliency in these blockchain platforms, and it’s going to be easier to use them.
Today, you have to assemble a lot of pieces by hand if you want to develop a blockchain platform, just like how, in 1995 or 1996, if you wanted to publish a website, you had to work with html. You had a page editor where you would hand write the html page almost line by line. No one does that anymore. Now you can create a web page without touching a line of code with Squarespace, WordPress, Tumblr, etc. That’s where we need to go.
Once again, shoutout to Investopedia for providing this article with the definitions.
**This blog is not all original content- I do not own all the content. The purpose of this blog is to collect valuable insights across various channels, publications, and articles, and present them in a digestible and current way. Some material has been copied, and referenced in some articles, and should not be treated as original work.