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Estimated reading time: 7 minutes
In Case You Missed It:
Recently we have been touching on the benefits of blockchain. We have discussed:
- how you can gain another stream of income simply by using the internet
- how blockchain is set to change the music industry by giving more power to artists and creators of art/content
- an exhaustive list of incentives and free money to get your feet wet in the cryptocurrency world
Blockchain is a technology born out of a desire to create a more transparent means of recording data some 30 years ago. The birth of Bitcoin saw the first use-case for the technology, but it is essential to separate your understanding of the two.
Bitcoin was simply an experiment to see if a digital currency could be created.
Bitcoin runs on blockchain, so all Bitcoin is blockchain. But all blockchain is NOT Bitcoin.
There are entire ecosystems of blockchain applications being created right now as you read this article. Cardano is my favorite (so far). Cardano runs on its native token ADA, named after Ada Lovelace, who created the first algorithm to be carried out by a “computer.”
There I go getting ahead of myself again. Let’s get back to it:
By nature, blockchain technologies present an interesting challenge to hacking attempts. Banks utilize a centralized framework for storing transactions: a server based network. I can’t just walk in and ask to see a ledger sheet for all their transactions– and for good reason. Security is a main issue for the finance industry.
Banks are governed by centralized authorities, and operate to fuel the best interests of that authority.
Blockchain takes the opposite approach, and is built on a peer-to-peer (P2P) system that connects computers together. These node-based frameworks are the same types of systems that ran Napster, and now fuel online gaming, as well as such apps as BitTorrent, Freecast, Tor, Skype, and Adobe Flash Player (source).
1. Finality of Truth
The first and foremost element to understand is this:
In a blockchain network, there is only one source of truth.
There is only one ledger for the whole network. To know who owns what, or to study a particular transaction, there is only one place to go.
Talk about draining the swamp…
2. Eliminates Need for 3rd Party
The P2P characteristic of blockchain allows the transactions to involve only two parties, the sender and the receiver.
Thus it removes the requirement of ‘third party authorization’ because everyone in the network is themselves able to authorize the transactions.
No need for a bank in this transaction.
3. Verifiable by ANYONE
Blockchains utilize a distributed framework for recording transactions: there is an exact copy of the entire database– including every transaction– on every node of the chain.
To add a transaction, every node needs to check its validity. If the majority thinks it’s valid, then it’s added to the ledger. This promotes transparency and makes it corruption proof.
4. Increased Capacity
Another advantage of the P2P framework is that since there are a lot of computers working together, their total power is much greater than individually. Moreover, adding nodes increases the capacity of the whole network.
5. Hacker Proof
Here’s where it gets good. If a hacker breaches a node on the chain and succeeds in altering the database, the other nodes are able to detect the irregular copy and reject it accordingly.
For a hack to succeed, 51% of the nodes on the chain would have to be compromised at the same time, and make the same change to the database.
Not a likely scenario. Blockchain isn’t without its own set of risks, something we will discuss in a later post.
6. Eliminates Forgery
Forgery is and has always been a feeding ground for illicit activities– and a worldwide stumbling block for authorities. Blockchain puts a stop to it by adding a mathematical feature– a cryptographic principle, to be exact– known as a hash.
If you would like the details read this. For simplicities sake, see the image below.
The transaction data is represented by the key. Execution of the hash function on the key changes that data into a hash value and creates the digital signature.
If ANY bit of the key is changed, the hash value (signature) will also change.
Bye bye forgery.
7. For the Good of the Many
We touched on this in #1, but it definitely deserves it’s own section. Governance is an essential element of any group: banks use big boards and are required to act in the interest of their shareholders/members.
Experience shows us that the system basically is a place for the rich to get richer while the rest of us are left to fight over the scraps.
Changing of the Guard:
Blockchains are governed by the nodes on the chain.
They don’t have a centralized authority or single person looking after the framework.
The interests of Big Business are not in play. Application of this truth has fueled The Decentralized Finance Movement, which we will discuss in a later post.
8. Consensus: A New Ruler
Every blockchain has to have a way of establishing consensus so that the network can effectively make decisions. Consensus algorithms are cleverly designed to achieve reliability in a network involving multiple unreliable nodes. These algorithms may be used to
- Decide whether to commit a distributed transaction to a database.
- Designate a node as a leader for some distributed task.
- Delineate Proof-of-Stake (more on this much later)
Participants know where the assets came from and how its ownership has changed over time.
Each asset’s ( whatever it is, tangible, intangible, digital ) provenance must be traceable.
If we have a blockchain designed to track a fish’s journey from the sea to a restaurant, we can record– and be able to know– where it was caught, by who, and when. Again, we can record how many middlemen were involved during the fish’s journey. All the way to the moment the restaurant bought my fish.
Supply chain has numerous real-use cases for blockchain.
10. Cheaper, Faster Settlements
As you will see in the next post, the explosion of real-use applications on blockchain are largely decentralized finance apps consisting of smart contracts that settle financial transactions.
But why should you care? Because you’re human.
Worldwide Problem: Remittances
Studies show that remittances alleviate poverty in lower- and middle-income countries, improve nutritional outcomes, are associated with higher spending on education, and reduce child labor in disadvantaged households.
Regardless as to whether you know anyone effected by the issue, if you have a heart, you care.
As two of my children are Hispanic, I have a bit of inside perspective. Abuelito (Grandpa) worked past 70 and sent money home every week. In fact, 2021 Mexican remittances are projected to be $9.3 billion.
Now let me ask you– have you ever tried to send money to somebody? How about at a different bank? Different state? What about to a different country?
Ordeal is putting it lightly. Western Union is a popular choice in this demographic– you can do it from Walmart or HEB, as well as gas stations across America.
I tried using their price-estimator but they wanted me to create an account. It’s been awhile, but it looks like fees can be as much as 6%. Plus, it takes at least a day to get there.
A solution you can even invest in. It’s a non-profit organization seeking to make the problems of financial transactions a thing of the past. From their website:
Stellar is an open-source network for currencies and payments. Stellar makes it possible to create, send and trade digital representations of all forms of money—dollars, pesos, bitcoin, pretty much anything. It’s designed so all the world’s financial systems can work together on a single network.
Stellar has no owner; if anything it’s owned by the public. The software runs across a decentralized, open network and handles millions of transactions each day. Like Bitcoin and Ethereum, Stellar relies on blockchain to keep the network in sync, but the end-user experience is more like cash—Stellar is much faster, cheaper, and more energy-efficient than typical blockchain-based systems (source).
In our next post, we are going to look at smart contracts and the DeFi Movement. We’re just getting started…