Opinion

What is Blockchain and why should you care?

In essence, Blockchain is just a transactional database that stores data in a decentralized
manner and has never been hacked. Sounds boring, I know.

Current state of Blockchain is very similar to the Internet in the 80s, as it is still underdeveloped,
lacks standards and there are very few mature use cases and production-ready applications.

The main difference is that, unlike the 80s, we now actually do have Internet and many
opportunities and problems that Blockchain created are now discussed very publicly and hyped
like crazy, which leads to unrealistic expectations, which positions Blockchain pretty much at the
peak of inflated expectations of Gartner’s hype cycle.

 

So why is it important now if most of it is still hype? Mostly because the opportunity behind it is
so huge as it offers us a possible way to remove any middle-man from any transaction in the
world.

It enables us to store and share high-value information without a central authority that could
cancel, change or force transactions and is a very powerful way to introduce trust and remove
middle-men from industries that have competitors that are sometimes forced to cooperate with
one another and need third-party services to keep them in check and honest.

 

Cryptocurrencies

Most people associate Blockchain with a cryptocurrency that we call Bitcoin. Bitcoin is the first
Blockchain use-case that saw the light of day and it was followed by many other
cryptocurrencies.

Satoshi Nakamoto, creator of Bitcoin announced the first release of Bitcoin, as a new electronic
cash system that uses a peer-to-peer network to prevent double-spending. It’s completely
decentralized with no server or central authority.

Double-spending is a potential flaw in a digital cash system in which the same “coin” can be
spent more than once. This is possible because digital money consists of a digital file that can
be duplicated or falsified. As with counterfeit money, such double-spending leads to inflation by
creating a new amount of fraudulent currency that did not previously exist. This devalues the
currency relative to other monetary units and diminishes user trust as well as the circulation and
retention of the currency.

There have been many attempts to create digital money in the past, but they all failed in the end
because they tried to solve the double spend problem by introducing centralized ledgers where
the creator of the digital currency was the one responsible for maintaining the system and trust
in all transactions.

In order to eliminate the double spend problem, we have to have someone verify all transactions
and stand behind them. However, it is very hard to trust that single entity as it can be
compromised, tricked or hacked.

So, the single most important part of Satoshi‘s invention was that he found a way to build a
decentralized digital cash system that introduced trust as its main component by introducing
something called Proof of Work, which is a way to verify transactions entered into a digital
ledger by having verifiers (called ‘miners) solve hard cryptographic functions by investing some
work of their computers to qualify for this task.

This makes it very expensive to verify false transactions and protects the system while making it
completely transparent, immutable and decentralized.

Bitcoin is no longer the only cryptocurrency. It solved one of the hardest problems related to
digital money and introduced us to the world of decentralized ledgers and databases
(Blockchain). However, Bitcoin transactions are quite expensive and the current price is volatile
which makes it hard to be used for real life payments. There are many problems with Bitcoin
scalability and speed which are mostly showing up due to limitations of Proof of Work and size
of the database itself which is growing more and more every day.

So many more Cryptocurrencies showed up in a desire to solve problems that Bitcoin has and
also to introduce other use cases for public Blockchains besides digital money.

Today cryptocurrencies have become a global phenomenon known to most people. The number
of different cryptocurrencies available over the internet as of 7 January 2018 is over 1384 and
growing.

 

Tokenization and Decentralization

Blockchain technology radically changed the way we think of investment and finance.

If you really think about it, Bitcoin, as a decentralized network of peers which keep a consensus
about accounts and balances, is more currency than the numbers you see in your bank
account. What are these numbers more than entries in a database – a database which can be
changed by people you don‘t see and by rules you don‘t know?

People who really believe into the power of Blockchain believe that in the coming years’
everything will be tokenized, creating a world where the value is held and distributed via
peer-to-peer networks rather than centralized hubs.

This means that any value could be represented by a “coin” or a “token” that could be traded on
an open token market. I could issue my own “token” called Ivan’s coin and have people hire me
as a consultant by buying these tokens that could represent my consultant services. The more
people are willing to pay for money I personally issued the more its value would rise making me
richer.

So, the idea of tokenization is that anything scarce will ultimately be tokenized because the
benefits of digitization and increased liquidity are so great. That means cash, stocks, bonds,
commodities, houses, cars, digital goods of every kind, and perhaps human time as well in the
form of the personal token described above.

This already created a hype around ICO’s (Initial Coin Offerings), which is a way to crowdfund
Blockchain based projects by investing into them and hoping their value will rise over time.

The ICO market is huge with billions of dollars being raised and still mainly unregulated,
although more and more steps for introducing regulation and more security for investors into
cryptocurrencies and Blockchain projects are being made.

Private vs Public

In some cases having a transparent, immutable and decentralized system that anyone can is
not always beneficial for everyone involved.

Companies might want to exclude middle-man and cooperate but don’t always require to have
public tokens anyone can use to trade or want everyone to have access to some of their data.

So one disadvantage is the openness of public Blockchains, which implies little to no privacy for
transactions.

Second drawback of a public blockchain is the substantial amount of computational power that
is necessary to maintain a distributed ledger via Proof of Work at a large scale.

Both of these issues are important considerations for enterprise use cases of Blockchain.

So, the main distinction between public and private blockchains is related to who is allowed to
participate in the network, execute the consensus protocol and maintain the shared ledger.

The second distinction is the lack of Proof of Work. Private Blockchains solve PoW problems
mostly by using other ways to reach a consensus that is less expensive. Some examples are
Proof of Authority and Proof of Delegated Stake, which are considered quite safe in an
environment where only trusted individuals are allowed into the network.

Hyperledger Fabric? is an example of a Permissioned blockchain framework implementation and
one of the Hyperledger projects hosted and maintained by The Linux Foundation and IBM. It
has been designed ground up to cater to these enterprise requirements.
So what is next?

While Blockchain is still in its early development stages it looks like it’s here to stay and continue
growing.

Cryptocurrencies are still the most talked about current use-case because of rapid growth in
value some of them saw in the near past.

However, more and more companies are playing around with proof of concept solutions based
on public and private Blockchains and the blockchain market size is expected to grow from USD
241.9 million in 2016 to USD 7,683.7 million by 2022 with more and more market share coming
from private Blockchains and enterprise market.

The new wave of Internet technologies is definitely coming and fun times are ahead.

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