Intro to Blockchain Technology
Cryptocurrencies and the technology behind it, blockchain, have dominated the news cycle over the past couple of years. It’s new, exciting, a tad mysterious, and because of the extremely complicated nature of this nascent technology, there is still quite a bit the general public needs to learn in order to understand the power of the decentralized finance industry. Cryptocurrencies show a lot of promise to mature over the next few years and could add a lot to your portfolio. But before you jump on Coinbase and start snatching up Bitcoin, let’s go over the facts in order to make an educated decision.
What is Blockchain?
A lot of times when people begin speaking about blocks, chains, distributed ledgers, people’s eyes quite understandably begin to gloss over. Yes, this technology is very intricate but the idea behind it is surprisingly simple. The blockchain is literally just a public database of blocks, digital ones. These digital blocks contain basic information such as the time, date, and dollar amount of the transactions that are made within the blockchain’s ecosystem. The blocks also anonymously store who was involved in the transaction.
As of right now, none of this information should sound too different from how any business owner is used to keeping a ledger of their own transactions. The difference here is that instead of a human being going through every single transaction to confirm whether both the seller and buyer are in agreement over specifics of the purchase, this work is done by the computing power of thousands of processors around the world. This is where “mining” comes in.
Proof of Work
Proof of Work is the system that cryptocurrencies like bitcoin use in order to confirm and finalize transactional records on the blockchain. Let’s say you decide to sell your car and agree to accept bitcoin as payment. Once the buyer sends you the payment (the process isn’t too different from sending money on PayPal). there is a large network of computers around the world that race to confirm the details of that transaction. The computer who was quickest to process the transaction is rewarded in cryptocurrency for the computing power and energy used in order to make that happen. And with everyone in agreement, the completed transaction is recorded and added to the immutable ledger on the chain.
Real-Life Application
So far, we’ve hopefully established that the blockchain is a great way to store financial information. The exciting part of this technology is that it has also proven to be very useful at storing many other types of information such as the trading of property or election and polling information. Even international humanitarian aid can be tracked on the chain. But as of right now, the most practical and obvious application of this technology is in the banking sector. Think about the time it takes for you to receive funds from a check that you deposit on a Friday afternoon. The odds are pretty good that you will not see those funds in your account until Monday. Due to the sheer volume of transactions the bank needs to verify every single day, even during the week, it might take three business days for the check to clear. If this money was sent from wallet to wallet on the blockchain, it would take as little as 10 minutes for the transaction to be verified and funds securely sent to the correct account. Systems like Ethereum are able to perform verification in as little as 15 seconds, and software developers in this ecosystem are working every day to make this the quickest and most secure way of sending and receiving money in the world.
This post is barely skimming the surface of the power of blockchain but hopefully, it provided a primer on the potential of this technology. Since it is such an exciting topic, and one that could eventually be a lucrative investment for the savvy investor, stay tuned for future posts diving further into both the practical applications in addition to informational articles on how to add bitcoin and other cryptocurrencies to your portfolio.
