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What is Blockchain?

Blockchain is the technology that fuels Bitcoin and the other Cryptocurrencies. Prior to Blockchain, there was no way to record transactions between random, untrusting parties without using a 3rd party like a bank, without the risk of fraud or theft. Blockchain technology solved this problem by allowing a public, decentralized digital ledger of transactions to exist without that third party administrator.

The background of this technology is as almost as mysterious and exciting as the technology itself. According to Bitcoin legend, a mysterious person or group called Satoshi Nakamoto developed the blockchain technology in 2008, and then applied it to Bitcoin the following year. I’m not sure that this story is the reason for the world’s fascination with Bitcoin, but it certainly doesn’t hurt. What geek doesn’t love a good story about a Japanese hacker cloaked in secrecy? It sounds like a movie script, and I’m sure it will be one someday.

I really want to be able tell you that I understand exactly how Blockchain technology works, but if I did, I would be lying. I do know that it uses a peer-to-peer network and a distributed timestamping server to allow the database to be managed autonomously. Because transaction information is agreed upon and recorded across many independent computers, verifying transactions and auditing them is very easy. This also adds security, as the data is not kept in one central repository that can be hacked. Let’s say that a computer storing blockchain data is hacked and the information is stolen. Essentially, that data cannot be forged or used in any other way because copies of the original data exist on thousands of other computers. If the hacker were to then introduce forged data into the network, the other computers would reject it because it doesn’t match their consensus data. In short, there is no “official” copy of the data, because every computer has the same data. The security is in the consensus between the thousands of anonymous users. Many people consider Blockchain technology to be un-hackable due to the open, distributed nature of the data.

This technology is really in its early stages, but many individuals and companies are working to apply this to a variety of different applications. The financial industry is working to use it to facilitate faster settlement systems when transferring money. Governments are interested in applying it to online voting systems, land ownership records, and even personal identification of its citizens. In 2017 the first international property transaction was completed using Blockchain technology. The healthcare industry wants to use it for medical records. The music industry is looking into collecting royalties for digital music through it. Earnst & Young, one of the big 4 accounting firms, accepts Bitcoin payments for their services.

While the technology is exciting, there are several downsides to it. For Blockchain technology to work, thousands of computers have to hold the same database. This is not very efficient. In many ways, this is the exact opposite of what the trend of going to the cloud has been trying to accomplish. The cloud takes a database that used to have to be stored locally on thousands of computers and centralizes it while still giving access to it from those same computers. Blockchain does the opposite, which makes it more secure but less efficient.

The other downside to this digital currency is that while the blockchain is considered hack proof, the companies that hold the digital wallets where Bitcoin is stored and the digital mining companies are not. For instance, this week the digital mining company NiceHash was hacked and about $80 million worth of Bitcoin was stolen. Multiple reports said that an employee’s computer was compromised through an elaborate social engineering scheme. Several exchanges have been hacked in the last couple of years, causing between $5 and $31 million of losses per event. There have been several other glitches reported that caused owners to be unable to trade their currencies for a period of time, which is dangerous when the currency you are holding can move several thousand dollars in value in a matter of hours.

After doing this research, I find it pretty clear that the future isn’t necessarily Bitcoin. Bitcoin may be a flash in the pan, replaced by the newer, better digital currency. However, the Blockchain technology is really exciting to me as a potential investment. Securing digital information is already a multi-billion dollar business, and there are many people that feel that Blockchain is the future of that industry. That seems like an exciting investment opportunity.