What the Heck is Blockchain?
Dear Clients & Friends,
Many folks over the last few years have asked me about Bitcoin and blockchain technology. Some of the questions were focused on investment feasibility, but many more people were simply asking- what the heck is “blockchain”?. I thought that it might be fun to offer some basic education regarding its form and use, because it’s not only used in digital currency.
What is it?
Simply put, “blockchain” is a system in which a record of transactions previously made are maintained across several computers that are linked together in a peer-to-peer network. Each ‘block’ of data is ‘chained’ together and encrypted to form the file’s digital ledger.
It was initially designed for the peer-to-peer exchange of the virtual currency Bitcoin. However, businesses are now developing and testing some potentially game-changing blockchain applications.
Control by consensus
Blockchain provides network participants with simultaneous access to a chain of strongly encrypted data. Each individual (or node) can enter new data, but the majority of nodes on the network must verify the addition before it becomes part of the permanent record. That’s what makes it difficult to corrupt or fraudulently change the ledger’s data.
Each transaction is time-stamped and linked to the previous transaction, forming a series of blocks in this digital chain. This creates an audit trail each time the data is changed, which helps to ensure the integrity and authenticity of the information. Because no third-party intermediary (or central authority) is needed, transactions can be completed instantaneously and at a lower cost.
As we know, copying files is easy in the digital world. We can duplicate a digital photograph an unlimited number of times without degrading the photograph’s quality. So, what prevents easy counterfeiting of digital money?
A unique advantage of blockchain’s “consensus” format for the financial industry is the difficulty of duplicating and spending the same currency, or coin, twice. This digital version of counterfeiting is called “double spending.” Because a decentralized digital ledger is embedded in all coins and must be confirmed by multiple computers, if someone were to attempt to spend a coin that has already been spent, the ledger of the fraudulent coin would be missing a recent time stamped transaction. This discrepancy in the ledger between these two otherwise identical coins would cause the second transaction to be rejected. With physical money, if a counterfeit coin is very well made, it does not possess a history of where it was spent, and therefore no way to verify if its real.
Realm of possibility
Financial markets. The financial industry is identifying ways in which blockchain technology could be used to protect sensitive data, increase speed, and cut costs for electronic payments, securities trading, and lending. Since 2015, more than 100 financial institutions, trade associations, regulators, and technology partners have joined forces to set up and test blockchains that could one day become an industry-wide platform.1
Supply chains. Each link in a company's supply chain could be verified by using blockchain to trace products from origin to store. The use of blockchain would discourage tampering and fraud. For example, customers could be assured that their food was raised on an organic farm or that a specific diamond did not come from a conflict zone.
Medical records. Health data can be stored in a blockchain system, which can then be conveniently shared among patients, doctors, hospitals, and insurers while protecting patient privacy.
Digital rights. Musicians, photographers, artists, and media businesses could more easily monetize, track, and control the use of their creations, which could reduce piracy. This could be revolutionary due to the massive amount of copyright infringement and music/video sharing that happens online, which cuts artists out of the royalties that they deserve.
Some other possible uses for blockchain include public real-estate registries, identity verification, law-enforcement activities, digital voting platforms, and securing Internet-connected devices.
Work in progress
Despite the heightened levels of interest and investment in blockchain, deployments are still fairly rare, and widespread adoption could be years away. In one 2018 survey, only 1% of Chief Information Officers (CIOs) indicated that their organizations have already invested in and deployed blockchain applications. Only 8% of CIOs are in active experimentation or short-term planning, and another 14% are in medium- or long-term planning. The bulk of surveyed CIOs (77%) either have no interest in blockchain or no plans to investigate or develop the technology.2 Factors that are slowing the pace of adoption include governance issues, a lack of regulatory frameworks, and a shortage of professionals with blockchain skills.
I think one of the more interesting discussions regarding blockchain technology pertains to its use in digital currency. On one hand, since each “coin” carries a digital history that exists in multiple decentralized locations, it would be difficult to remove, alter, or destroy this history. This could make blockchain technology very useful in terms of secure monetary transactions. On the other hand, Bitcoin’s security and the lack of a central government or agency to monitor its activity makes digital currency attractive to criminals.
As it is with most new technologies, we have a way to go before we figure out the best and safest use for blockchain. Nonetheless, it is certainly an interesting invention that will likely have a significant impact in many industries over the next several decades.
1) Reuters, October 3, 2017 2) Gartner, 2018
Matthew Ramer, AIF® Principal, Financial Advisor MOR Wealth Management, LLC
1801 Market Street, Suite 2435 Philadelphia, PA 19103 P: 267.930-8301 | c: 215-694-4784 | f: 267.284.4847 |
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This article is intended strictly for educational purposes only and is not a recommendation for or against cryptocurrency.