Been Reading Up On Blockchain Technology And How It Will Change The World

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I have been reading a lot, lately, on Blockchain. It is the technology that powers Bitcoin and all the cryptocurrencies. My sudden deep interest in it is both due to the hype around it and the fact that I am writing about it in my MBA assignment (5000 words paper).

So far, I am amazed by what I have read about the technology and the potential it holds. It is truly revolutionary and will change the way we do a lot of things -- not just how we spend money (cryptocurrency). 

It is very difficult to write about it without bothering a non-technical non-finance person to tears. If you want to risk being bored, then you should head over to Wikipedia to read up on what the blockchain technology is.

Earlier this year, the European Parliamentary Research Service did an extensive easy to read and understand report on how blockchain technology could change our lives. I'll advise you to read it. It is very eye-opening. It explained how cryptocurrencies are just a fractional part of what the technology powers. And that even though it is the early stages and things are going to change a lot going into the future -- we might see the cryptocurrencies of today completely replaced by one more regulated and more robust just like how the early internet companies mostly died and the ones currently reaping all the gain of internet were mostly non-existent in those early days of the internet. And that the same technology is currently being used to power public service records, supply chain management and digital non-financial transactions.

Below is an excerpt from the report. Enjoy.

How does blockchain technology work ?

Before attempting to understand how blockchain ledgers work, it is worth taking a look at traditional ledgers. For centuries, banks have used ledgers to maintain databases of account transactions, and governments have used them to keep records of land ownership. There is a central authority – the bank or government office – which manages changes to the record of transactions, so they can identify who owns what, at any given time. This allows them to check whether new transactions are legitimate, that the same €5 is not spent twice and houses are not sold by people who don't own them. Since users trust the manager of the ledger to check the transactions properly, people can buy and sell from each other even if they have never met before and do not trust each other. The middleman also controls access to information on the ledger. They might decide that anyone can find out who owns a building, but only account holders can check their balance. These ledgers are centralised (there is a middleman, trusted by all users, who has total control over the system and mediates every transaction) and black-boxed (the functioning of the ledger and its data are not fully visible to its users). Digitisation has made these ledgers faster and easier to use, but they remain centralised and black-boxed.

Blockchain offers the same record-keeping functionality but without a centralised architecture. The question is how it can be certain that a transaction is legitimate when there is no central authority to check it. Blockchains solve this problem by decentralising the ledger, so that each user holds a copy of it. Anyone can request that any transaction be added to the blockchain, but transactions are only accepted if all the users agree that it is legitimate, e.g. that the request comes from the authorised person, that the house seller has not already sold the house, and the buyer has not already spent the money. This checking is done reliably and automatically on behalf of each user, creating a very fast and secure ledger system that is remarkably tamper-proof.

Each new transaction to be recorded is bundled together with other new transactions into a 'block', which is added as the latest link on a long 'chain' of historic transactions. This chain forms the blockchain ledger that is held by all users. This work is called 'mining'. Anybody can become a miner and compete to be the first to solve the complex mathematical problem of creating a valid encrypted block of transactions to add to the blockchain. There are various means of incentivising people to do this work. Most often, the first miner to create a valid block and add it to the chain is rewarded with the sum of fees for its transactions. Fees are currently around €0.10 per transaction, but blocks are added regularly and contain thousands of transactions. Miners may also receive new currency that is created and put into circulation as an inflation mechanism.

Adding a new block to the chain means updating the ledger that is held by all users. Users only accept a new block when it has been verified that all of its transactions are valid. If a discrepancy is found, the block is rejected. Otherwise, the block is added and will remain there as a permanent public record. No user can remove it. While destroying or corrupting a traditional ledger requires an attack on the middleman, doing so with a blockchain requires an attack on every copy of the ledger simultaneously. There can be no 'fake ledger' because all users have their own genuine version to check against. Trust and control in blockchain-based transactions is not centralised and black-boxed, but decentralised and transparent. These blockchains are described as 'permissionless', because there is no special authority that can deny permission to participate in the checking and adding of transactions. They can also be described as embodying social and political values such as transparency and the redistribution of power.

It is also possible to set up 'permissioned' blockchains, where a limited group of actors retain the power to access, check and add transactions to the ledger. This enables 'mainstream' actors such as banks and governments to maintain substantial control over their blockchains. Permissioned blockchains are less transparent and decentralised than their permissionless counterparts and, as such, they embody somewhat different social and political values...

Read the full report at http://www.europarl.europa.eu/RegData/etudes/IDAN/2017/581948/EPRS_IDA(2017)581948_EN.pdf