by STEVE MARTIN

Unless you have been under a rock for the past few years, it is hard to have not heard of blockchain and cryptocurrencies. It seems that every day there is a news article or other media touting the incredible rise of the technology in our world. Beyond the well-known idea of cryptocurrency, Decentralized Finance, led by blockchain technology, has begun reshaping almost every aspect of the traditional financial landscape.

We are still in the early days of the decentralized finance movement. But I truly believe that it stands to reach and fundamentally alter every corner of finance, and many other industries, as well. I hope this article helps shed some light on what blockchain is, and is not.

WHAT IS BLOCKCHAIN?

You have probably heard of blockchain through the overwhelming increase in the value of Bitcoin and other cryptocurrencies. Cryptocurrencies, however, are just one use of blockchain. In fact, blockchain is as broad as an operating system. Different operating systems like Microsoft, Apple OS, Linux, etc. are all built similarly, but they can have completely different functionalities or benefits. Blockchain is very similar in that it provides the underlying foundation for a wide range of uses.

So what exactly is blockchain technology? In short, it is a distributed ledger system. At the most basic level, blockchain is a type of database. The data is stored across numerous computers on a network. In a public blockchain, the network consists of anyone with a computer who chooses to run the blockchain’s code. On private blockchains, the network is made up of the computers with access to run the blockchain. There is no part of the blockchain exclusively in a single computer in a public blockchain. A private blockchain can be coded to have different layers that can only be accessed by specific computers. While similar to a traditional database, it is important to understand that blockchains are different in the sense that they consist of blocks strung together chronologically using cryptography.

Blocks are simply bundles of data. In any given blockchain, the basic elements within a block are the data stored in that block. Once a block is filled with data, it is added to the list of verified blocks (i.e., the chain). The blocks can be programmed to contain any type of data. In the case of a cryptocurrency like Bitcoin, a block has a few parts. First, there is the number identifying it as part of the underlying Bitcoin network. In addition, the block contains the block size, the block header, a transaction count, and finally a list of transactions.

Whenever a transaction is entered, the transaction is placed into a transaction pool which operates as a queue. Transactions are then bundled, put into blocks, and added to the chain. How they are added to the chain is varied, depending on the type of blockchain. Using cryptocurrency as an example, Bitcoin uses a Proof of Work (PoW) system, meaning verification is granted to an individual based on their computing power to solve a complex problem. Ethereum, on the other hand, uses a Proof of Stake (PoS) system, where verifiers put a sort of “security deposit” into an account. The amount of the deposit determines the likelihood of their being chosen to verify. In both systems, the verifier, called a “miner” in Bitcoin and “forger” in Ethereum, is paid in the respective cryptocurrency to add the blocks to the chain. For cryptocurrencies, this is where the coins are created as well. Once all the Bitcoin is “mined,” the miners will rely entirely on transaction fees as compensation for verifying transactions.

The beauty of blockchain technology is that it is decentralized, immutable, transparent, and secure. Each of these characteristics strengthens the others. Decentralization, on a wide network, prevents any one party from having control over the system. Immutability simply means that transactions are permanently recorded. All of the blocks are linked together through cryptographic equations, and alterations to past blocks are immediately detected because the equations will no longer balance. This would “break” the chain, so to speak. Further all transactions are also transparent, so anybody can look at a block and verify the validity of a new block. All of these characteristics make the blockchain a very secure technology, and very suitable for finance.

Interested in digging a little deeper into exactly how blockchain technology works, and what role it will play in the financial industry of the future? Here is our BLOCKCHAIN GUIDE