What Is The Blockchain And Why Does It Matter?
Everyone has heard the term “Bitcoin,” especially when its price hit $20,000 per coin in late 2017. Despite this, I’ve found that few people know what the word “blockchain” means. The blockchain is the distributed ledger that cryptocurrencies run on. Without the blockchain, the entire cryptocurrency market would not exist.
The blockchain was created by a pseudo-anonymous individual going by the name of Satoshi Nakamoto. Satoshi’s innovation that powers cryptocurrencies are known as the blockchain. It is a ledger of transactions that is distributed on computers all over the world. The ledger automatically updates with every transaction and can be viewed by anyone at any time. Essentially, the entirety of the network reaches a consensus on each of the transactions, thereby preventing false transactions from being added to the ledger. Specialized computer hardware, called miners, carries out the process of verifying and adding transactions to the blockchain ledger. The miners are rewarded in cryptocurrency for carrying out these transactions.
As the CEO of a blockchain mining company that develops mining software and hardware, I’d like to talk about how the blockchain works and where the industry may be heading.
The blockchain has been described as the biggest innovation since the internet. Billions of dollars have been invested into projects that are building technology on the blockchain. The most successful application of this technology to date has been in the use of cryptocurrencies such as Bitcoin. (Full disclosure: My company holds Bitcoin, Ethereum, XRP, and other cryptocurrencies.) Cryptocurrency is special because it provides the anonymity of physical cash without the need to be controlled by a central authority, such as a bank.
E-gold was introduced in 1996 and became the first successful digital currency system. Due to a lack of trust over the internet, we needed centralized authorities, such as banks, through which to route our monetary transactions. Cryptocurrency, through the blockchain ledger, created something like digital cash. It is anonymous, non-traceable, instant and decentralized. Cryptocurrencies allow us to transfer value without a centralized authority. Thus, the blockchain is often considered to be a solution to something known as the Byzantine Generals problem.
Because we can’t trust everyone over the internet, the internet has filled up with a massive number of third parties. The function of these parties is to store and verify our information. Facebook, Google, PayPal, and Amazon are examples of third parties that have monetized our data. Unfortunately, the storage of our data by one central authority does have its disadvantages. The central authority becomes a target for hacks and misuse of customer data. Cambridge Analytica, which involved Facebook user data being used to manipulate the electoral process, is an infamous example of this.
Despite the positives of the blockchain, it currently comes with limitations. Maintaining the ledger takes a lot of work, and the machines that carry out this process consume a lot of electricity. Recent data has estimated that the power consumed by the Bitcoin network surpasses the power consumption of some countries. Furthermore, Bitcoin carries out less than a dozen transactions per second, while Visa’s system can do 65,000 transactions per second. It’s important to note that there are other cryptocurrencies that do not have these limitations. XRP, a coin from the company Ripple, can purportedly do 1,500 transactions per second at a negligible power cost. So, although there are other promising coins, Bitcoin is still the most widely known in the market, perhaps because it was the blockchain’s first trial run.
Just as gold’s value comes from what people perceive it to be worth, cryptocurrency value stems from the same principle. In 2010, one Bitcoin was worth six cents; at the time of writing this article, one Bitcoin is worth over $8,000. The billions invested into blockchain projects are an indication that people are optimistic that blockchain can revolutionize more than just money.
Entrepreneurs looking to break into the blockchain space should remember, however, that there are many poor applications of this technology. I’ve seen companies using the blockchain simply because they see so much hype around it. In many cases, a centralized database is a better way of storing data. So, when considering the use of blockchain for your company or for a specific project, it would be wise to thoroughly assess it to make sure there’s a genuine need for the technology. You can find countless online courses on the topic to learn more.
No one truly knows what decentralized applications will come out of the blockchain sector, but it’s a space to watch over the coming years.
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