Blockchain Technology: What it is and why you should care

Blockchain technology is a big deal. So say tech savvy friends. If you look it up, it pops up in investment and tech journals, news stories, interviews of venture capitalists and CEOs. Proponents say it will change everything. Banks, stock market managers and credit card companies are experimenting with it. Walmart hopes to use it to help improve food safety. IBM pitched it to the British Columbia government as a way to keep track of marijuana, from grower to bong.

So, what is it?

Why, it’s “the world’s leading software platform for digital assets.” Blockchain.com  It “has the potential to change the way we buy and sell, interact with government and verify the authenticity of everything from property titles to organic vegetables.” Goldmansachs.com

No, really. What is it?

Blockchain technology is the public online ledger that makes Bitcoin possible.

Bitcoin, of course, is imaginary money existing only in the ethernet. The cool word for it: cryptocurrency. People buy it with real money (also mostly imaginary these days), use it to trade online, and when it has increased in value, sell it back for cash.

Early adopters of Bitcoin were darknet criminals who laundered money and traded illegal drugs. In 2012, and again in 2013, the FBI shut down what was probably the biggest illegal platform, Silk Road. The founder, Ross William Ulbrict aka Dread Pirate Roberts is now serving a double life sentence.

There have been subsequent raids, shutdowns, arrests, and trials of various purveyors of contraband, but that hasn’t dampened the cryptocurrency trade.

Screen Shot 2017-11-07 at 7.54.51 PM.png
What happened to Bitcoin value when the founder of the Silk Road was arrested. Thank you Wikipedia. 

Here’s what Bitcoin is worth today: Screen Shot 2017-11-07 at 7.59.09 PM.png

Bitcoin might have stayed in the shadows as far as people like me are concerned, except for it’s amazing success, attributable largely to blockchain technology.

Screen Shot 2017-11-07 at 8.07.19 PM.png

Blockchain, in (overly) simplified terms, works like this:  

In any transaction, everyone involved has to:

  1. Know the parties are who they say they are (authentication), and
  2. Trust all parties have the right to and are able to do what is being done (authorization).

Ordinarily when you go to the grocery store and pay with your credit card, this is what happens:

  • A credit card reader connects to a third party, which
  • Confirms you are (probably) who you are
  • Approves the payment
  • Transfers money to the grocery store
  • Sends you a bill, and
  • You transfer money from your bank to the credit card.

In other words, most of us depend on a centralized system, which requires third parties to confirm transactions. It’s expensive because the outside authenticating party charges for their service, vulnerable because hackers only have to access one system to attack sensitive and valuable data, and cloaked in secrecy.

Screen Shot 2017-11-07 at 8.33.59 PM.png
An ordinary centralized banking system has drawbacks. Thank you Let’s Talk Payments

Blockchain technology, on the other hand, is decentralized. Everyone involved has a record of every transaction, and all transactions are confirmed by everyone. The most popular record becomes the official record and is kept by all of the “nodes” in the network. Since each record is held by many, records are almost impossible to tinker with, and  transparent to anyone who cares to look them up.

It works a little like Wikipedia, where many writers contribute and update entries. The difference is that Wikipedia data is controlled on a central server. Blockchain uses the participants to authenticate and store records. If you try to alter one record, it is immediately flagged as fake by all the other true records.

Transaction information is stored in electronically connected “blocks.” When one transaction is complete, a new one is added to the “chain” of blocks. Each block carries a bit of identifying information from the prior block. It’s kind of like a line of people, where each tells the person next to them a secret. Every secret is both in the head of the holder and the holder’s neighbor, and thus harder to lose, forget or deny.

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Thank you Coindesk

The mechanism for how transactions are authenticated and tamper-proofed is not clear to me. If I have it straight, it involves “miners” who compete to figure out the truest information, who then store the information in blocks and plant a “hash,” a secret code to both identify the transaction and to connect that block to the next block. Winning miners get a bit of cash for each correct solution. Expert miners can do very well, by the way.

Screen Shot 2017-11-07 at 9.16.53 PM.png
Got that? If so, please explain it to me. Thank you Blockchain: La technologie disruptive

Not everyone is high on blockchain technology. Detractors say it is too complicated, too slow, too expensive and dangerous. One of the early users, Stefan Thomas describes how blockchain works small scale, but becomes uncontrollable when lots of people get involved and lots of money is at stake. It is clunky, frustrating and potentially unstable. Better, writes Thomas, to figure out ways to keep mainstream systems from getting too centralized in the first place (coincidentally, he sells software that does just that).

Unstable or not, big names are pouring money into blockchain startups. Investment bankers — who love complicated systems which hide profits from ordinary schmucks and tax collectors — are particularly interested. That alone is probably reason enough to know at least a little about it.

A bubble? A revolutionary technology? The mechanism that brings a future dystopia?

On the edge of my seat.

Sources, resources and dire warnings:

Blockchain Investment Trends in Review

Satoshi Nakamoto

Drawbacks. Primary Challenges.

The Subtle Tyranny of Blockchain

Block Chain Dystopia?

Blockchain Revolution Review

What is Blockchain Technology?

Thank you Luke Descryptive for the header image.

6 comments

  • Wow, what an impressive blog post. That must have been a lot of work to put together! I wish I understood it better. Economics have always eluded me. I think I need to go back to Econ 101 to be able to understand anything beyond it. But ain’t nobody got time for that…

    Liked by 2 people

    • Economics may not be worth studying since everything that matters is pretty much counted as an “externality.” What matters to economists is rational decisions made under ideal conditions — a perfectly honest producer offering a good or service to a perfectly educated buyer. When does that ever happen? The value of clean air, water, bird song, mothering, people who make you laugh, who volunteer their time — externalities.

      Liked by 3 people

  • A highly informative and well put together piece, J.B., for which many thanks. Sadly, I didn’t buy Bitcoin when I was advised too — I’m far too cautious by nature — though, boy, you’d have to have nerves of steel watching the price jump all over the place. I imagine that most cryptocurrencies will come under regional legislation sooner or later (for tax collection purposes), although Blockchain looks sets to be big regardless. Didn’t I read somewhere that a few retail chains were already using it to hike prices at peak periods? Don’t buy your sandwich at lunchtime.

    Liked by 1 person

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