If you have heard of blockchain, most likely it has been synonymously used when talking about bitcoin. With the recent coverage that bitcoin and other cryptocurrencies have received in the news (such as with Elon Musk or Mark Cuban), it is natural for it to become a topic of discussion among our peers. But before we can get to cryptocurrency, or "cryptos," we have to establish what powers this financial innovation, which is blockchain technology.
What is a blockchain?
Coinbase, the largest and most well known cryptocurrency exchange in the United States, defined blockchain as "a list of transactions that anyone can view and verify. The Bitcoin blockchain, for example, contains a record of every time someone sent or received bitcoin" (https://www.coinbase.com/learn/crypto-basics/what-is-a-blockchain).
Expanding further, there are three main advantages to using blockchain technology:
1: Decentralized
Most ledgers for a business or enterprise are typically kept by an individual or a select few, or in other words centralized. With blockchain, this "ledger" is decentralized, meaning it is open and transparent. Below is an illustration of this.
Another way to think about it: Say you have Jack, Jill, Bob, and Jane. Jack want's to send $20 to Jane. Now, Jane is in charge of the ledger in this group. After she receives the money, she could try to alter the ledger, and claim she never received the payment, where she would want Jack to send it again.
Now, let's say that all four of them have a copy of the ledger, and once Jack sends that same 20 to Jane, and they along with Jill and Bob record the transaction in their copy of the ledger. If Jane tried the same tactic described above, it would be near impossible to try to alter the information, because all four of them have verified the transaction. If anything recorded needs to be updated, all four would have to do it.
2: Peer to Peer (or P2P)
On a blockchain, there isn't a need to rely on a third party, like a bank or a broker. Instead, participants on a blockchain will carry out their transactions directly with each other. This not only helps transparently, but it increases the speed of that transaction.
Here is an example:: After you purchase a quick meal on the go from a place like McDonald's, or got your favorite beverage from Starbucks, you get home and check to make sure it gets take out of your bank account. I don't know about you, but I get very impatient when it says that purchase I made is still "pending," even if I had made the purchase only 10 mins. before I even checked my account.
But, if I used a currency like bitcoin, and if McDonald's or Starbucks accepted it, then that transaction would be recorded on the blockchain. Because it doesn't rely on third-party mechanisms, like a bank, it means the transaction can be done instantaneously.
3: Privacy
A little bit of historical background; When blockchain, and subsequently bitcoin, was brought about by the pseudonymous person or persons known as Satoshi Nakamoto, its purpose was to become a way for a P2P network that would be private in that sense that you don't need to use your personal information to access your funds. Because of the immutable nature of the blockchain, it makes identity theft and hacking very difficult to bring about; and since the blockchain is not centralized.
Are there any disadvantages to blockchain?
Like any innovation, there is always room for improving it. The same can be said for blockchain. I will focus on the three that come to mind the most.
1: Scalability
The Blockchain Council, an educational organization, elaborated on the issue of scalability.
"The first and major issue related to its adoption is its scalability. Though transaction networks are capable of processing thousands of transactions per second without any failure, when it comes to Bitcoin (roughly, 3 to 7 transactions per second,) and Ethereum ( 15 to 20 transactions), there is a remarkable slowdown in processing the transactions, making Blockchain unviable for large-scale applications."
In other words, to continue to keep up with an ever technologically advancing world, a blockchain, any blockchain, needs to be be able to work for both the individual and large group, the small business and the large corporation, and so on.
2: Lack of standardization
Because there is no universal standard, it can be difficult to determine the validity and efficiency of a give blockchain. However, on the other hand such standardization cannot and should not try to make the blockchain more centralized or less private. Of course, I believe balance can be struck, but it will require advocates from both sides to make it work.
3: Energy consumption
While Elon Musk says that Tesla will accept bitcoin to purchase its products when those who "mine" or mint it go at least 50% green. there are two points to show why this shouldn't be as big as a concern as he makes it out to be.
Firstly, anything of value, especially a store of wealth, takes time and energy to make possible. When gold was being mined in the earlier centuries, it's not like miner Bob can just call up Amazon to deliver it for him. They had to use tools and resources that are like dinosaurs to what we have now. Besides gold and precious metals, art, medicines, etc. can all fall under things of value.
Secondly, minting bitcoin and other cryptos is much greener in terms of energy consumption, according to Bitcoin News. Comparing it to the energy consumption of making bitcoin (which we will talk about in a later post), "the cost of the modern banking system, something that bitcoin naysayers never account for when they criticize the crypto’s energy consumption. There is a great number of articles and statistics that indicate the current banking system uses well over 140 TWh a year. In one study, Katrina Kelly-Pitou, a researcher who “studies clean energy technology, specifically the transition toward decarbonized energy systems” says the energy conversation surrounding bitcoin is “oversimplified.”"
As I said before, anything that is of value require both time and energy to make it so.
In conclusion
Any technology or innovation will have its pros and cons, but in the case of blockchain technology, this simply means that there are more opportunities to improve and develop this technology. This includes cryptocurrencies, which will be addressed in "Laying the foundation Part 2: What is bitcoin, what is crypto?"
See you there!