A plain language guide to blockchain
Q. What is the blockchain?
A. A total minefield.
Perhaps a bit melodramatic, but not wholly untrue. Blockchain has rapidly moved from a technology used in experimental projects on the fringes of the financial sector, to a word I see flash across my screen several times a day – in advertisements, articles, across websites. And, whether we like to admit it or not, it has left us all playing catch up.
Sometimes I think I know what the blockchain is. It’s a distributed ledger, obviously. But before I know it, I’ve repeated a phrase that, while innocuous and intelligent-sounding, is stock, ultimately meaningless, and often used as a cover for shortcomings in being able to explain what blockchain is and why it is important.
So, in order to better myself, and maybe you too, here is a plain language guide to the basics of blockchain
Q. What is the blockchain (actually this time)?
A. An online system that uses cryptography to create a permanent record of any transaction.
That’s my one-sentence answer anyway. Ledger isn’t exactly colloquial unless you’re in finance, and the distributed aspect just has me picturing someone leaving the pages of their ledger all over the place. However, rather than describing what it is, it might be better to define it by its current most mainstream business use. It is a platform that organisations big and small are most commonly using to create alternatives to traditional financial products that rely on institutions. But there are multiple other uses beginning to be suggested – from registering marriages to fighting digital piracy.
Q. What’s so special about this chain of blocks?
A. To my mind there are three key features to the blockchain:
- It’s not owned by anyone – this is the “distributed” or “decentralised” bit, which immediately makes it different to traditional financial systems
- It’s public – anyone, in any part of the world, can add to it or read it. Which is the beauty of the internet
- It’s permanent – which is the fundamental reason you can trust it. Once a transaction has taken place, it will exist forever
A. Yes, forever.
Q. Where did it come from?
A. In the beginning there was a word. And the word was blockchain.
Ok, not quite. But like the universe, blockchain was created by an unknown entity (or entities). He, she, or they, go by the name Satoshi Nakamoto.
Q. What is the point?
A. It’s not the quickest way to explain it, but at this point I think an example is necessary. The best current use case for blockchain is still cryptocurrency.
Imagine you would like to transfer money to your good friend John* in Australia. You go to your bank, who then sends the money to John’s bank, which then transfers the money on to John. Both your banks and his bank have to see and touch the transaction. And in the middle of that transaction, there is a transfer (or remittance) fee charge and the cost of currency exchange.
When you think about it, the only reason you rely on your bank to do that transaction and pay the fees, rather than post the money yourself, is because these institutions guarantee the safety of that transfer. Money sent in the post could be lost. Your dodgy friend John might come back a week later saying he never received any money, and could you send some more? He may accuse you of never sending money at all.
The blockchain provides an institution-free solution to guarantee the transaction has taken place – you sent the money, he received it – and there are no fees or exchange costs.
*Name has been changed to protect the identity of “John”
Q. What are the benefits?
A. So the blockchain is:
- Time and cost-effective – nobody in the middle slowing things down and charging you for the pleasure
- Secure – “by design,” through the cryptography element
- Transparent – it’s public, so everyone can check the transaction took place
- Yet, also private – it records that the transaction took place but other details – name, date of birth, job, income, purpose – are not necessary (unlike from those pesky banks!) Unfortunately, this does attract a criminal element that favours anonymity, who tarnished the technology’s reputation in the early days of cryptocurrencies
Q. Other than cryptocurrency, how can or will it be used?
A. Bitcoin, Ethereum and Ripple are the cryptocurrencies we know and love but there is a multitude of others, more being created every day, and cryptocurrency is just one application for the blockchain. Other much-muted uses range from smart contracts, which will preserve an agreement between two or more people for all time, to supply chain technology.
In theory, blockchain could render the entire financial system – and indeed many other systems – redundant, taking the power out of the hands of a select oligarchy of institutions and placed into the hand of the masses. Make your own decision on whether you think that is a good thing, now.
Q. Do I need to know all of this, or is this a fad that we’ll all of forgotten about in a couple of years like LaserDiscs and Pokemon cards?
A. For a long time it was up in the air but the last year saw a dramatic rise in the price of Bitcoin (from around $100 in January 2017 to around $20,000 in December 2017) and initial coin offerings take off in a big way (we won’t go into what they are now). The price of Bitcoin is still fluctuating massively (it’s sitting at $9000 at the time of this article) and blockchain technology hasn’t hit the mainstream yet, but the general consensus is that it is here to stay. In fact, a recent survey from Lendingblock and CitizenMe found that one in five people have already owned cryptocurrency, 56 percent are tempted to buy some in future.
Q. Is that everything I need to know?
A. If there is one thing I can say for certain, it’s that this article is absolutely not a comprehensive overview of blockchain. We have merely skimmed the surface. But hopefully, I have loaned you a few words to describe the surface of blockchain. Go away and feel smug about yourself.