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Understanding the Blockchain

Understanding exactly what the blockchain is and its advantages

What is blockchain?

It is an immutable publicly viewable consensus ledger. You can't change, update, or remove what's been already added to it. It houses every "bitcoin" transaction that has been executed and is growing constantly as blocks are being added in chronological order (you can apply this idea to other markets as blockchain continues to expand). Each block contains a time-stamp and a link to a previous block. By design, blockchains are inherently resistant to modification of the data — once recorded, the data in a block cannot be altered retroactively.

Another way to describe the blockchain is as a "single source of truth" for shared information, such as financial transaction data, legal contracts, deeds of ownership, and identity and documentation. The information is recorded on a ledger that is distributed across every node (i.e., computer) in a network on the internet, and is structured and encrypted in such a way that it cannot be altered without agreement by a majority of the nodes in a network. The majority of the nodes in a network automatically and simultaneously check the change against the ledger.

Let's consider an example regarding two people who are paying each other in bitcoin. Person A pays person B from person A's bitcoin wallet to person B's bitcoin wallet. This payment, which is a change, must be requested by the owner of the data, which is person A in this scenario, using a combination of private and public keys that validate the identity and legality of the transaction. Security is based on the number of nodes in a network, meaning the more nodes there are, the more secure it is. This is because any attempt at fraud would require the corruption of the same chain in every node in a network simultaneously during the few seconds that the blockchain is processing a change.

As a result of the inherent security involved in the blockchain process regarding transactions, the process directly addresses the underlying issue of trust in society and business that creates the need for third-party validation (think banks and lawyers) since the network itself validates the change. When new information is added into the blockchain, a new block is created that is linked to the previous block - containing a related transaction or contract - and therefore, the historic data remains in the chain and an audit trail exists.

A great example is something like buying a house. In a simple transaction, the seller would instruct lawyers to draw up the paperwork, terms are agreed upon, contracts are physically signed by both parties, proof of payment is provided, and the lawyers then arrange for the transfer of the title deed. Using blockchain, the seller could send the buyer the contract containing the digital certificate of ownership for the house in the blockchain. Once the buyer completes the terms of the contract by sending the payment, the contract is automatically completed and the digital certificate of ownership is transferred to the buyer. The nodes in the blockchain validate the transaction and simultaneously update the ledger. In this way, the updated ownership can be verified on any node. The transaction is completed quickly, without the need for third-party verification of signatures and payment, and the history of ownership remains in one secure and indisputable place - the blockchain!

What are the advantages to blockchain?

Mitigated risk of fraud and disputes. Companies incur significant overheads assuring trust with counterparties and reducing the costs of eventual misunderstandings, disputes, and fraud. This includes writing and tracking all the contracts, compliance, reporting and monitoring, internally and in respect of service providers, along with all the associated paperwork. If the paperwork and the identity of participants, locations, asset type, and value were referenced and added to the blockchain, any dispute that arise could be dealt with by participants simply referencing this single ledger, rather than having to reconcile disparate databases and contracts.

Cost, time savings, and increased transparency for individuals, companies, and authorities. In complex transactions for purchases of goods, for example, buyers issue purchase orders, shippers issue packing lists, sellers submit invoices, and banks release funds, all of which are wrapped up in agreements, contract terms, and numbering schemes that enforce tracking, delivery, and payment. The use of a blockchain for these activities would dramatically accelerate the process by cutting out the intermediaries that currently are needed to validate documents and release products and funds. It would create a clear audit trail of timestamped documentation blocks that could be accessible to taxation and other authorities in real time, increasing transparency, and reducing the administrative burden on the parties involved.

What are some of the uses for blockchain?

Currency. Bitcoin began as a peer-to-peer (P2P) electronic cash system. Anyone can hold bitcoin and pay anyone without a middle man.

Payment Infrastructure. You can use Bitcoin to send money around the world. Merchants can accept bitcoin payments. This is slightly different than using bitcoin as a currency. Cases involving the use of blockchain include merchant processing and remittances.

Digital Assets. The blockchain can be used to create digital assets such as stocks, bonds, land titles, and frequent flyer miles. These assets are created using protocols on top of the Bitcoin blockchain.

Identity. Companies offer blockchain IDs that can be used to sign in to apps and web sites, digitally sign documents, etc.

Verifiable Data. Create a verifiable record of any data, file, or business process on the blockchain.

Smart Contracts. Software programs that live on the blockchain and execute without the possibility of third-party interference.

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