There is a great deal of confusion about blockchain, which is the technology underlying cryptocurrencies like bitcoin. It’s one of the most important technologies since the internet, but it’s also kind of mysterious.
Blockchain is a way to keep track of things that are shared between many people and computers so they can’t be altered or stolen. The distributed nature of it means that it is more secure than centralized data stores, such as banks and credit card companies.
It has applications far beyond cryptocurrencies: It can be used to create smart contracts where one party only owes another if certain conditions are met; make exchanges faster by eliminating middlemen like banks; and protect identities by making sure that everyone involved in an action has been verified as who they say they are.
Cryptocurrencies are the new buzzword in finance. If you want to explain blockchain to your friends, you can use this article as a starting point.
Cryptocurrency is a new kind of money. We think money is important because it can buy things we want, and because it allows us to store wealth. Cryptocurrency is different because it is not backed by anything physical – it’s just lines of computer code.
It’s important to understand what cryptocurrency is: not a new kind of money, but a new way to create new kinds of money.
If you have heard even one name in this book, you will know that Bitcoin is a digital currency. You will also know that it is a new kind of currency that you can use to pay people or send money to them. But you will probably not know very much about how it works. That’s because Bitcoin is a technology: an idea, a program and a network of computers. The idea of using cryptography to make and verify electronic payments without trusting anyone else is an old one, and many other people have thought about it before. But most of them didn’t get any further than that.
The breakthrough that makes Bitcoin possible is the invention of a new kind of computer, the special purpose computer known as a blockchain. It’s more complicated than the usual type of computer, but not as complicated as you might think.
Blockchains are useful for more than just Bitcoins. They can be used for many kinds of secure transactions, including online voting and online banking, which we explain in Chapter 1 . And they can be used for verifying other kinds of data, such as medical records or contracts.
Blockchain is a technology invented in 2009. It is not magic, but it has been described as “a magical technology.” It is one of the most hyped topics in the world today, with economists, pundits and evangelists arguing about what it means and what it will do.
Those who claim to understand blockchain are often talking past each other, or talking at cross purposes. They seem to be disagreeing about what blockchain is. Some seem to think that when you say “blockchain,” you are talking about an entirely new thing. In fact, when you say “blockchain,” you are usually only talking about one of two things: a set of software protocols for building decentralized applications (Dapps) or a specific kind of object called a block-chain which is just a data structure that records transactions.
In reality, there are many different ways to implement blockchain-based systems. Most people who talk about blockchain do not understand this important fact.
A powerful appeal of cryptocurrency lies in its potential for decentralized, anonymous transactions. But there is no doubt that in the early days, pieces of bitcoin were used for illegal purposes. They could be used to buy drugs and guns, launder money, or finance terrorism.
Even before that, the promise of cryptocurrency had attracted criminals who could not get their hands on legitimate currency. These men found ways to move money around the world without leaving a record of their transactions (they did this by sending through “virtual” bank accounts at “shell companies,” which are basically fake companies). In other words, they behaved like criminals but acted like businessmen. The anonymity they wanted was not a boon to law enforcement but a boon to them.
Most people think of the blockchain as a place where transactions are stored. It is the public ledger that records all transactions, something like a database. But there are also other important things that can be done with it.
One of these is distributed cryptography. This is the technique of publishing encrypted messages and solving problems in a distributed way, so that no one person has access to the solution without having revealed it to everyone else simultaneously. Bitcoin uses this for verifying payments; there is no central server or other party that could change the record.
You can do other things too: it’s not necessary to store data in some kind of public database, you can have an application that does the job instead.