Basics of Blockchain Technology

Basics of Blockchain Technology - While we could spend an entire book on blockchain and the technology behind it alone, it is important to understand the fundamentals if you’re planning to invest in Bitcoin, or any other cryptocurrency.

Blockchain is a decentralized ledger, meaning it is a record that is publicly accessible and can be verified by anyone. This is important for any non-tangible good as the unlike tangible goods like socks or candy, we need a record of a transaction happening in case something goes wrong. For example, we need proof that Steve paid John for the pair of socks that John sold him. The blockchain will have a record of a transaction from Steve’s account to John’s account, and no one else’s.
Previously, we would have the use a third party, like a bank, to verify the transaction did indeed take place.
The bank would then take their % of the total transaction. As the bank information is not publicly accessible, we would also have to trust that the bank did their job. By using blockchain technology, we have a 100% infallible record of the transaction taking place, and anyone can see this. There’s also no need to pay a large additional fee to a middleman. The only fee involved is the cost of running the blockchain itself.
If we only use blockchain for financial purposes, this is extremely useful in countries that do not have a trustworthy banking sector. Each transaction is recorded as a block, with a date and timestamp. These blocks cannot be altered without everyone seeing. The problem this solves is known as the “double-
spending problem”, where digital assets (like cryptocurrency) have the potential to be spent more than once.
What the blockchain allows us to do is see that Steve has already used his money to pay John, so he can’t then use that same money to try and pay Sally. The blockchain creates trust among all parties, and trust is paramount when dealing with monetary transactions.
Blockchain’s uses are not strictly financial. We can also use the technology to store other information that we would need in a publicly available, transparent form. This ranges from anything like voting records in an election, to a self-executing contract between two parties that fulfills when both parties have completed
their obligations. Blockchain eliminates the need for a middleman, or independent auditor in these situation, as the technology itself acts both as an auditor, and as an independent. In theory, the technology has the power to replace accountants, lawyers and much of the financial services industry. Before we get ahead of
ourselves though, much of the non-financial uses of blockchain technology are still strictly, in theory.

How does Bitcoin Work?

Bitcoin functions as a digital currency, by following the same three rules that traditional, or fiat currencies follow.
1. They need to be difficult to produce (cash) or find (gold or other precious metals)
2. They need have a limited supply
3. They need to be recognized by other humans as having value When we examine Bitcoin, it ticks the boxes of all three of these characteristics:
1. Bitcoin uses complex computer algorithms in its production which take a lot of computational power and proof-of-work, so it cannot be replicated easily or at a discount
2. There are a finite supply of Bitcoins - 21 Million to be exact. As of 2015, roughly 2/3 of this number had been mined
3. There are hundreds of Bitcoin exchanges and Bitcoin is accepted as payment everywhere from Subway to OK Cupid
Bitcoin miners have incentive to mine as they receive Bitcoin as a reward for their computer’s endeavors. Bitcoin was designed to be a deflationary currency, so unlike fiat currencies, the supply of money is fixed. This, combined with the decentralization principle ensure that no single person or government can simply create additional coins once the supply is mined. Once all the coins are mined, the value of the currency will in theory, continue to rise.
Bitcoin transactions are recorded on a digital ledger (or record) known as the blockchain. The core concept that upholds Bitcoin’s usefulness is decentralization. With decentralization, the blockchain is not owned by one
single person or entity. In fact, everyone has access to it. Therefore transactions are publicly broadcasted across the network, which ensures that both parties have upheld their end of the agreement. The code is open source (like Linux or
Android Operating Systems) so anyone can view it, this ensures transparency among all parties. Decentralization allows the blockchain to be secured by multiple points of entry and backed up by multiple points of failure. This is turn prevents incidents like hacking or theft. For example, if someone offers you 1 Bitcoin, you can check the blockchain records to make sure that Bitcoin is valid and hasn’t already been spent. This system means we do not need third parties to validate the transactions. The only transactions costs come from the electricity or mining power needed to run the blockchain itself.
This has tremendous real world application, from allowing cheaper international payments (since Bitcoin has no nationality) to lowering the overall price of certain goods.

Bitcoin as a Store of Wealth

Bitcoin’s status as a deflationary currency makes it incredibly useful in times where fiat currency is undergoing gross levels of inflation. Like gold has been traditionally used in times of economic hardship, Bitcoin has the potential to do the same. To be used as a store of value or wealth, Bitcoin has a fulfill a few criteria.
1. It has to not be perishable
2. It has to not depreciate over time, The second criteria is somewhat debatable, as critics argue that Bitcoin could
depreciate due to better technology surpassing it. However, Bitcoin has now
reached a certain market point where the idea itself has an intrinsic value, like say email or Facebook. Email isn’t particularly useful if you’re the only one with an address to send mail to, but the more people use the technology, the easier, and more valuable it is.
Venezuela is currently undergoing the worst cash crisis of the decade. Inflation has reached a level where people’s money is nigh-on worthless against the US dollar, and much of the country cannot afford basic necessities. That is, except
for those who hold Bitcoins, whose value against the US dollar continues to increase.
China is doing the same thing, albeit for different reasons. Traditional investments in Chinese assets have returned less than previous years due to the government’s devaluation of the Yuan. Converting money to gold and silver is
heavily regulated and often incurs large transaction costs. Bitcoin does not suffer from any of these issues, and often is the only alternative for those who are looking to secure their wealth in both the short and long term.
Gold has long been the traditional backup plan, or “hedge” against uncertain financial markets. In times of war, or financial crisis, gold prices tend to rise when financial markets are falling. However, in recent times this has not been
the case. At the time of writing, gold’s 12 month performance is stagnant, whereas Bitcoin has risen by nearly 1000%. Growing tensions in North Korea are just one factor that has spurned Bitcoin’s growth in times of uncertainty.
Tensions in the region have led to increased buys from the Chinese, Japanese and South Korean markets.