How does a blockchain work? Your go-to guide if you do not already know
Bitcoin-mania peaked with the price of the digital currency back in late 2017 but behind the scenes, the mystical and confusing blockchain industry has been quietly gathering momentum. Unlike bitcoin and other digital currencies, blockchain has plenty of real-life usages to make all of our lives more productive.
Few people understand how blockchain works which is a shame as it represents a fast-emerging technology. But no one should be faulted for not understanding blockchain. Here is a simple explanation of blockchain.
So, what is Blockchain?
Before understanding what blockchain technology is it would be wise to discuss real-life financial transactions that we are all used to. Suppose you are selling your home to a young couple and everyone agreed to a price and date. Congratulations!
The transaction cannot be completed with an intermediary, say a notary. The notary is a trusted individual who will approve the transaction and arrange all the regulatory and legal paperwork that needs to go on behind the scenes. Essentially, all the boring stuff few care to understand.
Now, mistakes can happen during the process – as rare as it is. According to the US National Notary Association, even the smallest of mistakes can bring “dire consequences.”
There simply is no alternative to the outdated process that needs a stamp of approval from a licensed individual.
Instead, a whole new process can exist in the digital world which replaces the outdated processes, called a blockchain. Blockchain in simple terms refers to a digital ledger that contains transaction details. The records of transactions are kept in “containers” referred to as blocks. And these blocks are joined together for all to see and secured using cryptography.
The main characteristic of blockchain is that data can only be added. It can never be altered or changed for any reason. The reason this works is everyone has a copy of the ledger so it would be very easy to identify one piece of information that is not consistent with the rest of public records.
Some of the other key characteristics and blockchain basics include:
Real-Life example
In our real estate example, it would be understandable for a newcomer to blockchain and cryptocurrency to laugh it off. But it is important to understand the world is moving in this direction whether we like it or not.
According to “Big Four” accounting and consulting firm Deloitte, there are several reasons why real estate transactions should be backed by blockchain technology:
Yes, this actually happens
A California-based blockchain start-up company called Propy announced in early 2018 it entered into an agreement with the city of South Burlington, Vermont to use its blockchain technology to close real estate deals.
A homeowner in the city wanted to purchase land that was for sale directly behind their home. But the owner was located in North Carolina which adds another layer of complexity to the transaction.
So, here is how a real-life example of the blockchain technology explained: the owner of the land first put their property for sale on Propy’s online platform. Then, the prospective buyer’s lawyer reached out to the owner and was able to leverage Propy’s platform to perform a title search and due diligence and then complete the transaction using a cryptocurrency.
The deal was closed and confirmed into the blockchain as a smart contract. While this type of transaction is the first of its kind in the state, it required physical signatures and confirmation for government records. But it appears it is only a matter of time, be it years or decades, before the process is 100 per cent digitised and signatures are a thing of the past.
So, can anyone build a blockchain?
Understanding the theory behind blockchain is half the battle. The other half is understanding how a blockchain works. Perhaps the more pressing question fresh on everyone’s mind is the most obvious one: if there are in theory infinite uses for blockchain, can anyone create one?
The answer is a simple yes. In fact, skilled programmers can build a blockchain from scratch in under 15 minutes. A simple search on YouTube shows dozens of videos on how anyone with advanced knowledge of programming can become a blockchain developer.
Some sort of currency needs to be involved for a transaction to finalise, the most common of which is a digital or cryptocurrency. Similar to creating a blockchain, anyone can create their own cryptocurrency. It should be noted that advanced knowledge of programming is required.
For those who do not aspire to become a blockchain developer, there are more common ways to benefit from the blockchain technologies. One of them is crypto trading.
There are a wide range of crypto exchanges out there with different performance and level of credibility. Check out numerous available options and focus on an award-winning and regulated crypto exchange, where you can buy, sell and hold your crypto assets safely.
A crypto exchange operates similar to platforms that traders use to buy stocks. The exchange connects you directly to the crypto marketplace, where you can exchange traditional fiat currencies for Bitcoin or altcoins. Somehow, crypto exchanges resemble FX markets, where you can exchange various crypto-to-fiat pairs like BTC to USD, BTC to EUR, or ETH to EUR.
The bottom Line: time needed
According to research firm Gartner, blockchain technology will create more than $176 billion worth of business value within five years and by the end of the decade, this figure will soar to $3.1 trillion.
For the time being, the blockchain universe is still stuck in a “hype phase,” according to Gartner. This means exactly how it sounds: blockchain’s real-life usage is extremely limited. But those who follow the industry are certainly excited and as the data suggests, cryptocurrency blockchain will be the standard for the future of commerce.
Gloss