Blockchain has quickly become one of the most revolutionary technological innovations with limitless possibilities. How will it shape our future?
By: Dennis Karpovitch
What is a Blockchain?
A blockchain is a decentralized, digitized, public ledger of all cryptocurrency transactions. A chain grows as completed blocks (transactions) are recorded and added in chronological order which allows market participants to keep track of transactions without central recordkeeping. Currently, the technology is primarily used for verifying transactions, though it is possible to also digitize, code, and insert practically any document into the immutable technology. Blockchain was designed so that the transactions could not be deleted or copied, but the data could still be distributed. However, as the technology grows in volume and use, storage and synchronization become more pressing issues.
To use the analogy of banks, each block is like an individual bank statement. However, this technology has the capability to replace expensive and inefficient account and payment networks of the financial industry. The blockchain is an open electronic ledger than can simplify business operations for all parties, making it attractive to financial institutions, stock exchanges, music, insurance companies, and Internet of Things devices. This technology could also be used for voting systems, weapon or vehicle registrations, medical records, or even to confirm ownership of antiquities or artwork.
Mining for Bitcoin
Blockchain is the underlying innovation of cryptocurrencies such as Bitcoin. The cryptocurrency is not regulated by a central authority, but rather the users dictate and validate transactions when they carry out payments for goods or services without the need for a middleman to store the transaction. The main difference among cryptocurrencies lies in the algorithms that they use to facilitate transactions and keep records, though many smaller currencies are usually similar derivatives of larger ones. Nonetheless, the variance in algorithms gives some cryptocurrencies such as Litecoin (LTC) or Ripple (XRP) advantages over others in transaction speed, fees, and security.
Bitcoin mining is a process in which transactions are verified as well as new bitcoin are released. The process involves compiling recent transactions into blocks and trying to solve a computationally difficult puzzle, though this requires access to the internet and suitable hardware. The difficulty of these puzzles depends on how much effort is being put into mining across the network. The aim is keeping the rate of block discovery constant as it approaches the cap of 21 million Bitcoins, so the algorithm adjusts to make the problems easier or harder
Pros of Blockchain Technology
Blockchain technology represents an innovation in information recording and distribution that eliminates the need for a trusted party to facilitate digital relationships. This results in a decentralized currency that is not managed by banks and consequently has significantly smaller fees. Furthermore, authentication and authorization are established parts of the technology as security is vital to digital transactions. Private key cryptography allows for users to fulfill authentication requirements quickly without too much personal information, and a built in protocol governing currencies such as Bitcoin relies on the internet and a network of computers to authorize transactions. Distributed networks ultimately reduce the risk of centralized corruption or failure while maintaining a commitment to the network’s recordkeeping and security. Blockchain technology also has the option to be used for purposes other than a currency. For one, Namecoin is a distributed domain name system that is designed to serve as an address book for the Internet that would be less vulnerable to political attack or mismanagement. Another example is Twister, a decentralized version of Twitter, which relies on blockchain technology for a distributed file sharing system.
Cons of Blockchain Technology
The skeptics of blockchain technology are more eager to comment on its drawbacks as a cryptocurrency. One argument is that the hype of cryptocurrencies is out of control as many people are pouring their life savings into a currency backed by nothing but technology. The result was a bubble which the world saw pop at the beginning of this year. In addition, the decentralization of transactions enables illegal transactions on the Dark Web as the lack of regulation allows money to flow anywhere. Furthermore, the blockchain’s distributed nature depends upon the cooperation of its participants to ensure that people with selfish motives do not exploit the system, though we already know about the vulnerability of cryptocurrencies such as Bitcoin and NEM from major heists in recent years. As blockchain technology gains more momentum, its use grows more widespread and will do so without an end in sight. But that heavy use requires a lot of electricity consumption which is becoming a more important concern as Global Warming becomes a greater issue.
While blockchain technology presents many opportunities for society today, it should be treated as a disruption with just as much risk.
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- Could cryptocurrencies based on blockchain technology become the next Pay Pal?
- When will the energy use associated with blockchain technology become a global issue?
- How might governments regulate decentralized blockchains in the future, if at all?