Nov 15, 2021, Business

It’s high time you knew the power of blockchain

Karolina Gabzdyl Junior Marketing Specialist

Cryptocurrencies are becoming increasingly popular around the world. One of the most popular ones is Bitcoin. Although it’s sometimes confused with Blockchain, you should know that they are not synonyms. So, what is this mysterious Blockchain and why should you know the difference between these two notions?

What’s Blockchain?

Blockchain is a basic architecture for storing information about transactions, eg. in the case of cryptocurrencies. It is a type of database where data is collected in blocks that store sets of information in a way that guarantees the immutability of historical data. Linking blocks in a chain where each subsequent block stores a hash of information from the previous block, makes the information writable only during block creation and impossible to modify once the block is public and distributed. It is often referred to as a ledger – only new transactions are added to the blockchain, so one can see how things change, but cannot edit previous transactions. Such an action would impair the correctness of subsequent ones. 

We can easily illustrate the principle of Blockchain when we imagine a database similar to a phone book which includes a top-down rule that only the owner can change his phone number. When someone has a new number and wants to change it in the database, his application sends this update to all computers in the network. Then, the computers must agree to this change (they all know the rule that only the owner can change the number – this is called consensus), they agree to this change and finally a new block is added. 

Where did Blockchain come from?

To fully understand Blockchain, one needs to understand where it originated, so it’s impossible not to mention its father, Bitcoin. Bitcoin is firmly embedded in the culture and used mistakenly with the word Blockchain. But Blockchain isn’t a synonym of Bitcoin. It’s its primary support mechanism.

Bitcoin as a new form of electronic cash was first talked about in 2008, in an article by Satoshi Nakamoto – to this day, it is still not known if it was one person or more (the mystery will probably never be solved).

Bitcoin works on a peer-to-peer (P2P) basis, meaning money goes directly from one user to another without any governing body. Such a transfer is enabled by Blockchain.

It has its advantages and disadvantages:

  • if one sends Bitcoin to the wrong wallet address, it is very difficult to reverse such a transaction, because of the lack of an intermediary person = one loses the money irretrievably,
  • it doesn’t exist in physical form = no coins, no bills,
  • Bitcoin miners must authorize the transaction, validate it, and record it in the ledger = adding a new block in Blockchain.

How is it possible that Bitcoin has any value at all?

What is valuable is usually rare, hard to get, and must be accepted as a medium of exchange. Gold, silver, diamonds, and oil are appropriate examples because they derive value mainly from the fact that they are rare and hard to mine.  

If we translate it to the reality of Bitcoin, we can see that:

  • Bitcoin is limited – there will only be about 21 million Bitcoins mined (one might think that 21 million is not a lot, but the last Bitcoin will be mined in 2140),
  • It is difficult to mine Bitcoins – the new Bitcoins are provided to Blockchain participants (people who have this database and check the validity of the transactions) as rewards for solving difficult mathematical tasks which is called proof of work.

2140 is a long way off, especially considering the so-called halving that occurs every 4 years and involves dividing the reward for solving a mathematical puzzle in half. It is 6.25 Bitcoin now. However, one doesn’t have to be a miner to own Bitcoins – in the same way one doesn’t have to be a mint to own gold, right? There’s a possibility to buy Bitcoin on the exchange with money. The value of Bitcoin is calculated just like the value of regular currencies, such as the dollar and the euro – on a supply and demand basis. The greater the demand, the higher the price.

What is most difficult about the introduction of Bitcoin as a currency is the cultural leap that needs to happen, as people still don’t take Bitcoin seriously, but rather as silly money on the Internet that will lose its value in x years. People buy Bitcoin not to be able to buy something with it, but with the idea that one day they will sell it for a higher amount, which shows the approach of not taking it seriously. Research so far shows that this is not the case at all and that Bitcoin should not be ignored. 

Application of Blockchain

Blockchain is public. People can see the transactions that are happening, but unless they are the parties involved, they can’t see exactly who is doing them. In what areas can it be applied?

  • Finance – it is possible that one day the standard understanding of money will disappear and we will start using cryptocurrencies. Sounds abstract? Once cashless payment seemed like an abstraction and something that will not find followers at all too, but today we cannot imagine life without this type of payment. It is also increasingly common to pay with our phones. A significant advantage of such a turn of events would be also the fact that it is difficult to create inflation on something strictly limited – more money can be printed, and when it comes to Bitcoin – it’s impossible.
  • Digital property – Blockchain could maintain ownership of various digital assets. Today it is difficult to prove that the photo belongs to you if you upload it on some particular websites, such as 
  • Identity – this is what the Internet is based on. We protect it in many ways, e.g. with passwords, usernames, but it is not the safest way to store it. Imagine if our credit ratings, property titles, birth or marriage certificates were stored in a decentralized system in a secure and tamper-proof manner. This would eliminate various offices for sure but would reduce high-level costs.

Now that we’ve explored the application areas, it’s time for particular examples. 

Blockchain was used by a startup called Everledger which was concerned with reducing fraudulent diamond smuggling across the border. A diamond registry was created where information could be found about which diamond belonged to whom, etc. The company has now expanded to include other luxury goods and commodities as well, such as wines, insurance, and art.

Hyperledger – an open-source project created by The Linux Foundation – is another example of an introduction of Blockchain. They did it to advance cross-industry blockchain technologies, mainly in business. Some countries use Blockchain as well. In 2016, when Colombians voted on a peace treaty between the government and the FARC (Revolutionary Armed Forces of Colombia), 6 million Colombians abroad were able to participate in this vote thanks to the Blockchain technology. What’s more, Georgia introduced a Blockchain-based land ownership system and Ukraine uses Blockchain to counter corruption in public procurement. 

Blockchain is a new project that is constantly being updated and evolving compellingly. 

In the future, we will use so-called smart contracts even more than nowadays. This is a computer protocol designed to digitally facilitate, verify, enforce the negotiation or execution of a contract. Let’s imagine Blockchain as a book in which we have some values listed, e.g. regarding money and in blocks instead of information about whose money it is or whom it is sent to, etc. we have small computer programs.

An example of a platform that uses Blockchain and smart contracts to build decentralized complex applications is Ethereum. Ethereum is the origin of two projects – Veramo, which is an identity management framework, and Serto – an online system for managing digital signatures.

Potential obstacles

As with the introduction of any solution, there are some obstacles concerning Blockchain, too. One of the most obvious ones is that a lot of people do not even know what it is and have never interacted with it. Apart from that, there are some teething problems such as a low number of transactions – 7 transactions per second is not much considering the scale we would like to achieve or bad impact on the environment because 1 Bitcoin transaction equals almost 2 million Visa card transactions. However, teams of professionals are working hard to address this problem.

According to the Bank of America, Bitcoin at its current stage of development uses as much electricity as a small developed country like Greece or a large airline with 200 million passengers per year. Another complication may be that technical knowledge is required because it is possible to send money to the wrong address and lose it irretrievably. QR codes in transaction handling are an appropriate solution to prevent such situations and they already exist in the majority of wallets. 

Moreover, we need a cultural adoption – people have to stop seeing cryptocurrencies as silly money from the Internet and start treating them as a serious medium of exchange. Also, an openness to change is required. The modern world cannot afford another situation like the one concerning self-parking cars. In the case of this development, people were delighted at first, but then they didn’t use it because they were afraid the car wouldn’t perform the action properly and would break or scrape itself. 

Blockchain will not make everyone pleased because a lot of companies will cease to be necessary. Banks and offices will not function in the way they do now. All the places that currently centralize online databases and provide online trust may become redundant over time. However, that is the price of progress and it doesn’t make any sense to pretend that cryptocurrencies don’t exist. Instead, people should accept this fact and adjust to the changing world by conducting proper research and adapting to new situations they are about to face in the future.