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What Is Blockchain Technology?

February 04, 2019 · 7 minute read

We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey. Read more We develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide. We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right. Read less

What Is Blockchain Technology?

First, know that Blockchain technology has never been more serious about becoming a part of your life, so you may need to get schooled now. The Blockchain technology market is expected to be worth $20 billion by the end of 2024.

Compare that to the measly $315 million it was worth in 2015, according to Cision PR Newswire. In 2016, The Dutch Blockchain Conference reported that “60 percent of the global financial services retails who know something about Blockchain technology call it the most important innovation since the creation of the internet.”

If you’re not yet convinced, here’s one more, from Nic Cary, cofounder of Blockchain.info, who told this to VentureBeat: “It’s my belief that Blockchain technology will be as important to the world as Gutenberg’s printing press. For the first time in the history of the world we can reimagine how the world transacts without relying on an intermediary.”

The reason why you’re suddenly hearing so much about Blockchain technology: techies who are no longer impressed with the world banking system, with its draconian transaction fees, non-transparency and five-business-day slowdowns.

That’s so anti-digital age. Blockchain technology is all about banking in real time, even across countries and hemispheres, with the middleman (namely, banks) totally eliminated.

On the most basic level, Blockchain technology can speed up the transfer of funds from one party to another in a matter of seconds (not days). Perhaps most importantly, Blockchain technology may ultimately help eliminate identity theft by creating specific digital IDs that require authentication and cannot be compromised. Ultimately, Blockchain technology eliminates paper from the process, which is a staple of the digital age (excuse the pun).

What’s The Difference Between Blockchain and Bitcoin?

Before we go deeper, let’s establish that Bitcoin and Blockchain are not exactly the same things, but they are closely related. Bitcoin was the first example of Blockchain technology, so everyone started using the terms interchangeably.

Here’s how to distinguish between the two.

Explaining Bitcoin

Bitcoin is a largely unregulated digital currency, called “cryptocurrency.” It’s only one type of cryptocurrency; there are others, most notably Ethereum, Ripple, and Litecoin. To keep things simple here, and to get you up to speed, we’re going to focus on Bitcoin.

That’s because it makes up 50 percent of the entire cryptocurrency market capitalization, according to Coindesk . Bitcoin’s market capitalization recorded $60,667,260,956 as of the posting of January 2019.

The intention of cryptocurrency is to work separately from government currency (and its controls and regulations) by eliminating the middleman: third-party payment processing establishments. Any Bitcoin transaction is moved through a digital ledger that can be viewed by the public, but is anonymous. However, in most cases you will still need access to a digital currency exchange to purchase Bitcoin and the majority of cryptocurrencies.

How Does Blockchain Work?

Blockchain is the technology that makes Bitcoin move about the Internet. Think of it as a block of information, and each block strung together creates a chain. It’s the foundation that holds the Bitcoin transaction ledger. Blockchain, therefore, is the wind beneath Bitcoin’s wings.

How Bitcoin and Blockchain Work Together

Bitcoin transactions appear on a Blockchain, in the form of a ledger. There is no central authority ruling over or monitoring this ledger.

Anyone participating in the transaction (investors funding a new commercial property, for instance) must agree ahead of time that the Blockchain ledger is valid, basically a “handshake agreement.”

Once somebody uses the Bitcoins in a transaction, users named “miners” go to work. They employ a process that is meant to legitimize the transaction, called a “proof of work.”

Put simply, it’s like trying to solve a complicated puzzle. The first miner to solve the puzzle gets to place the next block on the Blockchain and win rewards. These rewards are hopefully new Bitcoin.

Once this is achieved, others can get in on the Blockchain, because consensus was proven. Going forward, any transactions added to the Blockchain cannot be changed or corrupted.

Anyone can be a miner, as long as they have the right kind of hardware that can make it happen.

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How Blockchain Technology Uses Smart Contracts

A smart contract allows a Blockchain to do what a ledger is meant to do: record the transfer of money, property, shares, or the transportation/receipt of a product or service, without the need for a middleman. It’s simply a self-executing contract that is translated into computer code so that the Blockchain can understand what to do.

Blockgeeks explains smart contracts this way : compare the technology to a vending machine. Ordinarily, you would go to a lawyer or a notary, pay them, and wait while you get the document.

With smart contracts, you simply drop a Bitcoin into the vending machine (i.e. ledger), and your escrow, driver’s license, or whatever drops into your account.

From there, a network of computers execute the orders, contingent upon when conditions are met and verified. Once the transaction is complete, the Blockchain will update.

Smart contracts work just like a traditional contract, but has the technology to automatically obey and enforce any obligations that the contract dictates.

Benefits to smart contracts include the elimination of processing paperwork or correcting errors, no manual filing, no hacking or altering information. Which brings us to the subject of safety.

Safety and Security

Keep in mind that there is really nothing of value actually on the Blockchain itself, and that Blockchain, like any other technology, is not 100 percent immune from infiltration from shady hackers. The difference is that the Blockchain is like a puzzle that’s hard to crack.

The World Economic Forum explains it like this : “to alter a chain, one would need to take control of more than 51% of computers in the same distributed ledger and alter all of the transactional records within a very short space of time — within 10 minutes for Bitcoin. To date, this has never happened.”

The Blockchain uses a “public key infrastructure” (or cryptography) which protects against attempts to access the data, or to change it in any way. The logic is counterintuitive: the larger the Blockchain network, and the more people who have access to it, the safer it actually is.

Unlike using passwords, which often causes usage problems and can be vulnerable, Blockchain-based authentication systems use strong identity verification using digital signatures based on public key cryptography.

Blockchain technology brings a new dimension to the Internet to which we’ve been accustomed. Unlike traditional Internet usage, Blockchain does not allow digital information to be copied; it can only be distributed.

How Using Blockchain Can Help Businesses

Even for those who are not up on the technical workings of Blockchain technology, it’s becoming increasingly understood that one of its main benefits is the ability to send and receive payments anywhere within seconds.

Businesses may be able to transfer funds to anyone quickly, due to the fact that there are no middlemen slowing down that transfer. Businesses with employees who are spread out globally can benefit from quickly transferred funds, or even payroll.

Blockchain can even help with cloud storage, and save businesses money while doing so. Storj (a company that’s using the Blockchain to provide users with affordable, fast, and secure cloud storage) founder Shawn Wilkinson told VentureBeat, “Simply using excess hard drive space, users could store the traditional cloud 300 times over.

Considering the world spends $22 billion + on cloud storage alone, this could open a revenue stream for average users, while significantly reducing the cost to store data for companies and personal users.”

How Blockchain Came To Be

We can thank Satoshi Nakamoto (whoever that is) for the advent of Blockchain technology. As far as the world can gather, Nakamoto is the very cool (but disguised) name given to the person or group of people who developed Bitcoin.

The real author (or group of authors) is unknown. For the sense of clarity here, we’re going to refer to him/her/them as Nakamoto going forward.

The only evidence we have of the Bitcoin author is from a P2P Foundation profile, which theorizes that Nakamoto is a man living in Japan who was born on April 5, 1975. Nakamoto also created the Bitcointalk forum, posting the first message on the page in 2009. The name satoshi was used.

Bitcoin digital currency was first described in October 2008, in a paper published by Nakamoto. The title: “Bitcoin: A Peer-To-Peer Electronic Cash System.” Less than a year later, in January 2009, Nakamoto gave the world the first Bitcoin software (Version 0.1) and launched the first network of cryptocurrency (we now refer to this as Bitcoins).

In the website Bitcoin.org was then created, and Nakamoto transferred control of the network to Gavin Andresen, who is an actual real person.

Andresen is a software developer from Amherst, MA, and a pioneer in the development of three-dimensional technology and virtual-reality software. By 2012, Andresen became the “face” of Bitcoin currency, founding the Bitcoin Foundation, which supports and develops Bitcoin currency.

Andresen was fascinated with the Bitcoin idea long before his involvement. He first noticed the process in 2010, and started a website called The Bitcoin Faucet, which distributed actual Bitcoin.

He expressed his enthusiasm in the April 2011 issue of Forbes magazine, in which he said , “”Bitcoin is designed to bring us back to a decentralized currency of the people,” and “this is like better gold than gold.” Nakamoto took notice of Andresen’s excitement, and was brought on to lead the software development process. This network is now known as Bitcoin Core.

Nakamoto created the very basic building block of Blockchain: the Blockchain database. This helped resolve the issue of “double-spending” of digital currency, because a peer-to-peer network is used.

Does Blockchain Technology Have Its Naysayers?

Of course, not everybody is on board with Blockchain technology. Some believe it to be simply overhyped, some feel that it’s “too new,” and others feel that it should not always be considered the go-to tool for every job.

Blockchain-based transactions can only complete when all parties update their respective ledgers — a process that may take hours, according to
Forbes . And that chore could be as easy as herding cats.

“Blockchain has a lot to prove in its performance,” Peter Hiom, deputy CEO at the ASX trading exchange, tells Forbes. Axel Pierron, founder and managing director of financial consulting firm Optimas LLC adds, “The [transaction] delay before the final assurance that a transaction has been recorded ‘for good,’ that can be up to a couple of hours, would create too much uncertainty for market participants, especially during time of high volatility.”

The success of Blockchain depends on how many people will use it together, at the same time, for the same project. Without such universal adoption, Blockchain’s practicality is questionable.

“It’s obvious that a credit union-only distributed ledger system will require universal adoption to be of any use,” says John San Filippo, co-founder and principal at OmniChannel Communications. “It’s my experience that trying to achieve universal adoption of anything in this industry is an act of pure futility.”

Blockchain Is Not Going Away

Here’s more on the inevitability of Blockchain technology: according to Tech In Asia, about 50 percent of banks are either working with a fintech startup or technology company to augment their Blockchain technology capabilities whereas another 30 percent are opting for the consortium model.

51 percent of executives driving Blockchain technology initiatives are either chief technology officers or “chief innovation officers.”

How Blockchain Technology Will Affect Financial Industry

Blockchain technology can be used to onboard clients for future investments, eliminate third parties, manage portfolios, keep transactions secure, offer real-time payouts, help prevent fraud, accounting mistakes and laundering, streamline customer service, and help establish new financial products.

When you get right down to it, Blockchain is an accounting technology. It transfers assets and keeps a record of financial information, and it is designed to be efficient. Make sure your wealth plan is not sidelined or limited by changed in technology.

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