What is Blockchain? Blockchain Technology Explained for Beginners
Wondering what is blockchain? This article explains blockchain technology for beginners, why it matters as an investor even if you have zero interest in cryptocurrencies, and what blockchain might mean for the future of the global economy.
You may have heard a lot of excitement about blockchain technology recently, especially if you have interest in cryptocurrencies such as Bitcoin and others. You might have a lot of questions about what is it and what it is used for, and most importantly how it relates to you and your money.
There is a lot of new info on blockchain, and in a way we are all beginners, as this is not something that existed even 10 years ago. Hopefully this will explain it in a way that is easy to understand – even if you don’t have a lot of background in investments or currencies or data management.
In addition to blockchain explained, we are also going to cover what its potential impact can be on traders and investors. You should know about this because even if you are not an investor it impacts you. And, if you ARE an investor, it is quite exciting to learn about because new developments are always being made!
What is blockchain? Why Is it Important?
Blockchain was originally created out of necessity to serve as an accounting method for Bitcoin, a cryptocurrency. Then it started growing at an astonishing rate. More and more people are beginning to trust this new system of data management and many are beginning to trust the old system of the corporate giants less as time goes on.
When it comes to finding a definition for blockchain, there are not a lot of easy to understand answers. Highly technical descriptions can be confusing, especially if you do not have a strong technological background. Fortunately, there is a dictionary definition to help us get started.
According to the dictionary definition, it is defined as this:
Blockchain is a digital ledger in which transactions made in bitcoin or another cryptocurrency are recorded chronologically and publicly.
One thing that is fascinating about this definition is that not all experts agree with it. Many experts argue over what exactly the true definition is. Many people misuse the term as well. There is a great deal of confusion as a result and some experts are still working to come up with a concrete universal definition.
With that said, we will try to come up with some basic ideas to help you get some understanding of the subject matter. Even though experts may disagree with a uniform meaning thus far, we must make an attempt to understand it better because people are trading and using the technology every day.
Perhaps the best way to describe it is to first understand that there are multiple meanings and different organizations use it in different ways. There are simply different perspectives. We will tackle some of these perspectives in this article.
The word ledger is one way to begin looking at the concept. Think of an old fashioned accountant that used to keep records in an accounting ledger. Now imagine that the ledger keeps track of virtually all value and it is constantly being updated in real time and is accessible to the public.
Now imagine that this ledger is in a safe space where it is unlikely to be tampered with. Next, make it digital and start sharing it. You now have what is known as blockchain.
Many people are calling it “the new internet” because it is not able to be copied or easily tampered with.
Market Corrections: How Blockchain Can Help Determine Value
What exactly is value? It is intangible yet we instinctually all know what it is. We know we have value and that our work holds value yet we have been giving our value away to third parties for many years for much less than it’s worth. Think about it. Have you ever had a job and felt you were not being paid enough?
Think of blockchain technology as a market correction where the third party is removed and people begin to interact directly thus cutting out the middleman. With this we finally develop more freedom and we begin to collect more of our value as a result.
This leads to greater incentive.
We begin to work harder and we begin to collect more and more of our value. This value can be traded.
This value became digital currency. And one of the first digital currencies to be made is the one known as bitcoin. Bitcoin is simply a digital currency that can be traded. Just like any other currency, bitcoin has a value which can be exchanged into other currencies.
Bitcoin is becoming what I like to call digital diamonds. It is much like a commodity investment that can go up and down in value in the stock market.
Examples of Blockchain Technology: A Shared Table of Information
When you think of a digital ledger, perhaps you think of something like a spreadsheet file. This is a good example, because a spreadsheet helps organize data. Blockchain technology is what is used to sort and process and share all of this data.
Think of an electronic document like a spreadsheet where data is organized and can be edited and used for practical purposes. Now duplicate this data millions of times across shared computers known as networks. This shared system gets updated in real time. All of this is a way of describing a blockchain.
This information or blockchain is real even though it exists in the virtual world. It then gets shared over and over again by the people who access parts of various hard drives all around the world. It is because of this that it is never located in one single location.
Because it is not located on one single hard drive, this increases security as it becomes difficult to hack.
The data is constantly in the public eye so the records of this information remain safe. It’s kind of like a screenshot that has been shared already and many people have a copy and it is accessible to billions of users on the internet at the same moment.
Think of the old fashioned way that information was edited. It used to be that one person wrote something. Then they contacted their editor and their editor suggested changes or revisions. Then the writer made the suggested changes. The problem with this was that only one person could work on a document at a time.
With blockchain the writer and the editor can make changes simultaneously to a document that has no central location. It is spread across multiple locations and more than two can edit it at a time. This is a very valuable tool.
The Many Benefits of Blockchain Technology
There are a lot of benefits of blockchain technology. Here are some of the reasons why it is so important to understand its role in Bitcoin and other cryptocurrencies:
- The data is not controlled by one single person or company. It is shared by those who consent to be a part of the process. The data is more accurate because of all of these factors.
- There is less chance for human or mechanical errors to occur.
- The data also remains safe. That is why blockchains to date have not suffered any catastrophic hacks or any major disturbances.
- The data is out in the open where everyone can see it. Everyone has access to it so it is constantly being updated by multiple users. In this way it gets edited many times a day. When you group small portions of this data you get blocks.
Please note, just because blockchain is secure, of course it is still possible for the data to be tampered with. However, it would take a tremendous amount of power and resources to take over all of the servers simultaneously. It is difficult to corrupt because users are always updating it from various locations.
A blockchain is made up from a group of central connecting points. When people voluntarily join the network they get access to the blockchain. The users are constantly approving, sharing, proving the data as authentic, revising and downloading the data as they build their own blockchain network.
This is why many people are referring to blockchain info as a new kind of internet.
The users in a way have reverted back to the old days when the internet was more free and less regulated by government and corporate lobbyists. The people who willfully engage in this new network are more powerful then ever before because each enter as an administrator.
Now they have more incentives because they get a bigger piece of the action without the middleman getting in the way. This incentive is now being represented by the bitcoin. The fruits of labor generated by willing users can then be collected or traded like any currency.
Users have now started competing with one another to obtain more digital currency such as bitcoins. There are also various cryptocurrencies on the rise that can be converted to bitcoin.
Think of cryptocurrencies as tickets that you win at an arcade. After you win enough tickets you can eventually trade them in for a prize. In this case the prize is bitcoins. The bitcoins can finally be traded in the open market just like a stock and users can cash out when they want to.
There is no central point of ownership.
Think of the federal government as an example. The federal government is a centralized point that contains all the power and ownership. Now imagine that this power is taken away from the federal government and given back to the local citizens.
These citizens start to operate on a person to person basis and they work together to create and maintain their database. They are then given the power to manage their database and they begin to govern themselves by rewarding the good citizens.
What gets really interesting is when the users start creating their own spaces.
I like to think of these spaces as your own room in a house. It is a space where the users get to do whatever they want with their space. They need no permission from anybody as to how they decorate it.
What types of people use blockchains? Who needs blockchains?
One of the most common users of blockchains are content creators or internet publishers such as bloggers. The reason for this is simple. Many content creators have been grossly underpaid through the traditional payment system.
Third parties have been reaping what content creators have sewn and now many creators are learning that they can keep a bigger portion of their true value by using blockchain platforms such as Steemit. Once the funds in their wallet reach the desired point they can trade bitcoins, buy things and even cash out if they want to.
Identity experts and program developers also use blockchain because of the new invention of the virtual wallet. A virtual wallet is an online account where users who enter into a network such as Steemit earn digital currency by participating in the network. With Steemit the earnings in their virtual wallet go up when they create content, upvote responsibly and reply with thoughtful comments.
Users in the world of finance also play a big role.
You have currency traders, advisers, money transfer specialists, world currency experts, and many other finance users involved. More and more people are getting on board since the demand for blockchain experts has been growing.
How is blockchain data and currency kept safe?
I already mentioned the main part of security being that data is spread out across many hard drives thus keeping it safer. I did not mention the username and password implications or lack thereof.
The traditional method of security has always been a username and password. This is much easier to hack than the blockchain method of encryption. In the blockchain method the users are given a giant multi letter and number password that is randomly generated. It is so long that hacking it is nearly impossible.
Users are also given a giant encrypted public address that is randomly generated. This address is where users store their data. These are known as keys. One key is private and the other is public. Obviously the person has to protect their private key like they would their bank account password so their virtual wallet does not get stolen!
More and more startup businesses are starting to use blockchain technology. With more business comes more case study. Some companies will fail in their attempts at getting started using blockchain. Other business will do well. The end result is that the world will be watching and learning from both.
As more and more success models begin to unfold, more start ups will enter into the market. Eventually this will lead to a straight up competition between the old world companies and the the new blockchain ones.
There are several possible outcomes. The first possibility is that blockchain fails and becomes a failed experiment. The second option is it succeeds and companies who form the infrastructure get bought out by corporate giants.
The third option is the corporate giants start to incorporate the system into their own infrastructure. The forth possibility is the start ups put the giants out of business.
Lastly, it is completely possible the whole system could end up as some type of hybrid with all of these different types of scenarios.
One thing is certain, the new start ups that utilize blockchains are growing and more people are trying to learn about and implement the new system.
What Can We Expect to Happen as an Effect From Blockchains?
Knowing the impact blockchains may have on business as we know it today is important. As a relatively newer method of accounting, we can be sure that it will evolve in many ways in future years. It is rapidly expanding, which can also cause new developments to be made.
As an investor, it’s important to know how all of these things may impact you. Here are some potential ways the future of blockchain might be affected:
#1. The government will likely eventually become more involved.
Considering the government is so closely related to our current currency system in the United States, we all know that they will likely eventually try to pass regulations and get involved with cryptocurrencies.
Some governments have already begun experimenting with this, such as the Petro cryptocurrency created by the Venezuelan government. As more and more governments face bankruptcy and other financial distress, it is not surprising.
We can be sure that our own U.S. government will eventually try to regulate and tax cryptocurrencies. Lobbyists will eventually jump in and try to influence laws in regards to the government intervention.
If you are investing in Bitcoin or other cryptocurrencies, it is vital you be prepared for the day regulations may come into effect. Staying on top of the latest stock market news and government developments on cryptocurrency is always important.
Basically, as an investor, you’d want to exercise the exact same trading precautions you would on any type of open market stock or commodity investment.
#2. New Developments and Methods of Investment Will Emerge
This is very important to be aware of, because it could potentially result in new exciting investment opportunities for you.
For example, there are already new types of investments being created. One example of this is Ethereum. Ethereum is a project that basically creates contracts that are executed after certain conditions are met. If this sounds confusing, it can be helpful to think of it similar to what you might experience in a futures contract as an example or an options contract.
When the price of X gets to a certain level person A has the option of selling and person B has the option of buying or vice versa. In more simple terms it is a virtual contract that is easy to execute using modern blockchain technology when certain conditions are met.
#3: There Will Be Less Dependence on Third Parties
As blockchain technology continues to grow, you will likely see many so called “middle men” in business disappear. Just as we can trade stocks online today without the need of a sales rep, more and more apps and software programs exist because of this type of technology.
More and more start up tech companies are getting involved in this type of service. They develop apps which users can use to directly communicate with each other for their needs. This is a very big development in the arena of the sharing economy, such as AirBnB, ridesharing platforms, rental companies, service contractors and more.
A good example of this would be the app Splintlister. Once upon a time, not that long ago, if you wanted to try to learn how to kayak, you would have to go to a sporting goods store and purchase a lot of equipment. Today, you don’t need to purchase anything – you download an app, find people near you that might have a spare kayak you can borrow and you enjoy.
Because of the way blockchain technology is always updated and data is always shared publicly, people will be able to work directly with other people without the need for a third party.
Both parties enter the contract knowing and understanding the risks and the middleman is eliminated. Apps like this will soon be taking over many more markets, as we have seen explode as more and more drivers join ridesharing apps such as Sidecar, Lyft, and Uber. You don’t call a taxicab company anymore – instead you use the app to find available independent drivers as necessary.
#4: New blockchain venture capitalist projects will emerge
Users will be able to put their own capitol into a new start up or project that they believe in with the push of a button on an app. In doing so they will get a portion of the profits if their risk pays off.
This has already proven to be wildly successful. There are already a few case studies where start ups have gotten funds directly from people with little investment to spare yet they are willing to put what little funds they have into something they believe in. As a result both parties are benefitting and the model is growing.
#5: A real time system of checks and balances
Blockchain is governed in real time by person to person interactions. These interactions are instantly being recorded for all to see. Observers can see in real time what person A did with person B.
Users can see exactly when it happened. They can witness what exactly happened. These people will observe how both parties feel about what happened in real time by viewing comments. The online financial institution PayPal is already beginning to venture into this with apps such as Venmo.
In essence, people are beginning to see what is actually happening as it happens. Everything is out in the open. Thus, it is self governed in a system of checks and balances.
#6. Data exchange is getting faster and more secure.
I have already gone over data security but I did not mention the faster speeds associated with blockchain. Since the data is not in a centralized location it is easier and faster to access with blockchain. In today’s world speed is everything when it comes to data.
#7: Take a Guess and Bank on a Hunch
People are making money by guessing the future and businesses are forming as a result. In a way, this is a lot like the futures market or even gambling for that matter.
Markets are opening where people make money if they guess correctly on a future outcome. There are business that take the bets, place the bets, and pay the bets on anything futures related.
There is obviously high risk in such transactions but both parties in blockchains can see and understand the risk and decide if they accept it or not.
#8. Property Ownership Rights May Finally Have Protection
Remember when the entire music industry collapsed at the invention of Limewire, a music sharing software program that allowed users to share and download songs they did not purchase?
Had blockchain technology existed back then, it could have possibly been prevented. For digital artists and creators today, this means new exciting advancements to ensure their financial interest in property they own or have created stays protected.
The peer to peer system allows data to be protected the instant it is created or published. They are able to connect in real time with distributors who honor the copyrights in real time. Buyers are instantly notified that they are making a safe purchase since the distributer does not sell stolen content.
The music industry is a great example of this in action today. A musician uses blockchain technology to store a song on a database that instantly copyrights and distributes the music to a third party that wants to make sure nothing is stolen. It sounds complex but blockchains make it all happen instantly.
#9: Bitcoin trading and stock trading
Peer to peer blockchain technology makes trading digital stocks fast and easy. Users can easily sign up for and use trading platforms and directly buy and sell stocks with the trading platforms.
Companies can easily offer various cryptocurrencies or digital money. Cryptocurrencies can be converted to bitcoin. Ultimately individual stock traders can safely buy and sell and trade using the blockchain system and they can ultimately trade the currencies themselves.
#10. Industrial Uses for Blockchain Technology Will Advance
Industrial companies can use blockchain technology in lock step with computer monitoring systems such as sensors so they can relay data in real time.
Imagine a company that monitors and sells various chemicals or gas. They can use sensors to help them automatically detect when they are low on supplies.
More inventory can be automatically ordered and safety protocols can be automatically put in place and governed by blockchain technology. This saves both time and money. It also makes industry safer. This may even eventually be a catalyst to changes in the pharmaceutical industry and biotech stocks.
The possibilities are infinite in the industrial world. Needless to say there are also infinite business applications and individual user possibilities using blockchain technology.
Even if you have zero interest in trading cryptocurrencies, these developments in technology can affect your current investments in the industrial sectors.
The Early Results are In: Things Are Happening
Blockchain is expanding. More people are learning about blockchain. More people are beginning to trust blockchain. Digital currency is expanding. The only question that remains is what will happen next and what new technologies are coming in the near future as a result of this new technology.
We hope this article is useful for you and if you have any ideas or examples of blockchains and their importance please list them below. Also, if you have any comments or suggestions we appreciate any feedback!
Remember we do not provide any recommendations that you get into the blockchain market. That is for you to decide. Always assess your own risk and take sole responsibility for your actions in regards to blockchain, bitcoins and digital currency.
Have any questions? What are your thoughts on the new emergence of this digital technology? Share your thoughts in the comments section below!