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How Blockchain Works – Bitcoin & Blockchain Tutorial

cryptotime2099
November28/ 2017

 

Blockchain is a new type of technology which basically creates a “decentralized” database for use in storing any number of files, pieces of data and other transactable information.

Whilst “blockchain” is not actually talked about so much, the main “killer” feature for it has received massive media attention due mainly to its sharp price rises against the USD – Bitcoin. If you’re interested in either of these technologies, this article should explain exactly which features of them you should be looking at.

Before we begin, it must be stated that this article is NOT an endorsement of Blockchain or Bitcoin technology. As with ALL “investment” activities, the onus is upon you to perform the appropriate due diligence in order for YOU to make the most appropriate decision. This is not legal or financial advice…

 

How Blockchain Works

Blockchain is a term given to the technology created in 2008 by a group of software developers to “decentralize” data structures in the world.

Rather than storing data in a “linear” or “centralized” fashion, these developers wanted to create what amounted to something very similar to the “Torrent” system; whereby a single file could be downloaded from a large number of servers (as opposed to just one).

The beauty of the Blockchain is a combination of this decentralization, but also of how it can store data. Instead of having static files (which have no provenance or version history), a “blockchain” would store multiple versions of files in what were called “blocks”. These blocks would denote the version of the file… meaning that if you downloaded one, you’d know whether it was the most recent version or if there were others.

This was VERY powerful, because instead of creating a data network, they’d actually created a new type of database… the type of innovation which could be used for NEW types of “decentralized” application… one of which being “Bitcoin”.

Bitcoin surfaced in 2009 after a still-unknown software developer released the application built solely on the “blockchain” technology. The premise of Bitcoin is to provide a public ledger of financial transactions which can be used as a digital “currency“. Acting like a 21st century traveller’s cheque, the “Bitcoin” application was meant to provide users with a way to manage fiscal transactions without the need for a bank.

The main premise for Bitcoin lay in its ability to be accepted in “every” country irrespective of whether the local currency was devalued, the government was corrupt or there was social unrest. The “decentralized” nature of the application would ensure that no single entity could influence it, and ultimately allow the product to be used wherever there was an Internet connection. So far, this has proven to be correct.

 

The Rise Of Bitcoin

With “Blockchain” being adopted somewhat slowly, the main star of the show has certainly been “Bitcoin”. Whilst not the only “cryptocurrency” in existence, it’s certainly the most prolific, being traded by millions of people around the world.

Bitcoin is a member of the “cryptocurrency” family – a group of fiscal transaction applications designed to work on the “blockchain” network. Cryptocurrencies work by encrypting “blocks” in particular “blockchains”. The encryption algorithms are designed to give specific functionality (such as Bitcoin’s 21 million coin limit). Essentially, each “coin” people are using with Bitcoin, Ethereum etc is simply an encrypted file used to do this.

Regardless of the technology, the main reason people are interested in cryptocurrencies is down to how they’re being traded in secondary markets. At the time of writing, bitcoin’s price is at around $7,000 (which is woefully overpriced) and as such the majority of people looking into the system are only looking at how they can ride on the back of even more profits. This is the wrong way to look at this.

Bitcoin will likely fall down in price again to a reasonable value. We don’t know what that price would be because it’s very difficult to actually pinpoint the “worth” of the Bitcoin technology. In traditional investing, you’d be able to justify a position based on the returns you could generate from a potential asset. No such returns exist for Bitcoin. The underlying technology is free and open source.  There was once even a Biticoin heist that didn’t phase the market.

The only people making money in the Bitcoin arena are the exchange companies who are offering to transact the currency with others. Despite being unregulated, and sometimes having very shady pasts, these exchanges allow you to buy/sell & send bitcoin to other parties. These – of course – charge a small fee for their services. Other than this fee, there are no other financial constraints associated with Bitcoin which makes it both appealing and difficult to consider at the same time (some would say a dichotomy)…

 

How Bitcoin & Blockchain Influence Business

So the big question people have is how Blockchain and Bitcoin will influence business (that’s where the real money is, right?). The answer is that it depends.

The main problem with Bitcoin is that it does not store value directly. The argument from the optimists is that this shouldn’t be a hindrance to adoption. The argument from the realists is that it is a deal-breaker as it means that it’s not a “real currency”.

We certainly side with the realists at this moment in time. There is no reason why Bitcoin should be adopted by anyone, regardless of who they are or what position they hold on the currency.  And, as mentioned by a number of high profile individuals, the likelihood that a government – or a conglomeration of governments – could simply create their own digital currency infrastructure would basically wipe Bitcoin off the map overnight.

The main problem people don’t seem to see is that a country’s currency is a denotation of its influence in the world. The larger your influence, the more your currency is traded and used. You can learn all about the different bitcoin competitors here.  The USD is ubiquitous for a reason – the commercial, industrial and cultural might of the USA is broad & deep. The GBP is still strong after the empire’s high water mark, and the collection of strong European economies makes the Euro quite influential also.

Because a country has military, governmental and human resources to back up its currency, it can afford to print more of it etc. Whilst most people cite this as a major problem, it’s backed up by trading power and as such people have the opportunity to earn more of it by working more creatively etc.

Bitcoin has no such value. You cannot “earn” more of it and you cannot use it as a store of value. Gold has a value because people – throughout history – have used it as a means to denote status… as well as being a form of universally accepted commodity. This means that if Bitcoin is going to achieve the adoption it needs to survive, there needs to be a clear definition of how it could store and enhance the value of anyone using it.  This interview was pretty interesting when discussing Bitcoins Future.

This is where business comes in.

What most people don’t realize is that Bitcoin isn’t a “currency” at all, but a ledger. It stores  financial transactions and allows people to access them if they have a particular key/hash.

This mechanism of storage means that the coins themselves (used to store the transactions) are only as valuable as the type of transactions they’re able to store. This is where Bitcoin’s chance lies — in being able to provide access to more interesting & valuable services which were not available before.

The true value of Bitcoin – to us – lies in its cross-border trading ability. By swapping local currency for a “Bitcoin”, you’re in theory able to transfer unlimited amounts of money to people in other countries – without governments even knowing. Despite the nefarious opportunities this creates, the core of it is that it would open the door to MANY previously unavailable services in countries such as China, Ukraine, Mexico and Brazil (where government problems have prevented commercial progress).  You can get started in mining with these techniques.

Much how the Internet, Paypal and Alibaba gave us access to products/services which we would have not had access to before, it could be the case that Bitcoin – or its equivalent – could do the same for smaller creators.

 

Conclusion

Ultimately, no one knows what will happen with Bitcoin and business. What is important, however, is understanding how it works, and how it fits into the wider spectrum of commerce.

Unfortunately, many retail traders are being scammed into buying coins which simply don’t have any value (at present). Their defense is normally a case of stating how they want to help transform things into a “cashless society” with “digital currency”… but we all know they are only there because of the potential for high gains in the secondary market.

Our opinion is that until real businesses are willing to accept “Bitcoin” (or other coins) as a form of payment, it’s best to sit on your hands. The watershed for the cryptocurrency ideal will likely come in the next 24 months – where either mainstream adoption will occur, or money will slowly ebb out of the markets. Whilst the technology is sound, it needs sound financial backing before it will be adopted by business.

 

 

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