The ‘blockchain’ phenomenon has certainly become a prolific fixture of the 2017 zeitgeist, but is it all it’s cracked up to be?
As an investor and technologist, I have the rare privilege of being able to straddle both sides of the Bitcoin / Blockchain craze – providing appropriate insight for readers to make more pertinent decisions. If you’re interested in learning about how Crypto Currency, and its fundamental technology set “blockchain”, this tutorial should help you…
Blockchain is the underlying technology which powers “Bitcoin” and all the other “crypto” coins available on the market today. Whilst these “coins” have received the lion’s share of attention, the truth is they are mainly “applications” for the new “blockchain” infrastructure.
To describe the essence of “blockchain”, the reality is actually quite simple. A very interesting article on blockchain’s roots here.
Rather than having a central “data stack” (database available through one or two providers), “blockchain” splits data up and makes it available across multiple “nodes” in a “blockchain network”. Each node (computer) on the network is able to store a number of blockchain files, which can be changed and edited on each machine.
This means that if you have a file, the current method of its storage today is to save it to your hard drive, or if you have the likes of “Dropbox”, you’re able to sync the file with the ones you have stored “in the cloud” (on Dropbox’s server). This essentially gives you a *backup* of the file (data) which you’re able to download and access if you have access to the DropBox link. Find out more on our Blockchain tutorial.
Blockchain works by taking the file and saving it on 100’s of servers. This way, when you want to “sync” the file with your local version, the “blockchain” infrastructure is able to download from a potentially unlimited number of providers (VERY similar to how Torrents work). This is called decentralization as it allows your file (data) to be accessed across a wide range of different providers.
Whilst this might not seem overly impressive, the MAGIC happens when you realize the two other aspects of the technology — low-level encryption & data chaining (versioning).
Indeed, the MAIN reason why Blockchain has received so much support is down to how it *chains* data. This is not only revolutionary but also HIGHLY important in appreciating the reason why so many have chosen to ‘invest’ into its various coins…
Encrypted Data Chaining
Traditional databases (even digital ones) do NOT support data versioning.
If you save a file, or a row in a data table – that data is kept as a standalone version of the data. There are no “previous” versions, unless the developer explicitly defines them in the database’s schema. This is important, as it raises the question of “data integrity” which has lead MANY users to question the validity of the current technology.
The idea that blockchain has popularized is the idea that you can *chain* data to make it DYNAMIC. Instead of saving/recalling individual items, you’re ACTUALLY calling a particular “block” of data, which may or may not be the most recent version of it.
Think of it like an email system. Traditional data would say that each new email message would be the WHOLE email message + ALL the old messages you sent in a particular “conversation”. This makes the file sizes for each email conversion HUGE (because it’s storing STATIC versions of the messages).
Blockchain doesn’t have this problem. Rather than treating each email conversation as a separate set of data, blockchain will treat them as *chains* of constantly changing data – the various VERSIONS of data being the BLOCKS added to the chain. Thus, instead of having to constantly send the entire email conversion around the Internet, blockchain-enabled systems are simply able to download the latest “block” added to each chain.
This not only makes computing more efficient (removing the need for MASSIVE independent data storage), but blended with the OTHER killer feature of blockchain, makes for a VERY compelling solution… ALL of the data inside a blockchain can be encrypted with ANY algorithm. This means that if you wanted the data to NOT be public (if you wanted to store financial transactions for example), you’re able to do so. This is where crypto currencies originated…
In a nutshell, the idea blockchain has popularized is the “decentralized database”, which is the term used to describe how blockchain-centered data is made available across a MUCH wider spectrum of providers than just one or two.
From a technical perspective, it means you’re able to provide an infrastructure which exists out of the scope of central regulation (banks/governments), and gives people the opportunity to manage what they create/change as they require. In other words, financial transactions can be managed independent of a central body…
The whole point of “crypto” currency is to provide an algorithm through which certain elements of the “blockchain” can be encrypted. The various coins are basically just different forms of algorithm, designed to provide certain levels of protection (the “bitcoin” algorithm has only 21 million possible variations as an example).
The reason why crypto currencies have become so prolific is not necessarily due to their technology, but their application. This is best evidenced with the many markets into which the majority of these coins have seen their highest gains — “developing” countries, crisis-hit areas and corruption-riddled governments. The use of the “currencies” spiked in these areas/times.
To explain how this works, it’s important to come to a seminal understanding of its background & why so many people (of differing backgrounds) are interested in the technology… the “coins” you see are not actual coins. They’re files. These files have an encryption key (known as a “hash”) which are used to unlock the file. That’s it. You can’t go to China and use the coin to buy food… because it’s just a file.
The reason *why* these “coins” have become popular is because they have been used as a “public ledger” for financial transactions carried out digitally. This means that if you wanted to purchase a product, from a toy manufacturer in China, rather than having to go through a bank, you are able to “trade” the value of the toy for a bitcoin file. The toy manufacturer can then “exchange” the bitcoin’s value to his own currency locally, or trade it with someone else. The transaction will complete as it would with USD or GBP etc, the only difference being the *way* in which it was carried out.
The important thing to note here is that whilst this idea is quite romantic, the reality is that in order to make “bitcoin” type transactions a valid vehicle of exchange, there needs to be a much more developed infrastructure. In short, the way many technologists are seeing the technology is as a means by which a larger body (typically a startup) could provide the end-to-end payment assurance for the buyer. In other words, on the buy-side you’re able “deposit” or “purchase” a particular value of bitcoin (equating to a corresponding value of local currency), and the sell-side will be able to “cash” the bitcoin into their own local currency. This is where the opportunity lies for investors…
‘Crypto’ as An Investment Vehicle
Obviously, the main reason people are interested in “crypto” is because of its massive price spikes in recent times. With many hailing a new era of currency trading, the reality is much different.
Whilst there *is* core value of the technology & its application, this has been eclipsed by the spikes seen only in the likes of the Tulip and South Sea bubbles before it. In other words, most of the hype around Bitcoin et al is driven by wild speculation, not intrinsic value. It’s important to stipulate this before proceeding.
The difference between “investing” and “trading” an asset lies in how your capital is used. Buying & selling a cryptographic currency is currently a trading game – your main market being other traders. Whilst there is NOTHING wrong with this, it’s vital to differentiate between the two if you are considering getting involved.
Investing into the cypto currency / blockchain infrastructure is NOT about trying to hold onto “coins” for as long as they’re rising in price – it’s about creating an underlying platform through which the technology can be adopted and used.
As explained “crypto” currency is looking more and more like the next wave of financial development – a digital “cheque” if you will. With this in mind, you need to appreciate that in order to make a “cheque” payable, you need to be able to trade it for an equitable set of value.
A bank would do this with a guarantee, typically backed by physical assets such as gold, which they’ll draw upon to pay the claimant of the cheque at the end of its transactive journey. Because the decentralized nature of “bitcoin” etc has no such guarantor, the market has to ensure this itself. This is where the “real” investors come in.
The challenge for Bitcoin’s adoption resides in how it’s able to store “value”.
The concensus today is that the value of a “coin” is directly associated to how much usage it will receive. This usage will determine whether the people who “buy” coins (and cash them at the other end) are able to rely on their money being made available after the transaction completes. The only way to ensure this will be possible is to ensure the flow of investment into the technology continues, and that the service providers who may accept Bitcoin as a new form of payment are adequately supported in terms of social and commercial interests.