What Is Blockchain and What Difference Does It Make?
It's time to become an expert! A guide to everything you need to know about the complex world of blockchain.
OK, you’re tired of people raising blockchain at the pub and family dinner parties. You’re over that sinking feeling when you know your unenthusiastic response proves that you have absolutely no idea what blockchain is, and why everyone keeps talking about it.
Consider this a gift - a cheat sheet. A five-minute solution. Print it, put it in your wallet and spend your next train ride wisely.
What is blockchain?
It all boils down to openness and trust in the process of passing money (or more correctly, value) between parties. Ordinary money transactions involve a trusted third-party to confirm that actual funds are available to cover the demanded amount. Blockchain technology makes trustworthy electronic transactions between individuals possible, without the need of a third-party.
A blockchain refers to a digitally transmitted open ledger that all parties can access and inspect. The blockchain is a timeline of a transaction. The ledger is organised as a chain of blocks that include all parties and amounts of a transaction - recorded as received.
Transferring money through blockchain eliminates limitations on the size of the transaction, the cost of money transfer and the time delays required to make most wire transfers.
Paper Money Transfers
Moving physical money or money-demand documents like checks means that the physical paper has to be carried from sender to receiver, entered into the receiver's account and recorded as received.
The bank or holder of the receiver's money has to contact the sender's financial institution to confirm the money is actually available before the value is actually added to the receiver's account, and subtracted from the sender's account.
Electronic Money Transfers
Conventional online electronic money transfers (EFTs) allows people to move money from one bank account to another without having to move a physical demand document. When you do an EFT you are not really moving currency. You are moving data that signifies the value of the money.
The data you send is a sentence demanding money from one account be transferred into another account, with account address information included. Once you hit send on a secure money transfer website, the message is converted into a code and sent out over the internet in encrypted form. Once the message is received by the recipient's bank or financial service, it is decrypted and enters the recipient's financial record as received.
The third-party in EFTs is the Automated Clearing House (ACH), one of four independent agencies that secures financial data transmissions. The ACH offers various levels of protection, such as confirmation e-mails and insurance policies that guarantee the money will actually be sent and bank accounts won't be compromised.
The ACH adds cost to the transfer process and limits the amount of money that can be transferred at any one time. For instance, Western Union caps U.S. transfers to $3,000, MoneyGram won't let you transfer more than $3,000 over a 30 day period, and Paypal allows up to $10,000 within the U.S. only. The service fees imposed by the ACH can be as much as 10 percent of the transaction. The services of the ACH can also be rather leisurely, as an electronic transfer could take as long as two days to complete.
Blockchain is a way of making financial exchanges universal, independent of national currency systems through the use of a digital system. Bitcoin is at the root of the blockchain system.
To use blockchain, you purchase bitcoins at the going rate on the bitcoin marketplace.
Bitcoin is a universal currency whose value is not based on an external standard, but only on common perception of its worth, while Blockchain is the digital bitcoin exchange system.
In order to perform transactions in the blockchain, you need a "wallet", which is a program that allows you to store and exchange your bitcoins. Each wallet is protected by a special cryptographic method that uses two connected keys, a private and a public key. Only the owner of the keys can decrypt or encrypt messages to the system.
To keep track of how many bitcoins you own, you enter the blockchain system. Blockchain uses a ledger, a file linked to you that keeps track of all bitcoin transactions. The ledger is not stored in any one single data center or bank. It is distributed across the world via a network of private computers that are storing data and executing the necessary computations to maintain the system. The computers in the network are a system of nodes in a blockchain network.
Each node has a copy of the ledger file that lists all the owners of bitcoins and how much they own. If one person wants to transfer bitcoin value to another, he or she broadcasts a message to the node that his or her bitcoin count should go down by the amount of the transfer, and that the recipient’s count should go up by that same number.
Each node in the network will receive this message and apply the requested transaction to its copy of the ledger. Anyone can obtain their own balance along with all other bitcoin accounts.
The fact that the ledger is common among all bitcoin owners and that it is maintained by a group of connected computers, not a private corporation or bank, means any user can witness the entire system of transactions.
Blockchain is born out of the same kind of logic that created crowd-funding and the internet itself - governed by a mass of self-organized bodies.
The number of bitcoins in existence is fixed at 21 million bitcoins, so the value of each bitcoin will depend on a bargaining price and willingness to exchange. All of the regulation in the blockchain financial system are written into the computer code so regulation of the system does not have to be monitored by any outside regulators. If a transaction violates the rules, the blockchain system will reject the transaction as invalid.
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