Since 2014, the echoes of a FinTech buzzword have got louder and louder. From its first mention on the pages of the dark web, to its meteoric rise as a source of great interest (and concern) for world banks, the word “blockchain” now finds itself on the lips of every self-respecting CIO.

As a consequence, there is a lot of noise and misinformation around blockchain, as scores of people try to explain what it is without truly understanding it. This series of short blogs will give you the essential facts about blockchain and why it is more than just the latest buzzword.

Blockchain and Bitcoin are Separate Entities

Blockchain technology underpins cryptocurrencies (digital currencies not controlled by any nation state, i.e. Bitcoin and Ethereum), but, they are not the same thing! Blockchain is the technology that allows you to transfer value digitally, but it is not the value itself. In otherwords, blockchain is to cryptocurrencies, like roads are to cars. Why the connection? Cryptocurrencies such as bitcoin were born from a socialist, ideological internet movement that values decentralisation of power, true anonymity online and collectivism. The same movement has given rise to groups such as LOLsec and Anonymous. During 2008 a person or persons named Satoshi Nakamoto (the identity of the inventor is still unknown) invented the Bitcoin and released a paper called “the Bitcoin Protocol”. This took place at the time of the financial crash, where people had lost confidence in traditional banking systems and alternative options seem increasingly appealing. Inventing the currency itself was fairly simple, but the methods by which to control the currency’s inflation and distribution proved trickier. The main problem the inventor(s) solved was how to distribute value without a trusted third party. Today, all online transactions require an intermediary between the buyer and seller, not only to facilitate the movement of money, but also to ensure the transaction isn’t fraudulent and that the people who are involved in the trade are who they say they are. The position of third party is incredibly powerful in modern societies. Third parties are banks, clearing houses, governments etc. For a cryptocurrency founded on the anarchic beliefs of anonymity and decentralisation, this posed a huge problem because the existing monetary system run counter to their aspirations. Therefore, the only option was to rebuild the system in the image of their ideologies. Blockchain solves this issue by using clever code to facilitate the transaction, eradicating the need for a trusted third party whilst maintaining the integrity of the cryptocurrency.

Blockchain is just Another Database

First and foremost, it’s important to understand that blockchain is infrastructure technology. It is a clever rethink of the structure of common databases. If leveraged correctly in the right use cases, blockchains have huge advantages over traditional relational databases. At present large banks each maintain their own central databases with details of transactions and each bank must reconcile their databases with the other banks continuously. Maintaining these databases is not only costly, it’s also incredibly risky because these databases are target number one for hackers. For banks and financial institutions, blockchains are an enticing solution because they cut down on the costs and risks of conducting business as usual.

Blockchains are called as such because each block is a file and these files are chained together using cryptographic principles. The chain is maintained by NODES on a peer to peer network. Each node is responsible for making new blocks, maintaining the chain and validating one another’s work. They are also the key to making sure that each bitcoin is unique, only existing in one place on the chain in time. This is important because people who commit fraud using cryptocurrencies often attempt to do two transactions at once using the same money. The nodes defend against fraudsters by disallowing these types of transactions.

Having a community of nodes validating transactions is much faster and reduces costs significantly. For example, if I want to send money abroad, the money must first pass through a clearing house to be validated and then sent on to the destination. The clearing house is both a bottleneck and a burdensome cost, not only will they levy taxes on my transaction, it will also take them roughly three days for them to do the work.

Meanwhile if I were to make the same transaction using a cryptocurrency running on blockchain infrastructure the transaction would take just ten minutes and the transaction fee a fraction of what the clearing house would charge. This is because the nodes are able to validate and approve transactions within 10 minutes on average, compared to a clearing house taking around 3 days to complete similar tasks.

In my next blog instalment, I will cover some of the other hot topics surrounding blockchain, including smart contracts, exciting new use cases, and answer the burning question – Who exactly is funding the research into this technology?

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