What is blockchain technology? Why is it creating so much buzz in the tech industry and finance industry? Before we can answer these questions it’s important to understand where the technology originated from in the first place.
Blockchain technology didn’t officially exist until the birth of Bitcoin, back in 2008 after the financial crisis here in the United States. The original white papers for bitcoin were written by a computer programmer (who is still unknown or to be found today) with the name Satoshi Nakomato.
For most people outside the technology industry, when Bitcoin arrived, this was the first time they had heard of the terminology referred to as (peer to peer). What is peer to peer technology? Without confusing you too much, I will use a scenario based on my I.T. cyber security background to describe what peer to peer is and how it works.
Peer to Peer technology and how it works
First let me touch a bit on my background so you know you are reading from a credited source. I spent 3 years as a civilian contractor for implementing cyber security measures for the USDA and Department of defense. I also spent 3 years in the private sector and built out the infrastructure networks for a Credit Union/Bank as a Network Engineer and helped host the state local Govt. websites across the nation from Kansas.gov to Hawaii.gov with virtualization of servers with the use of VMWare technology.
When I was contracting as a civilian for the Govt. I was basically playing a liaison for communication between the two agencies. With all the work we we’re doing on the I.T. side, we had to send email back and forth that was confidential and sometimes secret in nature.
Due to concerns with security threats such as hackers, we had to use peer to peer technology when sending emails back and forth over various networks. Pay attention to this next portion because this is where peer to peer technology brings value and TRUST to a network of computers talking to each other.
For one person to know 100% that they are receiving an email from another person that is internal to the organization, they must have a way to know that the source sending the message can be trusted 100%. With peer to peer technology, you could take an internal email and (winzip) it into a package that could not be opened unless you had a private key to unlock it.
The private key is a long chain of numbers and letters mixed together making it almost impossible to crack if someone were to get a hold of it, such as a hacker. The private key is held with the person who zips the file and if someone else wanted to open the package and see the contents inside they would need permission or (the private key) from the person holding the private key. This is peer to peer technology and how it works in a nutshell.
The blockchain and DLT
At Bitcoins core is something called the blockchain. This is also referred to as the distributed ledger technology or DLT. Simply put, this is a consensus of replicated, shared, and synchronized digital data, geographically spread across multiple sites, countries, or institutions. There is no central administrator or centralized data storage. Meaning, no one person or company can have complete control over the network. It’s a lot like the internet and is considered by many as the internet 2.0 with much more sophistication of the technology for payment systems and applications to be built on.
The blockchain basically acts as a ledger or record of accounting for financial transactions or any other form of record kept, that contains
digital data. The network also uses peer to peer technology for accounts that are created within this distributed network ledger.
This is a huge break through in technology because the ledger, is a distributed network of computers creating the blocks that make up the blockchain. The blocks are series of financial transactions that are kept on the network. In this case, Bitcoins network.
These transactions have to be confirmed as trustworthy transactions by mathematical algorithms that other computers on the network have to solve in order to confirm the transactions.
When a computer cracks the code or algorithm given to it from the block of financial transactions with in the ledger of accounting, the computer that cracked the code first, is awarded Bitcoin. This led to what you might hear about today as Bitcoin mining or crypto mining.
If you want a far more technical breakdown of how it works if this is confusing you, I would recommend watching the video below. It’s a bit long but it gives you a complete break down visually of how this all works and will answer a lot of questions you may have about the technology behind Bitcoin. Let’s continue reading before you watch the video.
Blockchain accounts and privacy
One of the major issues that faces our financial systems today is privacy. In so many cases over the last few years, we have literally seen multiple major financial institutions get hacked including the credit rating agencies such as Experian.
That has caused a lot of folks to second guess where they keep their money and their confidential information to their private lives safe. The blockchain has solved a lot of these problems just solely based on the accounting ledger within the blockchain.
(FACT: Back in 2011 the U.S. Treasury officially announced that Bitcoin was un-hackable and deemed Bitcoin as a digital currency. Since then, no one Govt. or individual has been able to successfully hack Bitcoins network.)
If you wanted to create an account right now on the Blockchain ledger you could. It’s as easy as a 3 or 4 step process. All you must do, is go to one of the exchanges that allow you a way to buy, sell and trade Bitcoin for other cryptocurrencies.
That’s right, I did say “other cryptocurrencies”. If you thought Bitcoin was the only digital asset that offers this technology, you thought wrong. There ae 100’s if not thousands of them in existent today. I won’t get into any of the other coins or cryptos today because we can talk about those in later articles. For now, I’ll stick with Bitcoin.
Getting back to the accounts that can be created on the Bitcoin network, if you create an account the first piece of information you receive is a private key address. Remember the peer to peer technology we covered earlier? This is the equivalent of that technology being used with the private key address you get when you create the account. It is your own unique identifier to your Bitcoin account and can only be recognized by another user who has your private key.
As former president Obama once said, “It’s the equivalent of people walking around with a Swiss Bank account in their pocket”. It’s totally private and secure because if you have the private key no one else can gain access to it.
The private key comes in many different variations. It can come in the form of a paper wallet; a physical flash drive called a ledger wallet, or it can be a private key that resides on a website such as one of the exchanges. How you choose to use the private keys is up to you.
Personally, I have a combination of private key addresses also referred to as “wallets”, on exchanges and in physical form, locked up in a vault with my cryptos on the flash drive/ledger wallet.
I recommend these two methods of storage for 2 reasons.
- If you have some of your Bitcoin or other coins on exchanges, you can buy and sell instantly, just like you would with a stock on a stock Broker site.
- If you have cryptos stored on a ledger wallet/flash drive, you can have physical ownership of your digital currencies in hand and off the exchanges.
I highly recommend the second method because one of the main concerns in the past year or two, is hackers. There have been many breaches on numerous exchanges and many individuals private key accounts have been breached or stolen.
Now you may be saying to yourself but wait…. I thought you said it was un-hackable??
Well, the network that makes up the accounting ledger and the network that the digital currency travels on, can’t be hacked because its distributed across millions of individual computers. It’s the exchanges or company networks, THAT ARE HACKABLE because those are centralized and controlled by one system or network, not a distributed network of many systems.
The point here is just remembering that if your cryptos are on an exchange, there is RISK that they can be stolen. On the flip side, how is that different than the RISK you take in storing your US dollars in a stock, on an exchange? There is no difference really, just that one exchange/broker site holds a bunch of digital currency and the other…. does the same thing.
Your stocks that you buy on an exchange are nothing more than digital 1’s and 0s on a screen after you have deposited real physical dollars into that stock broker site from your Bank account. Another wards, if you have any concerns about digital currency and adjusting to that environment of having no cash, just digital cash…. WE ARE ALREADY THERE!
I helped design these environments for the Bank I worked for so I know from first hand experience that we are already living in that environment.
Are Bitcoins transaction speeds fast enough?
I briefly mentioned how the distributed ledger technology offers a way to record financial transactions and records of digital data through Blockchain. Now, let’s talk about the transaction speeds for those financial transactions that are being recorded.
If you understood how the transactions are confirmed, then you will understand this next part.
When a computer solves those algorithms, we talked about earlier, the computer is awarded Bitcoin for doing so. This is considered mining for Bitcoin like we had talked about. When that math problem is solved, and the transaction is confirmed, then whatever SWAP of digital currency that was made from one private key to another is complete and considered TRUSTED by the ledger on the blockchain. The transaction at that point is complete.
There is only one problem with this process, for Bitcoin at least…. It takes roughly 60 minutes for that transaction to be confirmed because of the difficulty of each algorithm that must be solved by the computers on a specific block. Keep in mind, the time for confirmation I am speaking of is only for Bitcoin. That means if you were to use Bitcoin in a store to buy goods or food, you would have to wait 60 minutes for confirmation and by then your food would be cold.
Bitcoin was ahead of its time and because of this Satoshi could not foresee this problem in the future. Fortunately for the rest of us, others did see this problem with Bitcoins technology.
Programmers around the world have improved upon the blockchain by creating new block chains that are independent of Bitcoins, for other Crypto currencies that behave in much the same way, ONLY transaction times are much, much faster. This innovation has given birth to an entire market of cryptos that we see today.
The rise of a new asset class and market?
The market that has been created due to these new blockchains is truly revolutionary and will in my opinion, based on my technical background, create the next wave of Giant tech companies that we saw survive and flourish out of the .com bubble. The next wave of tech companies will be block chain based and will more than likely be the next Google, Facebook, You Tube, Twitter and so on.
If you are wondering just how many of these tech companies are competing for these spots just look at the website called “Coin Market Cap.” The website lists all the available tokens and cryptocurrencies that make up this multi-billion-dollar industry today, thanks to Bitcoin and Satoshi Nakomoto.
Bitcoin according to the IRS here in the U.S. is now considered a commodity when you go to file your taxes at the end of the year along with coins like Ethereum and Litecoin. Therefore, we can officially call cryptos a new asset class. A digital commodity so to speak.
Last thoughts
At the current moment, our company is NOT invested in crypto currencies due to LLC agreements for doing business as a registered LLC. We do personally as individuals hold investments in cryptos outside of the business for our own personal investment ventures.
I have used Litecoin for personal transactions and have bought services with Litecoin before. I can tell you that Litecoin’s, lightning network that the digital currency travels on, is superfast. Confirmation of transactions takes 30 seconds at the most. Sometimes I have noticed transactions as fast as 2 seconds or less.
Another great benefit to using cryptocurrencies for services and goods is that the Fees for transactions from companies that accept the cryptos is almost nonexistent when you compare it to the service FEES you get when you use a credit card or bank card.
It will be very interesting to see where this new technology takes us and how Govts. Try to regulate the industry as it grows in the next year or so.
If you are interested in learning more about cryptos you can subscribe to our website and get any new updates in real time that we release with information on the crypto markets.
Feel free to share your thoughts on some of these new cryptos and the technology. Where do you think it will be in 5 years from now and how do you think it will impact the financial industries around the world? What has been your experience so far if you have used cryptos or invest in them?