What Is Blockchain

Though often mentioned in the news, most people don’t know what blockchain is thanks to the misinformation surrounding it. That’s hardly surprising… blockchain is new technology.

First misconception: Blockchain is Bitcoin.

They’re two separate things. Bitcoin is a digital currency that uses blockchain.

A good analogy is a shared work file (e.g. Excel file). Every time someone makes a change, it’s updated on everyone’s computer. With one difference, though. Once a block has been created, it cannot be edited.

Blockchain is typically used as a way of recording events in a permanent, unchangeable manner, most often to record financial transactions.

Computers worldwide—“nodes”—carry out transactions and work together to verify their authenticity, in a manner called “consensus-based network.” Because a majority of nodes need agree on each transaction (a consensus), the risk of fraud is almost zero.

For example, I want to sell 5 Bitcoins. My “wallet address” will be checked against the existing records to confirm that I have 5 Bitcoins to sell. Once 51% of the nodes have checked and agreed, the transaction will be approved.

All network nodes receive details whenever someone requests a transaction, then check those details against their records. E.g., do both accounts have the required funds?

If so, a transaction is created and stored in a “block.” The block contains all the important information, such as transaction value and the accounts involved. Then, it’s time-stamped and added to a chain of previously created blocks.

This blockchain, stored from oldest to most recent, becomes a public record accessible to users of all the transactions ever to have occurred.

The first blockchain version emerged in the 1970s when computer scientist Ralph Merkle created the “Merkle Tree,” a computer network that reached a consensus to agree on a transaction. Each data block was connected to the previous block, and all data blocks combined were a record of all previous transactions.

As this was before the internet, the idea was shelved for decades despite being great.

Nearly 30 years later, the legendary Satoshi Nakamoto created Bitcoin. The bitcoin.org domain was registered in August 2008.

On 31 Oct. 2008, a whitepaper named “Bitcoin: A Peer-to-Peer Electronic Cash System” appeared. Then, on Jan. 3, the Bitcoin network was born, and Satoshi mined the first block of Bitcoins.

It came into being shortly after the financial crisis of 2007 to 2008, when anti-banker sentiment was at an all-time high. Many idealists saw Bitcoin as a real alternative to the current financial system.

Perception was, the general public had paid to bail out the banks who had acted in a greedy and unethical way. In theory, by adopting Bitcoin, money could be taken out of the bankers’ hands, become their own bank, and benefit from instant online transactions.

Nobody knows who Satoshi Nakamoto is. It’s widely assumed the name is a pseudonym, but no one knows whether it’s hiding a person or a group. Satoshi’s account is now rich, though. Nakamoto owns at least 1 million Bitcoins, worth just over US$8 billion at the time of writing. In December 2017, when Bitcoin was at its all-time high, Nakamoto even appeared on lists of the world’s richest people.

One of the more interesting theories is that Satoshi Nakamoto is a group of Japanese companies: Fujitsu and Toshiba make Satoshi and Nakamichi and Canon make Nakamoto. Unsurprisingly, there has been no comment on this speculation.

Australian entrepreneur Craig Wright has repeatedly tried to take credit for being Satoshi despite zero supporting evidence. Wright even promised to provide proof but has changed his mind. He hinted that powerful forces are preventing him from coming forward.

Bitcoin and cryptocurrency have had a quiet start in 2019. After the 2017 bull run’s heady heights, things have stagnated in the crypto sphere for the last 15 months.

Over the last few days, Bitcoin prices have started to increase, and the media narrative is beginning to change. Real-world use cases are being built on blockchain, so it seems this technology is here to stay.

Blockchain is the technology that Bitcoin uses to record transactions. Remember, every block records a transaction, which are time-stamped, stored chronologically, and linked as if in a chain. The information in each block includes, date, time, value, parties involved, and a unique transaction ID to distinguish them.

But if each Bitcoin unit— a “token”—is just code, what’s to stop it being copied or used twice in a transaction?

Blockchain uses a ledger database to keep a record of all transactions. For example, if I send you one token, the ledger stores the information. If I then tried to send that same Bitcoin to another person, the ledger would show that I no longer own the coin and block the transaction.

But who controls the ledger? After all, whoever owns the ledger could manipulate the system however they want to.

Bitcoin’s ledger is decentralized. It’s accessible to thousands of people, becoming more difficult to cheat.

When you want to send a transaction across the ledger, the network nodes check your copy of events against everyone else’s. If more than half of the system users have the same record as you, nodes reach a consensus, making forgery much more unlikely… but not impossible.

The mainstream media frequently confuses Bitcoin and blockchain. Often, talking heads say Bitcoin instead of blockchain. Bitcoin has drawn a lot of criticism; some of it valid.

Sensationalist media outlets have made wild generalizations about Bitcoin users, claiming only criminals and lawbreakers use cryptocurrencies… as they’re the type of people looking to make illegal purchases via online anonymity. This is nonsense. Although Bitcoin can, and has been used for nefarious purposes, to generalize in such a way shows a lack of intelligence… or agenda.

JPMorgan Chase CEO Jamie Dimon, a prominent critic, has been especially harsh on Bitcoin, calling it a fraud and claiming that global governments will crush all cryptocurrencies. He threatened to fire any JPMorgan employee caught trading this cryptocurrency. His comments have had an impact on public perception and contributed to a big crash in Bitcoin prices.

However, JPMorgan has been saying one thing and doing another. On Feb. 14 they launched their own cryptocurrency, JPM Coin. Despite telling the public to stay away, JPMorgan saw enough potential in crypto to spend vast sums creating their own. Whether or not you think they deliberately misled the public depends on how much you trust banks—but what’s true is that they’ve been buying up cheap crypto.

JPMorgan is setting up a cryptocurrency hedge fund. Once asset managers start directing pension and investment funds into crypto, prices will rise fast. JPMorgan could make a killing from this, so it’s hardly surprising that they’re happy for the bear market to continue as long as possible.

Facebook has followed a similar path. Recently, after removing all crypto ads from their site, Facebook announced the launch of a cryptocurrency that they had been developing since before banning advertising. Whether or not these companies have also been buying up cryptocurrencies at low prices remains to be seen.

While cryptocurrency is undoubtedly the future, Bitcoin may not last.

It does, however, have one major advantage over the competition: it was the first. Its brand recognition is far beyond other cryptocurrencies— known as “alts” or “altcoins”—being number one from the outset and seen as something of a king. Should Bitcoin lose its place at the top of the market cap charts, this could signal the start of a run away from Bitcoin and into other alts.

It benefits from being the easiest crypto to purchase. Looking to swap your fiat into crypto? Chances are, you need to go through Bitcoin. Even if you wanted to buy another cryptocurrency, you’d likely need to buy Bitcoin to trade it on an exchange.

But it has some issues that may impact its future use.

For starters, transactions are slow, taking anywhere from 15 minutes to days. Clearly, this makes the use of Bitcoin for everyday purchases unrealistic. When the Bitcoin network experiences high volumes, transaction speeds can fall even further.

It’s also suffering from increased mining costs. To mine a crypto token, your computer needs to solve increasingly complex algorithms. In the early days, miners could mine Bitcoin from home, with basic equipment. Today, all the easy algorithms have been solved. Mining Bitcoin is no longer profitable for most people. You need a huge and vastly expensive computer rig to even consider mining.

It’s becoming energy inefficient. Mining uses a colossal amount of electricity. So, if Bitcoin became a global standard, it’d use an unprecedented amount of electricity, which would—almost certainly—have a harmful environmental impact.

Bitcoin has been proposed as a replacement for the U.S. dollar as a global reserve currency. This could work in theory, though unwise environmentally speaking.

Another problem is how much control China wields over the Bitcoin network… China could feasibly execute a 51% attack—Bitcoin’s fatal flaw.

It has a few problems, starting with its vulnerability to a “51% attack.”

As mentioned, a Bitcoin transaction is approved when more than half the nodes agree. Thus, if more than half the node owners collaborated, they could commit fraudulent activities—a 51% attack.

Although Bitcoin claims to be decentralized, the numbers tell a different story. China has more than 70% of the Bitcoin mining pools, and control a majority stake of the computing power (“hashrate”) used to verify transactions.

Miners in China could band together at any time and spend a token however many times they wanted, passing fraudulent transactions. They may not want to band together, but they could… or, if the Chinese government demanded Bitcoin was crashed, they could do it quickly and easily.

This would go against miners’ best interests, as they’d lose the most money if Bitcoin crashes. Other nations will be wary of using any system that one country has so much control over.

Plus, over 95% of Bitcoin tokens are held by 4% of Bitcoin holders.

These dangers will prevent Bitcoin from ever becoming a global reserve currency.

Additionally, it struggles under high volumes. True, the Lightning Network upgrade has rectified some of these problems. But the Lightning Network works with all cryptos, not just Bitcoin. This means Bitcoin has not closed ground with rivals. Bitcoin transaction fees are also increasing. During the last bull run, transaction fees went up to US$50; a set fee, not a percentage charge. If you wanted to transfer US$1 in Bitcoin, you’d still have paid US$50.

One possibility is that it could become a store of value, a kind of digital gold. However, anything can be a store of value, regardless of utility. Back in the 1600s, tulips became a store of value. The world, so enamored with tulips, built a futures market around them that led to a huge speculative bubble that, of course, crashed hard. We can draw interesting parallels between Bitcoin and tulips.

Gold’s value is built on utility. Bitcoin has very limited utility. While Bitcoin can be safely stored and kept out of reach of governments and thieves, this doesn’t guarantee its value. Indeed, if governments made it illegal, it would become almost worthless as a store of value.

Bitcoin was the first generation of digital tokens. Successive tokens have looked at its strengths but, also, its weaknesses and where to improve.

Hundreds of different altcoins compete in the crypto sphere. Do any of them have the potential to dethrone the reigning king?

Check back for the best cryptocurrencies under US$1. There’s a chance to make huge money before Wall Street and all the other big players arrive.

And they’re coming.

Oliver Lovett