I’ve been hearing the term “block chain” come up more and more in discussions about finance, cryptocurrency, and global shipping. It seems important, but I’ve struggled to find a clear explanation of the concept. What is a block chain, and what makes it so important?
In: Technology
depends on the implementation. when it comes to bitcoin it’s essentially an immutable ledger that records every transaction that has ever happened in the currency. bitcoin is the first and most successful implementation of a blockchain.
as for areas outside of cryptocurrency we have yet to see a successful implementation of it. there’s been a lot of hype but little substance.
So imagine you’re keeping track of transactions in a ledger. (Book of transactions)
Everyone else is also keeping this list of transactions in the same ledger.
Let’s say you have $5 and give that money to someone else.
You write in the ledger:
Me -$5 someone else: +$5
Then you each send that transaction to other people keeping the ledger so they can update theirs.
This is kind of part 1 and part 2 is what really makes it the “blockchain”.
The problem comes with verifying how much money any person has.
If I send you $5 and then send another person that same $5 what do people write down on their transaction ledger? Obviously the first one goes first.
So what happens is every once in a while a block is “written” and all the transactions in that block are sort of locked in.
Any disagreement between people keeping ledgers is solved by consensus. The most common transaction list is the truth.
So a transaction is written on the ledger, sent to other ledgers, and then made complete the next time a block is written.
It just means that the state of a system is determined by a shared, public ledger.
Each person who wants to be involved in the system has their own ledger which they make publicly available. When someone wants to make a transaction using the system they have to send a record of that transaction to every single other person using the system. Those people check their ledgers to see if the transaction is valid. If it is, then they update their ledger to account for the new transaction.
Most blockchain systems have a mechanism by which compliance with the public ledger can be forced. Bitcoin, for example, has a mechanism by which someone who controls 51% or more of the available ledgers can force their ledger on the other 49%. If the owners of the 49% disagree they can technically break away and form their own, separate ledger but this requires a huge amount of work on their part.
You’ll probably be disappointed with the “why this is important” answer – its not. There were a few people who made tremendous sums of money by being early adopters of bitcoin. That caused a huge influx of people who were buying bitcoins without really understanding what they were simply because those people wanted to also make money. The one thing they understood about bitcoins was that it involved a “blockchain” and the term became a buzzword in the financial industry.
The entire point of a buzzword is that the people you’re using it with don’t understand what it actually means, they just associate it with something good and so the use of a buzzword is a sort of intellectual shortcut that allows you to say “this is a good thing” without really explaining what that thing actually is. But there isn’t anything new or interesting about a shared public ledger, the concept dates back hundreds of years.
The term itself has even fallen out of favor in much of the financial industry due to its meaninglessness, and the primary people who are left pushing “blockchains” are pyramid schemes and other crypto scams that try to use the term to trick their victims into thinking that whatever they’re pushing is legitimate.
If you’ve just encountered this term from someone trying to tell you how you can use it to earn a passive income – or in any way make money – then whatever they’re pushing is a scam.
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