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What is Blockchain? Top 5 Things You Need to Know.
Lately, I’ve had many conversations with friends who are extremely interested and eager to learn more about blockchain.
Most are old friends whose employers are investigating blockchain for enterprise apps. Some are intrigued by the massive swings in bitcoin prices. Yet others have heard about world changing innovations using blockchain applications, such as tracking refugees.
I have been investigating blockchain and distributed ledgers since 2017, performing a variety of functions which include:
- Providing legal review and examining the code for an enterprise project based on making a Microsoft Active Directory built on Hyperledger
- Serving as general counsel for a distributed ledger technology company
- Performing intellectual property (IP) review for a cryptocurrency
- Writing an Ethereum based track and trace demo for a national consortium
As an early adopter, I picked up quite a few scars during my learning process. Since my friends are smarter than me, they thought it better to learn from my mistakes rather than repeat them.
Based on my conversations, these are the most common concepts that arise when defining blockchain.
Top 5 things Blockchain newbies should know:
1. Consensus is the goal.
A blockchain is just a computer data structure. It is one of many instances of a more generalized concept called a distributed ledger. It is indeed a data structure with remarkable attributes, but if we remember that a blockchain’s abilities derive from computer science then we can inoculate ourselves from the hype.
The notion of distributed ledgers comes from the computer science notion of “consensus.” Consensus is the idea that a predetermined set of data on Computer A could be guaranteed to be the same—or consistent with—another predetermined set of data on Computer B.
Computer A would know its own directory structure and contents, as well as that of Computer B. To achieve consensus, changes on one computer would propagate to the other.
Consensus is the heart of distributed systems. To achieve it without having a centralized data store is what makes distributed ledgers “decentralized.”
2. Cryptocurrency is not a blockchain.
A cryptocurrency is an application of the blockchain; it is not a blockchain itself.
The confusion about cryptocurrency and blockchain being one in the same may be because many people’s first exposure to blockchain is from learning about Bitcoin.
Perhaps the confusion was amplified by Bitcoin founder Satoshi Nakamoto’s original paper, which explained how to use blockchain to create cryptocurrencies.
3. Public and private blockchains exist.
A blockchain can be public/permissionless (i.e., accessible to everyone regardless of credentials). It can also be private/permissioned (i.e., accessible only to those with acceptable credentials).
A side effect of confusing cryptocurrencies and blockchains is not realizing that blockchain applications do not need to be public. Cryptocurrencies are generally, but not always, public because they rely on the general public to verify transactions. The users are called validators.
Imagine that one computer records a payment. There is always going to be some latency in the other computers to achieve consensus. This means that someone could defraud the system by using the same cryptocurrency multiple times before the other computers catch up. This is similar to the crime of “kiting checks”—spending the same funds with multiple checks before the banks can post the transactions.
To address this issue, most cryptocurrencies have third-party computers validate transactions. They reward the validators with some cryptocurrency. In this way, a validator has a chance of taking a cut of a transaction. This is called mining cryptocurrency.
4. Mining cryptocurrency is completely unnecessary with a private blockchain.
Enterprises most often employ private blockchains. With private blockchains, you don’t have -- let alone need to pay -- third-party validators. Instead, you limit the set of users who can access the blockchain. Instead of paying third-party validators with cryptocurrency, users are bound by standard legal contracts such as employment agreements and agreements between companies to collaborate.
The threat of an old-fashioned lawsuit is the basis of trust instead of a small army of third-party validators.
5. Blockchain alone will not burn up the world.
Articles abound about how blockchain adoption will create a huge demand for electricity and burn up the world in the process. What those articles are referring to is where validators run server farms to validate transactions and profit from cryptocurrency mining. Those server farms take up a lot of electricity. Worse, there are usually multiple parties attempting to validate the same transaction.
This is clearly wasteful and is also disproportionate to the rate of return: consider the waste of validating the sale of a $1 pack of chewing gum with a large amount of energy consumption.
While use of server farms and energy consumption is an issue, it is not an issue because of blockchain. Private blockchains generally do not use cryptocurrency. However, there is an issue with public blockchains.
An earlier version of blockchain validation called proof-of-work indeed could have burned up the world, assuming energy costs did not make transactions prohibitively expensive for the validator. Recognizing this risk, there has begun a transition to a less energy consumptive version of validation called proof-of-stake.
Now that we’ve established what Blockchain is, let's discuss common misconceptions and the potential it has to impact complex global issues.
And here is a list of Blockchain terms we've covered in this article.
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