Blockchain

Innovation through cryptocurrencies

Bitcoin and the blockchain – an introduction


Previously I mentioned that there may soon be a new medium of exchange which could one day be a ‘good’ form of money.  This money is what is has been named ‘cryptocurrency’ – a result of combining the internet, cryptography and currency. No doubt the first cryptocurrency to spring everyone’s mind is of course is – Bitcoin.


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Bitcoin (launched 2009) was the first cryptocurrency, built upon a decentralised blockchain. In essence, a ‘blockchain’ is simply a ‘spreadsheet’.  However, unlike a spreadsheet which is open and running on a single computer, this spreadsheet is run on computers all over the world – simultaneously, with no single point of failure.

Each Bitcoin (or part thereof) represents a unit of currency on the spreadsheet and each Bitcoin account represents a cell.

Only those who hold the password (private key) to an account are able to transfer Bitcoin from this account to others. This means that so long as an account owner keeps their private key safe, their Bitcoin will not leave their account. However, others may send Bitcoin to the first owner’s account if they know the account address (the public key).

Blockchain can be trustless, to the extent that responsibility for operating and maintaining the blockchain can be spread across multiple third parties, across multiple jurisdictions and can be kept outside the boundaries of any one government, regulator or bank.

Transactions are near instantaneous, are borderless and permanent. Compare this to the transfer of monies to foreign bank accounts which can take many days to complete the transactions. Bitcoin and other cryptocurrencies make transfers happen in minutes and with some, mere seconds.

Once a transaction has been made, it becomes forever written upon a single block within the blockchain. Each block is compressed, encrypted and verified by the miners or block producers. The ending ‘hash’ of one block then becomes the ‘header’ of the next, thereby forming the chain.  And the more blocks in the chain, the more difficult it becomes to alter earlier transactions.

Bitcoin itself is now the most powerful computer network on Earth and it is virtually impossible for any one organisation to hack and fraudulently alter transactions.


We are still in the very early stages of cryptocurrency, however blockchains are evolving rapidly. Bitcoin itself, whilst the most commonly used blockchain is only capable of a maximum 10-12 transactions per second. This is nowhere near quick enough to be a mainstream transaction platform – at least not in its current state. Visa for instance, processes thousands of transactions a second.

In addition to transaction limitations, Bitcoin also requires enormous quantities of electricity to maintain the blockchain.  The servers (called ‘miners’) which are running the Bitcoin blockchain, are said to be collectively using enough electricity to power a small country. Unless Bitcoin can overcome this inefficiency, its future again looks limited.

As I have said in the opening – Bitcoin was just the very beginning of blockchain and cryptocurrency – the 1st generation. The technological advancement of blockchain over the past 5 years though has been remarkable.

In upcoming posts we will discuss 2nd and 3rd generation blockchain technology. We will also examine cryptocurrency with respect to the 8 characteristics of ‘good money’. All part of your…

Financial Awakening!

GOLDSMITH


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