Blockchain demystified – What is Blockchain? (1/4).


Blockchain is one of the buzz words of 2016. By the financial industry, blockchain is seen as the future. It’s impact is compared to how internet has revolutionized the computer and global communications, like nothing before. Especially, financial parties seem to be investing in blockchain and the potential advantages this technology may offer to them. Undoubtedly many know what blockchain is all about. But probably even more don’t. This article is aimed at the latter. In order to help understand what this “buzz” is all about, blockchain is demystified in four consecutive parts:

Part 1. What is blockchain? 

Part 2. Transparency, Security and Governance.

Part 3. Thoughts around the regulatory environment on blockchain.

Part 4. Impact of blockchain on the financial sector.


2014-02-03 16.04.46 klein

By Norbert Braspenning

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Part 1. – What is blockchain?

The general context.

When you vote, have you ever wondered whether your ballot is actually counted? If you meet someone online, how do you know that they are who they say they are? When you buy coffee that’s labelled “fair trade”, what makes you so certain of its origin? To be sure, really sure, about any of those questions, you need a system where records can be stored, facts can be verified by anyone and security is guaranteed. That way, no one could cheat the system by editing records, because everyone using the system would be watching. Systems like this are on the horizon. The software that powers them is called a blockchain. Blockchains store information across the network of personal computers, making them not just decentralized but – so called – distributed. No central company or person owns the system. Yet everyone can use it and help run it. This is important because it means it’s difficult for any one person to take down the network or corrupt it. The people who run the system, use their computer to hold bundles of records, submitted by others – known as blocks  –  in a chronological chain. The blockchain uses a form of math called cryptography, to ensure that records can’t be counterfeited or changed by anyone else.

Back to basics. A rudimentary understanding of what a blockchain is.

Let’s illustrate this with a digital currency. How does a digital currency exist? How could “bits” sent over the internet, be somehow interpreted as money? Well, let’s take something we’re all very familiar with; an email. Envision an email that states that it represents one “email-money”. This then can be used to buy things that cost one email-money. Technically, if enough people would accept this and pass it around, it could serve as a primitive sort of digital currency. However, it wouldn’t be a very good one at that. The same email, sent to one person, can also be send to a second, third, fourth etcetera. All of a sudden, where we started out with just one email-money, we now have four. New email-money’s were simply created out of thin air, and this could technically be done unlimited. The money supply can be rapidly expanded in a completely unaccountable way. Hence unlimited unpredictable inflation. This is problematic. If any new monetary system is to be considered worthy, it needs to ensure that it isn’t – digitally – infinitely inflatable. To address this, every email that was sent, is tracked on a kind of ledger. This concept of a digital ledger makes up the entire foundation of digital currency – also called crypto currency. But the digital ledger and digital currency are two completely different things.

So why isn’t it then simply called “digital open ledger”?

This has to do with how the ledger works. The most important thing of this digital ledger – any ledger as a matter of fact – is that the numbers are trustworthy. Therefore ensuring that the monetary supply of email-money is open, honest, accountable and auditable. The answer lies in the fact that no one gets to actually change the ledger. Only update it. So each and every time we wish to change who owns what, we have to add an update – time stamped. Each update to the ledger is called a block and a cumulative result this is a chain. Hence blockchain.

Impact on transferring assets.

Modern technology (especially the internet) already allows people to communicate directly. Voice and video calls, emails, pictures and instant messages travel directly from A to B, maintaining trust between individuals, irrespective how far apart they are. When it comes to money, people have to trust a third-party (usually  bank) to be able to complete transaction. Blockchain technology is challenging the status quo in a radical way. By using math and cryptography, blockchain provides an open decentralized database of any transaction involving anything of value (money, goods, property etcetera) whereby the entire community can verify record authenticity.

Bitcoin ≠ Blockchain

Bitcoin = digital coin

Blockchain = technology that enables movement of assets (like Bitcoins)

With blockchain’s first form of digital cash – Bitcoin – you can send money to anyone, even a complete stranger. Bitcoin is different from credit cards, PayPal or other ways to send money, because there isn’t a bank or financial intermediate (so called trusted third-party) involved. Instead people from all over the world help move the digital money, by validating other’s Bitcoin transactions with their personal computers, earning a small fee in the process. Bitcoin (the digital coin) uses the blockchain (the technology) by tracking records of ownership over this digital cash, so only one person can be the owner at a time and a cash can’t be spent twice (like counterfeit money in the physical world can).

Conceptually, replacing the trusted third-party with the digital open ledger brings advantages. i) counterparties “communicate” directly with each other, ii) funds get transferred immediately, iii) much cheaper or even without any deduction of fees.

The future.

Bitcoin is just the beginning for Blockchains. The future global economy will move towards one of distributed property and trust where anyone with access to the internet can get involved in blockchain based transactions of any sort (not just digital coins). Third-party trust organizations may no longer be necessary. The uses of blockchain technology are endless. Some expected that in less than 10 years it will be used to collect taxes, it will make it easier for immigrants to send money back to countries where access to financial institutions is limited. Financial fraud will be significantly reduced, as every transaction will be recorded on the public and distributed ledger. This ledger would be accessible to anyone with an internet connection. Think of it as wills and contracts that execute themselves, or dated approval existence for ideas, much like a patent.

In the future Blockchains that manage and verify online data, could enable us to launch companies that are entirely run by algorithms, making self-driving car safer, help us protect her online identities and even track the billions of devices on the Internet of things. These innovations will change our lives forever and it’s all just beginning.

Blockchain will have a profound change in how the world works.

Blockchain will become a global decentralized source of trust and efficiency in the exchange of anything. But not everyone is ready to embrace it. A huge proportion of trust services, from banking to notaries, will face challenges on price, volume, and in some cases their very survival. Public authorities could find it more and more difficult to enforce traditional financial regulations due to the new possibilities offered by digital currencies (like the Bitcoin network) to bypass traditional financial intermediaries. Unimagined new networks will evolve to meet society’s needs more cheaply and potentially more securely. Will governments, financial and legal institutions embrace blockchain? What will happen to the ones who don’t?

Coming up in the next posts:

Part 2. Transparency, Security and Governance.

Part 3. Thoughts around the regulatory environment on blockchain.

Part 4. Impact of blockchain on the financial sector.

Visit the blog-page for this and more articles (click here).

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