From a ‘castle’ full of bitcoin millionaires to the initial coin offering (ICO) craze, it’s hard to escape the chatter about how some people are building their fortunes off the new world of cryptocurrencies. But behind those cryptocurrencies sits a technology called blockchains, which some people believe could fundamentally rewrite how transactions are handled online.
With analysts at UBS estimating that blockchains could be a $300 billion to $400 billion global industry by 2027, it’s clear that regardless of what happens in the bitcoin bubble, blockchain technology is here to stay.
Here’s what you need to know about blockchains, the technology that’s set to disrupt the world of contracts, finance, shipping and countless other industries.
BLOCKCHAINS ARE DIGITAL LEDGERS
Simply put, a blockchain is a digital ledger. Each unit of the ledger is a “block,” and these blocks are linked in order of when they are created. The blocks are linked together using cryptography, which binds them together in a way that is virtually un-editable.
Inside every block is a complete history of everything that has ever happened on that chain, as well as the rules that all of the blocks follow.
HINK OF A BLOCKCHAIN AS AN EVER EVOLVING MUSIC PLAYLIST
Imagine that you start a new playlist on Spotify. Every time you add a song, you create a new version of the playlist, or a new “block” in the chain. The new block contains your newly added songs and the previous songs.
If your cousin decides to add some country music songs onto the playlist, she creates the next block in the chain. If that block is approved by all participants, a new block gets added to the chain and becomes the new version of your playlist. If your cousin also decides to delete one of your songs from the playlist, the next version of the playlist would contain a note that the song was previously on the list, but has been deleted.
THEY ARE MOST USEFUL IN SITUATIONS WHERE YOU NEED A TRUSTWORTHY SYSTEM OF RECORD
Blockchains are good for two things: recording events, and making sure that record is never erased.
This makes them particularly useful in situations where two people want to make a deal but don’t trust one another.
Some think blockchains could put an end to fraudulent deals, such as the Ponzi scheme that led to famed investor Bernie Madoff’s demise around 2009.
BLOCKCHAINS COULD EVENTUALLY REPLACE INSTITUTIONS LIKE BANKS AND LAW FIRMS
As a society, we’ve developed institutions, like law firms and banks, to handle the exchange of property and money.
But many of these exchanges can also be achieved using blockchain technology as a smart contract — or a self-executing contract. Smart contracts use rules to require that one thing happens in order to get a desired outcome.
If Person A is leasing an apartment, for example, the smart contract could require that Person B transfer $1,000 to Person A in exchange for the apartment door code.
Blockchains eliminate the risk of having a middleman who defrauds someone on either side of the transaction or who takes the money and runs.
BITCOIN, THE FIRST BLOCKCHAIN EVER, WAS CREATED IN 2009 TO DO JUST THAT
Bitcoin — the uber popular cryptocurrency whose price soared above $8,000 a pop this month — was the first blockchain ever created.
Bitcoin was created in 2009, following the instructions set out in a white paper written by a mysterious figure known as Satoshi Nakamoto, whose true identity is still unknown.
The original idea was to create an electronic form of cash that could be sent “peer-to-peer” without going through a bank — an objective which was inspired by the banking crisis during the 2007-2008 recession.