This blog will be the beginning of a series to frame the inner workings of Blockchains and how they are evolving in modern society.
Let us begin with this question, “What is a Blockchain”. A Blockchain is a continuous record of individual transactions or “Blocks”. We might look at a Block as a receipt. When you make a purchase at a store, you are given a receipt for that purchase. When you think about it, that receipt is a record of two things. First it records how much money escaped your pocket. Next, it is proof of how much money was placed into a stores cash register. It is a chore to consumers across the globe to store a receipt as proof of a purchase. Enter the Blockchain. A Blockchain can be viewed as a centralized collection of all receipts. By “all”, I mean all over the entire world. Like a global library whose purpose is to just store receipts. It would work similar to a consumer making a purchase and then mailing the receipt to one global address for storage. The store where the purchase was made would do the same. Thus, the receipt would be permanently archived in the library. The Blockchain works much like this. Each individual Block is a receipt of mutually agreed upon conditions and attached to the Blockchain in a decentralized environment, and stored there forever without the possibility of corruption.
Now that we have some idea of the algorithm behind it, “what use does it have?” It is good for virtual currencies. They do not exist physically. They have no intrinsic value. They are worthless, right? Not right. BitCoin to the rescue. BitCoin is a Blockchain monetization platform. What Bitcoin does is prove that it took a lot of work to generate the virtual currency (Bitcoin). Thus, value was created. “How so?” you might ask. Mining is a key part of it. Bitcoin mining is the process of computing hash sequences which have varied levels of difficulty. When the correct hash (code) is returned then a block is generated by Bitcoin and attached to the Blockchain with the total amount of Bitcoins awarded for returning that correct code. This process involves building specialized computers which consume a great deal of electricity. There is definitely work involved in generating each Bitcoin. What Bitcoin does is determine the “Total Amount” on the receipt which you will be mailing to the global library.
Now that there is value there can be trade. How can we trade? Let’s take the analogy from the beginning. You make a purchase at a store and are given a receipt (or block). You mail that receipt to the global library and are done. Let us continue further, the store has your cash. That store would like to use that cash to pay the employee working the register. On payday that employee will be given a receipt (or block) for their pay. Then the employee will mail it to the global library (Blockchain) which will check all receipts for that company and make sure there is a matching consumer receipt. If there are enough sales receipts to cover the employee wages then the library will archive the employee receipt. So, trade begins with the creation of a Block. Once both parties agree to mutual terms, the Block will be attached to the Blockchain and become a permanent record of that transaction.
No we have an economy based on Blockchains. There is no physical money. There is value. It is near impossible to hack or rob it. What could possibly go wrong? Well, to begin with Bitcoin was never designed to last forever. Bitcoin mining is the process of generating virtual currencies used for trade. However, the algorithm used to reward Bitcoin miners was designed to stop after a fixed number of Bitcoins are issued. In November of 2012 the Bitcoin algorithm awarded 50 Bitcoins for each Block generated. That award amount is diminished by half every 210,000 Blocks, or approximately every 4 years. On July 9, 2016 it was halved again and only awarded 25 Bitcoins for every Block generated. Currently, 12 Bitcoins are awarded for each Block mined. This halving will continue until the final one, which is the 64th halving, after which no more bitcoins will be awarded. The total number of Bitcoins to ever be produced will be 21 million and currently 78% of them have already been mined.
Then, are there enough Bitcoins to do something with them? After all of them have been mined, there will be about 53 billion US dollars’ worth in circulation. To put it in perspective there are 1,800 billionaires in the world. The total possible number of Bitcoins would only cover 53 of them. You can see why a lot of wealthy people really hate Bitcoin. Clearly Bitcoin was only designed to introduce virtual currency to the world and nothing more. This will be discussed in more detail in future blogs.
We now have a new type of currency with value that can be traded and used for payment, but its circulation level is fixed to accommodate only a small group of the global population. What was the point of it all? The point of Blockchain for Bitcoin was to introduce the concept, but the point now looks to be to extend it to infinity. Keep in mind that, the Blockchain is infinite, so we can attach an infinite number of Blocks to it. A Block is simply a record of a mutual agreement. That agreement could be a purchase in Bitcoins, a transfer of a car title, a calendar date for an appointment or anything else.
From the Blockchain perspective is makes no different what sort of agreement it is. This point is what is driving the next generation of block chain companies. Ethereum (www.ethereum.org ) is a scripting platform that supports Blockchain operations. It is a software platform which allows for mutual agreements to be recorded as Blocks and attached to the Blockchain. Can you see the potential? It could be a social network site with a built in payment system. It could be a real estate site which records purchase contracts. It is potentially a revolution in how online services are done. Tezos is a recent start-up to enter this space. Unlike many others which are more focused on using blocks for non-currency transactions, Tezos claims to actually have invented their own block chain algorithm and no doubt have virtual currencies in the works to support trade on their platform.
What is the future of the block chain? We can see that as a virtual currency platform it fell short. However, as an incorruptible record of mutually agreed upon terms between two parties, the block chain will be around for a very long time.