Blockchain – A continuously growing list of transactions (blocks) all of which are recorded and used to prove every transaction in the chain.
Decentralized Network of Nodes
Cryptocurrencies are based on a peer-to-peer (p2p) network. This refers to the method of transactions between actors using the network. There is no centralized hub. Instead, every computer, or node, is an equal player in the transactions happening. When a singular node wants to send information to another node in the system, it does so on the blockchain.
Traditional money transfer services, like bank transfers and Venmo, incorporate a centralized node network. This entrusts a single entity, usually a bank, to record every transaction taking place.
Blockchain technology allows for secure and trustworthy transactions to take place without the need for an authority recording every transaction. Individuals can communicate directly to one another– there is no middleman.
What is a Ledger?
Let’s look at how your bank account works as an example of what a ledger is.
When you log on to your bank account, you are accessing your personal ledger. On this ledger is stored all of your information surrounding your banking transactions, every withdrawal, and deposit.
You trust your bank to keep this information accurate.
Your information is kept on internal servers, owned by the bank, and kept secure from nefarious actors. Your bank knows how much money it holds based on the total transactions of its membership. Your bank can create debit cards and credit cards based on your account information. When you access an ATM to withdraw cash or you make a purchase, that transaction is recorded on your personal bank account and stored on the bank’s ledger.
The Downsides of Using a Centralized Ledger
The benefits of having a bank account are obvious. It’s easy to use, quick to withdraw money, and your employer most likely provides direct deposit. When using fiat currency, there really isn’t a better option. This does not make centralized ledgers infallible.
Reduction of financial autonomy.
All of your money is stored in the bank. This forces you to access the bank whenever you want cash. If you wanted to withdraw all of your money, you probably wouldn’t be able to. Your local branch most likely does not have enough cash on hand to cover your demand. This begs the question, is it really your money?
Another example of centralized banking headaches is the dreaded bank transfer. Sometimes, a simple money transfer can take upwards of a week. And what if a banking holiday occurs during the process?
If you truly had control over your money, you would be able to move it wherever and whenever you wanted. If you had true liberation, there would be no need to wait for arduous amounts of time to pass.
When all of your money is stored on a bank’s ledger, it allows access to your private information for anyone who has access to the bank’s internal information.
The most likely culprit to want your bank information?
Not only can the federal government request access to your personal ledger, but they can actually manipulate it. The IRS can make withdrawals from your account without your knowledge. They can freeze your bank account and prevent you from gaining access to the funds that you thought were yours.
Centralized ledgers make monetary transactions simple but at the cost of your financial liberty. Entrusting an organization with your monetary details puts you at risk of exploitation, whether it be from banking fees, lack of control, or government involvement.
Blockchain Provides a Distributed Ledger
Every transaction made in the blockchain is stored on every participant’s ledger. Instead of having a central authority keep track of transactions, every person involved with the blockchain is holding onto a copy of every transaction ever made. This is referred to as a distributed ledger.
This allows for transactions between two parties, even if they don’t trust each other. It also creates more efficient transactions because there is no bottleneck, i.e. centralized authority.
When using blockchain, you are your own bank. Nobody can prevent you from accepting transfers. You can use a wallet to store your cryptocurrency information and never need to entrust a bank with it. Even the government cannot freeze your ability to use the blockchain.
If the government wanted to stop the blockchain from operating, they would need to shut down the entire system, something that would require the complete disconnection of the internet. Even then, it is possible to store value on paper wallets.
Every node on the blockchain is simultaneously updating their own ledger and everyone else’s. This creates a system of transparency and trust. Depending on the blockchain, every user’s identity could also be anonymous. It all depends on the network you decide to use!
Blockchain Creates a P2P Network Independent of Authority
When someone makes the claim that cryptocurrency is the future, it is because of the underlying technology that is blockchain. The popularity of computers has exploded– think smartphones. Every person on the planet can use blockchain to transfer information and value to anyone else. This is all done without being bogged down by banks or governments.
It is not so much a disruptive technology as it is an alternative to the current monetary system. Decentralized methods of communication make for faster, more convenient, and more secure transactions. Cryptocurrency is only the first application that has incorporated blockchain technology. The potential that lies ahead is virtually unlimited.