On a typical day in October of 2008, a white paper entitled “Bitcoin: A Peer-to-Peer Electronic Cash System” was published by a person or a group under the name of Satoshi Nakamoto. Little did we know that that white paper described a system that would go on to become the backbone of some of the most disrupting new tech since the Internet itself.
What was in that white paper?
The white paper described the first peer-to-peer decentralized monetary system and the technology behind it. Seemingly, Nakamoto was not happy with the current state of our financial system. The financial crises of 2008 showed just how ineffective the traditional model was and Nakamoto wanted to create a system where a trusted third party was not required to carry out a transaction. So he did. It was called Bitcoin.
So what exactly is Bitcoin and how does it work?
The best way to understand what Bitcoin is to think of it as an internet currency which isn’t owned by anyone. It isn’t too different from traditional currencies, but it does do a few things differently. The two main differences are:
- Unlike traditional currency, there is no central authority controlling the transactions. No intermediary means lower or no fees.
- The transactions are done anonymously. Bitcoin uses cryptography to encrypt every single transaction.
What is Blockchain?
Blockchain is the technology that powers Bitcoin. But it’s so much more than just that.
Blockchain, to a lot of people, is a complicated subject, borderline overwhelming. Simply put, it’s a distributed ledger (maintained by a group of people) where a record of transactions are made and kept in an encrypted format. It’s a ledger, that’s it. Okay, that may be oversimplifying it a bit too much but that’s the gist of it.
Bitcoin is the most popular application of blockchain, there is no doubt about that. But it’s certainly not the only place where blockchain is being used.
Why is it such a big deal?
Blockchain took the world by storm because of the sheer number of new possibilities it opened up. A decentralized peer-to-peer (which is what blockchain is) isn’t something new but the real-world applications of such a technology and their feasibility was never really tested at a large mainstream platform before (until Bitcoin, of course).
It can be hard to visualize the true potential of blockchain is but think of it like this – could the person who invented the wheel ever imagine the number of lives his invention would impact?
Current State of the Internet
Our current model of internet works on the principle of sharing multiple copies of the same data with different users on a network. You join a network like Twitter to share your copy of a picture with hundreds or even thousands of others. Each person gets access to a copy of your data. This idea expands to everything on the Internet. From emails, videos on YouTube, or any other data for that matter.
The problem with this model is that it’s limited in the number of things it can do. You can share data like photos, videos, etc. and not have a problem with other having a copy of it but what about when it comes to real-world assets with real monetary value?
For instance, you pay someone $10 in cash, the person takes the money and you no longer have the $10 note. But on the Internet, unless you have a middleman or some verification system in place, you can pay someone $10 in digital cash and still have the original $10 because, with our current model of the Internet, we are just sharing copies of data. This is known as the problem of double spending. Blockchain aims to fix this problem while at the same time removing the need for middlemen.
Blockchain and the Problem of Double Spending
The problem of double spending simply refers to the problem of having two copies of something that should be unique. Think a house or car or any real-world asset – you wouldn’t want the other person to continue owning the house you just paid for, right?
Blockchain solves the problem of double spending using cryptography. It creates a unique ID for every transaction which is verified by a group of people called miners. A transaction is only validated once everyone in the group solves a puzzle and if the transaction is legit, they will all get the same answer to the puzzle and at which point, the transaction is noted in the ledger. Once noted, no changes can be made and thus, there can only be one copy of every transaction.
The Next Generation of the Internet
Blockchain technology has been called the next generation of the Internet by a lot of experts and with good reason. Double spending was one of the major problems hurdles in the development of digital currency and one day in 2008, it wasn’t a problem anymore. People could now transfer money, trade securities, buy and sell assets, and so much more using digital currency without an intermediary. But the most important thing in all of this was the safety and convenience you would get by using digital currency.
I do not have any investments in bitcoin or any digital currency. In fact, I think investing in cryptocurrency is too stressful of an activity for me but I do think it’s an exciting and important new prospect that isn’t understood by the majority of the people very well. I plan on talking more about other applications of blockchain that make it so interesting and versatile.
Incorporating blockchain into the mainstream Internet is the next step. Our data needs (in the fields of medical, finance, tech, etc.) are changing rapidly which calls for an evolution of the Internet – to make it better suited for this new world.
Blockchain takes the Internet and makes it a platform that can do things that just weren’t possible before. It’s similar to what happened to the Internet back in 1993 when it was first opened to the public.
Yes, the technology has its limitations right now, but so did the Internet back in 1993.
Limitations can be overcome, that’s the very idea that created blockchain.