I am passionate about the recent advancement in blockchain technologies. However, with massive hype comes misunderstanding. I’ll cover a few of the basics about blockchains, cryptocurrencies, and their potential impact. This article is by no means a comprehensive summary. Instead, it’s a starting point.

What is a Blockchain?

A series of structured transactions, which together store an immutable record. Let’s unpack this. As the name implies, a blockchain is a string of entries, tied together with a distinct link to the previous and future transactions. Thus, if one transaction is changed, all other transactions will be changed. This makes records immutable. There are various types of blockchains. The most popular and recognizable is Bitcoin

What is Bitcoin?

Bitcoin is a decentralized, permissionless, public blockchain. Again, a few loaded words here.

Decentralized: No central entity owns the record. It is maintained by a dispersion of nodes (computers), that are incentivized to maintain the network through a cleaver “mining” scheme.

Permissionless: No entity can control who can participate in the network. If you have even a fraction of a Bitcoin, you can transact (and thus write) on the Bitcoin blockchain. This is important in the potential applications (think censorship).

Public: Anyone can view the complete Bitcoin blockchain and all of its transactions. You can look up specific addresses and view his or her transactions and balances. [The famous “10K Bitcoins for a pizza” transaction can be found here]. It’s important to note that while you can’t view someone’s identity through the address alone, once the owner is known, you can follow every single transaction to and from that account.

Bitcoin was created in 2008 by a mysterious figure. The original framework was published in a whitepaper. It’s technical but is the foundation the blockchain technology. Also, this website gives you a technical demo of a blockchain.

The significant innovation of a decentralized, permissionless, public blockchain technology is the ability for two mutually mistrusting parties to transact without a trusted third party. Untrusted parties can reach an agreement on a collective digital record.

Mutually mistrusting entities?

You’re probably thinking, what situations have mutually mistrusting entities? Glad you asked. A lot. A simple digital payment is a great example:

Alice (using Bank A) wants to digitally send $100 to Bob (using Bank B). Currently, each must first trust their bank, which is typically OK in the U.S., but may not be in corrupt countries. Remember, Bank A has the sole control of Alice’s balance on its records.

First, Bank A must check for sufficient funds in Alice’s account. Then, Bank A sends a transaction to a central bank (trusted third party), which aggregates many, many payments between banks. The central bank, controlled by the government, will settle all transfers to and from Bank B at once. Bank B will then add $100 Bob’s account. This is a simplified example, but already there are three separate institutions Alice and Bob must trust. In the U.S., the whole process takes three days. 72 hours.

International payment include an even more complex and cumbersome system.

With Bitcoin, Alice can send a transaction to Bob through the computers (“miners”) maintaining the Bitcoin blockchain network , which verifies Alice’s Bitcoin balance (because all records are public) and her authority to transfer Bitcoins from her address. Once verified, the miners cement the transaction through “mining” a block. You don’t need to know or trust any of the miners, but the network can process and record the transaction in a public ledger. This all happens in just ten minutes. Many other blockchains boast transaction times in the order of a few seconds.

Essentially, a blockchain is a database or ledger. Using the proper incentives, you can create a permissionless and public ledger.

So, blockchain for everything?

Blockchains won’t solve all problems. Remember, a blockchain is just a database or list of transactions. Oracle has been in the database business for over 40 years. Oracle’s traditional databases are usually maintained by a central entity (i.e., Bank A) or a group of trusted user.

The innovation of blockchain removes the trusted third party and allows for an open network in which participants are unknown. A recent paper concisely sums up when a blockchain makes sense in the following flowchart:

A few definitions: “state” means records, “writers” means parties which can create records (i.e., transactions), and “TTP” means trusted third party.

As you can see, there are very specific use cases for blockchains. We are likely still in the early hype days.

Potential Impacts

The units of exchange on individual blockchains are called cryptocurrencies. There are over 1,500 different cryptocurrencies. Each is trying to address a unique problem. Each could (and likely will) warrant their own post. A few applications:

Decentralized applications (dApps): Ethereum has built a platform for developers to write code that executes automatically, called smart contracts (ERC20 tokens). A practical example is replacing an escrow agent in the sale of a house: the seller delivers a digital deed (proof of ownership), and the buyer delivers a digital currency; once both requirements are satisfied, the transfer automatically occurs.

Decentralized exchanges: 0x is building a platform for peer-to-peer exchanges which directly matches buyers and sellers, eliminating the need exchanges.

Tokenization (digital ownership of physical goods): Take physical record of physical goods (i.e., the paper title to your car) and represent ownership through a public ledger (blockchain). Tokenization brings transparency, speed, and accessibility to physical goods. I’m very excited about the prospects here. We only recently stopped accounting for ownership of $1B+ private companies with paper certificates.

Compliance: Each country has specific complex financial regulations. Harbor is building a protocol to ensure all participants are within the laws (i.e., anti-money laundering, tax laws, and Know Your Customer).

Store of value: Nearly every fiat currency has some deflationary characteristic, which is controlled by a central government or group of governments. This means your $1.00 today is only worth $0.98 next year, and even less every subsequent year. Certain cryptocurrencies, including Bitcoin, have a fixed supply. This means an entity can’t just make more Bitcoins and thus devalue yours. Again, difficult to fully understand from the U.S., but the people of Venezuela understand.

Bottom line: If you’re in the “trusted third party” business, find another business.

Future posts on the topic: Why invest in cryptocurrencies, how to invest in cryptocurrencies, the tokenization of everything, and specific project reviews.

Thank you for reading!