Surely the first thing that pops up in your mind when you hear about blockchain is Bitcoin but what if I told you that blockchain is to Bitcoin what metal is to a bridge. Metal brings stability to any modern bridge; so it happens with blockchain and digital currencies. To understand the extent of the aforementioned statement let us examine how blockchain enables cryptocurrencies and other digital financial solutions to exist.
An immutable book. Imagine for a second that you decide to start a financial business dedicated to offering personal loans. One big concern that might get your — and your client’s — attention is how to establish a trust framework. What if there was an unchangeable book in which you and your client can write every detail about your commercial endeavors? We have just touched the very reason of blockchain’s existence.
Cryptocurrencies. Perhaps at this moment, you are wondering how blockchain powers digital currencies… to seize that, let us take Bitcoin as a study case. Bitcoin — like any other digital asset — lacks a physical form that can be stored. Furthermost, no file represents it either. Being said that, how can you claim the possession of it? The name “blockchain” underlines the answer.
Blockchain. This neologism refers to a sequence of digital blocks. Each of them is a box packed with transactions along with a reference to the previous block. Most digital currencies benefit from this since it allows them to keep track of the coin’s possession without the need for any representation of the asset, other than the history of transactions stored in the chain of blocks.
it is time for an illustration. Let us fashion a new digital currency called My Virtual Currency ( MVC) with 4 initial accounts, each with a balance of 3 MVC.
What is the balance of each account after these 3 blocks are added successfully to the blockchain?
A1 = 3 MVC — 1 MVC +2 MVC + 1 MVC = 5 MVC
A2 = 3 MVC -1 MVC = 2 MVC
A3 = 3 MVC = 3 MVC
A4 = 3 MVC + 1 MVC + 1 MVC- 2 MVC — 1 MVC = 2 MVC
A distributed ledger. The power of blockchain resides on the network that runs underneath. It consists of a group of distributed nodes, each of them holds a copy of the ledger, along with a hash representing its content, and modifications to the content are not allowed.
Almost perfect… but not quite. Blockchain is secure but it is not unbreakable. There are multiple ways in which a hacker can hijack into the system, being the most lethal one the infamous “51%” attack. This attack requires the attacker to control the majority of the nodes. Once in possession of such power, the intruder can manipulate the system at will.
Let us now put all the pieces together. The blockchain serves to Bitcoin -and other digital solutions- as a source of truth due to its immutable nature powered by a distributed network. It is not a perfect system — in terms of security — but it is secure enough to be disrupting the finance world. In the upcoming years, a vast variety of blockchain-based solutions will emerge. Blockchain is here to stay, no doubt about it.
