Hello, This is the first post, of the series, which will explain in simple language with easy-to-relate examples, the many potential application, shortcomings and current state of the art of the blockchain and cryptocurrency technologies especially in Indian context.
Good information about these is already out there but most of it is written by very knowledgeable people, but in a very precise and technical manner which may be difficult for non-technical people to grasp. Then there is an marginally-more-understandable mixture of facts-fiction-speculation out there spread by people who know little of the technologies but try to impress by packing a lot of jargon and end up misinforming readers. And finally, there is the Media, which thrive on the controversies and loud statements issued by politicians, intellectuals and other bigwigs who either proclaim these technologies as the silver bullet to end all-problems-known-to-mankind or denounce them as largest fraud of the century.
Realistically speaking, you do not need to be an economist or an accountant or an engineer to understand the blockchain/cryptocurrency technologies out there . Hope you will find this blog a good way to venture forth towards the exciting possibilities in world of blockchain!
Lets Begin with Basics
Blockchain is a very broad term, used to describe a range of technological implementations, which in simple words is essentially:
A shared-record-book that is maintained by an online group of computers (and people owning these computers) spread across the world. The most obvious use case of of the blockchain technologies are Cryptocurrencies which could serve as an alternative to the paper/coin money that we use today. And then there are lots of new, yet- unexplored possible applications of using this shared-record-book systems such as decentralized organizations, smart-contracts, tokens and many more.
Now you will wonder, what could be so new or great or exciting about a record-book that is stored online? What is so special about these cryptocurrencies that people are willing to exchange their hard earned money into some thing that may or may not be of any value in the long term? To answer these question in detail, you need to have an overview the history of money and the structure of current monetary systems. These topics are too broad to explain in this blog so I’ll try to explain in short with a recent example.
You must remember the evening of 8th November 2016 when suddenly the PM announced that the then-used 500 and 1000 Rs notes in circulation are to be phased out and replaced by newer 500 and 2000 Rs notes. The days and months that followed are also not easy to forget: the uncertainty, the long queue outside ATM and banks, the attacks and counter-attacks between political parties broadcasted on media. Without getting sidetracked by commenting on the motivation or logic or methodology or execution of the decision, I want you to focus on the core issue that was highlighted by the events:
The money that you have in your pockets and bank accounts is controlled by the government, which may be either printed/minted pieces of paper/metal or in case of money in a bank account, it is represented in books or computer databases. Group of few select people can make such decisions that can diminish or totally destroy your life saving.
Countries like America, Japan and EU are manipulating the supply of money continuously to maintain their economic stability. Their seemingly stable leadership is in a very precarious state. Economies of smaller countries have been ruined by inflation due to wars, unstable governments, incompetence of the people who make money-policy decision. In short, value of the money that you have, can be and is being, manipulated in ways that are subtle and , in some situations, not-so-subtle.
How do Blockchain and Cryptocurrencies come into picture?
All databases and records of companies, banks and governments, having a lot of sensitive information are susceptible to tampering either by authorized internal persons with vested interest or by external persons such as hackers without any trace.
However, the shared-record-book nature of the blockchain, which follows strict machine-implemented code to prevent historical tampering and new transaction which are validated and updated by large number of computers across the globe, makes tampering with the records in an undetectable/irreversible manner very difficult. Main feature of “irrefutably” recording information and transactions (including money-transfers) are due to cryptographic methods that are used during validation step.
Other than irrefutability, there are many other possible alternate features relating to anonymity, privacy, transparency, tracability etc. that shared-record-books can choose to have depending on the application of the particular blockchain.
Each blockchain such as Bitcoin blockchain, Ethereum blockchain and many others, are independent record-book systems with their own set of internal rules, incentives for participation and tokens for exchanging information and values. The rules of these blockchains as well as most details are generally visible to all and generally everyone can make use of the blockchain as well as ,optionally, participate in maintaining the network of shared-record-book by running a programs on their computer to earn the incentive offered by the particular network . Decisions regarding network-related issues in public blockchains are taken and implemented by cooperation between all people who maintain the network, not by select group of people.
Given that the internet, database systems, cryptography and related technologies has been available to public for more than 30 years now, the blockchain or cryptocurrencies are not new technologies but they are something new made using existing technology in a very unusual way to give rise to “decentralised” economy where people and entities can participate without interference from any single company or government.
Oh Wow, I want to join too, Where do I sign up?
Hold on, hold on. The details of how to get started are reserved for the next post. There are a few more things you need to know about the blockchain and cryptocurrencies to use them in a safe manner before you hop on to the bandwagon.
Storing and maintaining records of information and money transaction in a network of shared-record-books is lot more inefficient than storing all information in one server. Although reading from the shared-record-book is free, a small transaction fee has to be paid for storing information. Illustrating the reason for the fee with an example, compared to the free services given by Facebook where you can store unlimited photos, links, likes, pokes and posts and whatnot for free, it is very important that people do not flood the already inefficient blockchains with useless records. This transaction fee also gives additional incentive for the people who contribute their computing equipment to validate transaction and maintain the shared-record-books.
This transaction fee has to be paid usually in form of the particular cryptocurrency used by the network. So you need to have a “wallet” or an account and then have some cryptocurrency in it if you want to record information and transactions. The account is protected by a very long software generated number called a private key which has to be guarded very strongly. It is NOT an ordinary password that can be changed or recovered. If the number gets lost the cryptocurrencies in that account are lost forever without chance of recovery. If someone else gets that number, they can empty the account without any secondary challenge like OTP or create records or transactions using your account.
Other than the cryptocurrencies, the applications running on blockchain can give away for free or sell tokens that can be used later for some purpose. You should keep in mind that value of any particular cryptocurrency or token of a blockchain network is based on supply and demand. Price of these can fluctuate very largely in a short duration. Over time it is possible that a token or currency fall out of popularity same way websites fall out of fashion like Orkut, MySpace etc. All the tokens and cryptocurrencies can potentially become valueless (the same way the likes you get on any FB post is valueless). So you have to do adequate research on the cryptocurrency or token that you’re buying and understand the risks and benefits of investing in it.
Another point to note is that on Bitcoin blockchain, the rate at which block of transactions are entered on to the shared-record-book is fixed at 10 mins, so you must expect a delay of 20 mins after you have broadcast your transaction. Also, if feasible, you may want to wait for 60 mins or so, after which you can be assured that the transaction is surely registered on the blockchain. This wait time is set differently in different blockchains, which can be checked online.
Well this is a nice medium-sized summary covering all the basic points. I hope you find this post useful. I’ll post later all the useful and interesting things that are possible due to implementation of blockchain technology and how they can improve or change some of the systems we have used till now.
Please leave your feedback comments etc. Please watch this blog for new posts on blockchain and cryptocurrencies.