Blockchain 101

Think about Amazon as a book seller in the 1990’s. They were competing against the strong incumbents: Barnes & Noble, B. Dalton, Borders and Brentano. No one saw them as a true game changer as to how people would purchase books. They were more of a novelty and “could not” replace the experience of being in a store, browsing the bookshelves, physically touching and turning pages that were so much a part of the book buying experience. Amazon taught us that a new more efficient way was not only possible, but over time was preferred.

Little did we know that they would ultimately sell much more than books. Amazon focused on removing the middle-man from the process and by doing so to offer books at prices below the brick and mortar retailers. It took time, but Amazon has changed retail on a global scale, and we can now see the empty stores with for rent signs as the long-term outcome of people buying directly from the distributor without a middle-man became the norm vs the exception.

The internet changed so much about the way we live.

One of the things that did not change was how we paid for things. We ordered online and paid for our merchandise through banks via our credit cards. There was no way to pay for our orders directly to the merchant. We needed a middle-man to process the payment, a bank.

The internet did not have the capability to transfer money or value because it could not create a unique transaction that moved money from one person to another. As an example of the problem, when you send an email, both you and the person receiving the email have it. You both have the content of the email, and you can each share that content with any number of other people. That does not work in a world of money where we need to destroy the ownership of the money from the sender to ensure that the only person who now has the money is the merchant who sent you the goods.

In 2008, we experienced a banking crisis. Part of the issue in that environment was that our financial institutions were a part of every transaction, whether it was credit card purchases, mortgages, derivative financial assets created and issued by Wall Street, etc. Being a part of every transaction exposed both the everyday citizen and the business citizen to each other’s problems because we both used the middle-men that served both of us, the banks.

In 2008/2009 a research paper was published that introduced Bitcoin and its Blockchain. If you hear the name Satoshi Nakamoto, that is the name signed to the research paper. No one knows who this person is.

Satoshi had solved the riddle of money over the internet.

To better understand the underlying foundation to Satoshi’s solution, I want you to picture a Library of books. Each book sits on a shelf and is independent of the book next to it. Now imagine that each book is connected to the books on either side of it. This is a blockchain.

A Blockchain is an ever-expanding library with each new book connecting to the book next to it. Each book is called a Block, and each Book or Block contains its own story, its own unique collection of words or data, and that book or block remains connected to all of the other books or blocks by a protected pathway that is cryptographically encoded to prevent any alteration to the connection or to the content of each book or block.

Okay, so we can see that technology is creating a new form of a library, a library where everything is connected and because of that connection there is a reliance on each other. If a book or block were to be removed the connection would be broken and everyone would know about it because the chain would alert everyone that there was a break. This connection would also be broken if there was a change made to any of the individual books that are already part of the chain. The only way to make a change would be to write a new book or block with the new information, and that change would be forever memorialized in the chain. This protection creates an unchangeable record of the past, as the past has been recorded in a book or block or ledger that is a permanent record.

Satoshi introduced a digital form of currency that would represent the receipt and payment of value between people with no middleman acting as a go-between. There would be no need for a bank, just like there is no need for a post office to send and receive email.

The idea is to write a book every ten minutes and to record to that book all of the transactions taking place with this digital currency, Bitcoin. After ten minutes the Book or Block is closed, then it is posted to the Blockchain where it becomes a permanent record of history. Think about that. If I buy your house and pay you with Bitcoin, that transaction is recorded on the blockchain. If I then want to resell the house, I do not need a title search to validate my ownership for it is there on the permanent blockchain in a permanent block that has its own identifying code for retrieval purposes. Think of the middlemen eliminated in this that today add to the cost of buying a home, and think of the elimination of fraud.

So we now have this digital currency, Bitcoin, that we can buy with our dollars or euros or yen, etc. Why should we even think of doing this. Why not just keep things status quo where our paychecks are deposited to our bank accounts, where we pay our bills through the bank and the bank apps, and collect interest on our deposits in the bank?

If we keep things status quo then our deposits will earn between 0.25% to 1.00% per year. The bank loves this because they can then lend the money you just deposited to someone who wants to borrow that dollar. There are different types of borrowers and if you happen to be a credit card user, then when you borrow from the bank to buy some good in a store or online with your credit card, the bank charges you an interest rate of anywhere up to 24% on what you borrowed. Also, when you deposit a single dollar, the bank gets to lend out $10 under our country’s banking rules, so the dollar you deposited that earns you interest of 0.25 cents to 1.0 cent, is earning interest income for the bank of $2.40. A pretty good deal for the banks and not such a good deal for us the depositors.

Now back to Satoshi. He/She recognized that the internet could be used in its next phase of growth to enable people to transact without a bank. That by doing so, we would eliminate large costs in our financial system that do not have to be there. He/She developed a blockchain to permanently record these transactions with the protection that you could not double spend the money, meaning only one person could have the value of the Bitcoin used to transact at any one time. Unique private wallets were created to store Bitcoin so that every person would have their own account numbers or addresses to receive or send Bitcoin and these account numbers or addresses are cryptographically protected from hacking.

For the moment think about the costs you incur from your bank. Monthly account fees. Wire transfer fees. Interest expense greatly in excess of interest income. Credit card fees. Late payment fees, etc. How many of these would be reduced or eliminated with a blockchain platform? Did you know that JP Morgan alone made $35 billion in income last year?

Finally, there is the issue of inflation. Our money declines in its purchasing power when the cost of things we need rise faster than our salaries and income. What has happened to the cost of your home insurance, life insurance, auto insurance, and health insurance? What about the cost of food? Entertainment?

Governments around the world print money to pay for the services they provide and the debts they carry. The more money printed, the less it buys, as inflation eats away at our savings. Bitcoin has a finite supply. It was designed to have no more than 21 million Bitcoin. There are 7 billion people in the world.

Because the Bitcoin Blockchain runs on computers throughout the world, the ability to send Bitcoin anywhere in the world exists today. It is the world’s first global currency, convertible into local currency at all times either through exchanges or ATMs. The benefits it offers should be thought about and considered by everyone. It just may change the world, just as Amazon has done, as the internet 1.0 has done, as the railroad did, as the automobile did, as the printing press did, and so many other inventions that were at first scoffed at, but ultimately prevailed. Food for thought I say. What do you say?