Blockchain is a shared database that differs from traditional databases in how data is stored. Information is kept in blocks, which are cryptographically linked together.

Blockchains are a form of ledger that is managed collectively by its power users rather than centrally by a single entity like a bank controls all of its customers’ accounts.

As new data is generated, it is entered into a new block as it arrives. When the block is filled, it is chained to the previous block, forming a chronological data chain.

Blockchains may hold various data, but the most popular application has been as a transaction ledger.

Blockchains are deployed in a decentralized manner, meaning that no single person or group has oversight. Instead, all the users collectively do this through consensus.

Decentralized blockchains are immutable, meaning that the data cannot be changed. This tamper-proof quality means that transactions are forever recorded and transparently accessible to everybody.

A blockchain is a distributed database. It’s a decentralized ledger in which data is stored in digital blocks. Once a block is confirmed valid and added to the chain, the chain can’t be altered. Thus, blockchains offer transparent public records of unchangeable data.

Many different blockchains feature varying degrees of decentralization, efficiency (speed and ability to scale), and security. In addition, many have their native cryptocurrency or tokens. Ether, for instance, is a cryptocurrency based on the Ethereum network, and bitcoin is the currency built on the Bitcoin blockchain.

Some Altcoins are built on top of the Ethereum blockchain, these are called Layer 2 altcoins, and some are built on their own proprietary blockchains and have properties that expand and refine Ethereum.

Transactions on blockchains are finalized only when a new bundle of transactions, called a block, is accepted by the network. Adding blocks takes around ten minutes on Bitcoin and 13 seconds on Ethereum. Newer blockchains are designed to address speed and expense issues related to handling large-scale use cases and competing with financial entities like Visa and NASDAQ in transaction volume and speed.

These newer blockchains and their attendant altcoins are called third-generation blockchain platforms; Bitcoin is the first generation, and Ethereum is the second generation.

Blockchain technology enables peer-to-peer transfer of digital assets without an intermediary. This disintermediation is disruptive to the banking and financial industry, which traditionally has held our transaction ledgers since the Medici in Renaissance Florence. That banking revolution fueled the renaissance. So how will this innovation transform our world in the future?

The record of cryptocurrency transfers on a blockchain cannot be altered or hacked. It is stored across multiple computers in a distributed network system secured by cryptography. With cryptocurrencies and blockchain, transactions are transparent and cannot be manipulated.

Blockchains are databases distributed over many computers and kept secure by cryptography.

Bitcoin is a cryptocurrency that acts as digital property and is a store of value. Bitcoin is referred to as digital gold. Ethereum is a blockchain network that acts as a Turing complete computer system using smart contracts built in a coding language called Solidity. Bitcoin and Ethereum differ in how their blockchains record events in the database. Bitcoin is a transaction ledger. Ethereum is a balance ledger.

Third-generation Altcoins expand and refine both concepts.

So, what is a blockchain?

Blockchains are databases distributed over many computers and kept secure by cryptography.

A blockchain is a sequential log of events or data that is tamper-proof. It is a time-stamped append-only log. Append only means you can’t go back and change transactions already recorded.

Blockchains are secured by cryptography. Cryptography is the science of communication in the presence of third parties or adversaries. It’s how we make secret codes. For example, the Enigma machine was the Nazi cryptographic device that they thought was tamper-proof and that the Poles and English decoded.

The data in a blockchain can be a value like Bitcoin, or the data can be computer code like smart contracts as in the Ethereum chain.

We know what a ledger is from accounting. A ledger is a log that records all the transactions of an entity like a company and uses double-entry accounting of debits and credits.

For every asset transaction, one account gains (debit), and one account is reduced (credit), and vice versa for liabilities. If this is confusing, take my accounting course.

In traditional accounting, there is one set of books, the ledger. A Blockchain is a distributed ledger where all the nodes or computers have a complete set of books and verify through consensus when a new block of transactions is recorded.

It has taken seemingly long to adopt because blockchain is an exponential technology. Those usually tend to trend up very slowly at first and then accelerate at an astonishing pace.

It seems long, but it has only been a little more than a decade since Bitcoin was invented. It is now a digital network with a value of over $1 trillion. Only four other companies, all essentially digital networks, are valued over $1 trillion: Amazon, Apple, Microsoft, and Facebook.

All four took way longer than a decade to reach that value threshold.

Crypto and blockchain are also so different and new that it is challenging to get our minds around the concepts and applications at first.

There have also been some epic speedbumps and screwups along the way, like the early failure of crypto exchange Mt. Gox and the nefarious activity of the Silkroad trading website.

Blockchain is a solution that addresses a big problem.

The idea of money created and transacted on blockchains came about in the aftermath of the 2008 financial meltdown and crisis. It is essentially a response to fixing a fragile system that incentivizes risky behavior.

The concept of Moral Hazard is from economics. It describes a situation where an economic actor has an incentive to increase its exposure to risk because it does not bear the total costs of that risk. For example, moral hazard is a fundamental problem of “too big to fail” financial institutions like investment banks that bonus individuals for risky trades and investment practices.

There is also Counterparty risk and other risks. For example, money printing by governments to pay debts in devalued currency, inflation, and other risks created by centralized financial control systems are addressed by blockchain-based cryptocurrencies.

Besides addressing risky behavior, the crypto ecosystem aims to reduce costs. The financial system represents 7.5% of economic activity, and transaction fees are generally 2–3% and take more time than is necessary. Credit card companies enjoy 60% gross profit margins. These are excess rents that are ripe for disruption.

The anonymous Satoshi Nakamoto penned the Bitcoin white paper that started it all. Still, Satoshi didn’t invent blockchain technology, although Satoshi codified the most compelling use case, so far, for blockchain.

In 1991, scientists at Bell Labs conceived blockchain as a research project. The blockchain concept predates Bitcoin, which was first implemented in 2009. For blockchain technology to work in practice, it needed the internet to become mature.

Blockchains like Ethereum and Bitcoin run as layers on top of the internet.

Blockchain technology also needed computer hardware and software to develop the speed and capacity to handle the storage and cryptographic number-crunching requirements.

Second Generation Blockchain: Ethereum, Turing Complete, and Smart Contracts

The benefit of implementing a blockchain like Ethereum is that it functions equivalent to a new type of computer. A physical computer stores data and manipulates it using a set of instructions known as a program. These criteria are known as “Turing Complete” after Alan Turing, who first defined a computer’s fundamental criteria. A Turing-complete language (also called a universal language) is one where you can compute anything that any other computational method can compute.

A blockchain can operate as a Turing complete computer distributed over many connected computers. This worldwide computer is the revolutionary concept behind smart contracts and Ethereum.

Smart contracts can execute any contractual condition or function. Furthermore, they are Turing-complete, meaning that they use programming languages with conditional statements and conditional branching. These programming languages have “if, then, else” and can replicate any computer logic.

The Ethereum blockchain, like a virtual computer that runs on top of a network of actual computers, provides a mechanism to store and execute data. As a result, the computer will continue to function as intended and will not be controlled by the whims of a central organization.

Decentralization

A person or organization controls every computer outside of a blockchain. That entity can change their mind. This control sometimes operates at the physical hardware level. Apple, in many ways, retains broad authority over the devices it sells through its ability to push software updates like how it neutered Facebook’s trackers. More importantly, this applies across all web pages and applications. For example, each time someone logs on to Facebook, they rely on server farms run by Facebook hosting its service. Companies can change the software as they wish by controlling the hardware.

However, the relationship is flipped on a blockchain: the software regulates the hardware and may make commitments. In addition, blockchain-enabled computers can make guarantees. A central controlling agent can’t tamper or change the game’s rules. This arrangement removes or at least drastically reduces counter-party risk.

If you have ever dealt with making a claim to an insurance company, you know what counter-party risk is.

KEY TAKEAWAYS

• Blockchain is a shared database that differs from traditional databases in how data is stored. Information is kept in blocks, which are cryptographically linked together.
• New data is entered into a new block as it arrives. When the block is filled, it is chained to the previous block, forming a chronological data chain.
• Blockchains may hold various data, but the most popular application to date has been as a transaction ledger.
• Blockchains are deployed in a decentralized manner, meaning that no single person or group has oversight, all users collectively do.
• Decentralized blockchains are immutable, meaning that the data cannot be changed. This tamper-proof quality means that transactions are forever recorded and transparently accessible to everybody.

This is from my book:

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