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There's More To Gain From Blockchain Than Just A Bit Of Coin

It has the potential to impact our lives in ways we can't even begin to imagine.
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It's not every day that a paradigm-shifting innovation bursts onto the scene and opens new pathways to significant societal change.

Harnessing fire was a game changer for those long ice age winters, and more importantly, introduced the concept of medium-rare.

The wheel certainly made chariot races more interesting; Gutenberg's printing press revolutionised communication and democratised knowledge; Chinese gunpowder facilitated the escalation of arguments to all new levels; and the telescope revealed a seemingly unending universe beyond.

Of course the lightbulb, telephone, and phonograph paved the way for selfies in the nightclub and the ubiquitous Internet turned pretty much everything on its head.

Now it's time to add one more to that list. The blockchain.

What is the blockchain? Well, you probably know that it has something to do with Bitcoin and that everyone has been telling you to buy bitcoins. But what is it exactly, and why is it so important?

First, a very brief background. Back in 2008, a paper was released under the pseudonym of Satoshi Nakamoto, which explained a peer-to-peer network that allowed "a system for electronic transactions without relying on trust".

People could transact with each other without the need for a third-party intermediary. If I wanted to send money to you, I could do so without using a bank. No risk. Almost zero fees. Pretty cool stuff. He called it Bitcoin.

It's only early days and the impact of the blockchain hasn't even started to be felt yet. Over the coming years it will become pervasive and ubiquitous.

At the heart of this network is a 'blockchain'. I've tried explaining this many times to different people and there is no simple way. But here goes...

Imagine we're a group of five friends and we each have a record book that shows how much money we each have. If I want to send $10 to you, I send a text message to the group and ask them to check their record book to make sure that I have $10 in my wallet. Once everyone agrees that I have $10 to send you and they record the transaction in their books, only then will the transaction be approved. Now you have $10 more and I have $10 less. If our friends agreed that I didn't have $10 then the transaction would be denied.

No physical cash needs to change hands and we don't need to use a bank as we are relying on each other to keep tabs on who has what. This cycle continues and if there is a discrepancy in our records we can simply trace the transactions back and see what went wrong as we should all have the same information in our record books.

Now imagine that this group consists of millions of strangers and the record book is on computers spread all around the world in what is called a distributed ledger.

Each of us has a wallet with a special private access key that only we know. There is also a corresponding public key that we can share to receive bitcoin. So, if I want to send you money or 'bitcoin' you give me your public key and I transfer the bitcoin to your wallet using my private key. In the same way as above, all of these record books are checked to make sure I have the bitcoin to send and if they match up, the transaction is approved and you get your bitcoin. If the record shows that I don't have the bitcoin to send, then the transaction is denied.

Many transactions occur every second, so to make things easier transactions are bundled together into groups or 'blocks' and around every 10 minutes or so, the block is verified and all the transactions in that block are approved. Put simply, once the block is verified it is added to a chain of blocks from previous iterations.

And that's how we get the blockchain.

Information about every single transaction since the very beginning is stored in the blockchain. This means that I can't just create bitcoins out of thin air, because all of those millions of computers with their own copy of the same public ledger would show that I never had the coins in the first place.

We just need to trace the transactions backwards to confirm how many bitcoins are in my wallet and if it doesn't add up then the transaction is not approved. This is an important feature of the platform as it means that I don't need to know you, or trust you, to know that the bitcoin you sent me is legitimate. I just need to know your wallet public key.

Now this, on its own, is not enough to be considered as one of the biggest innovations of all time. And the truth is, Bitcoin has a few problems.

First, that 10-minute wait for blocks to be verified means that you will be waiting at the shop counter for a while before your purchase clears.

Second, the transaction cost is now around $5, which if you're transferring $1 million sounds fantastic, but if you're buying a bottle of water then this becomes problematic. It is the same transaction fee no matter what the value of the transaction.

For these reasons, and a few more, Bitcoin will likely never be a commonly used currency or popular medium of exchange. What it will be is a store of value or, as you've probably heard, digital gold. Just like gold, there is a limited supply of bitcoin as there will only ever be 21 million bitcoins in existence. Why?

All 21 million bitcoin were created in code back in 2008 and the only way they are released into the market is through mining. Remember those blocks that need to be verified every 10 minutes? That requires computing power, which requires electricity, which requires money. The owners of those computers won't do this for free.

As a reward for solving those cryptographic problems and verifying all those transactions, one random lucky 'miner' is given 12.5 bitcoins for every block solved. Every four years over the next 122 years, bitcoin mining rewards are halved until the last bitcoin (fraction) is mined sometime around 2140.

Many people argue that bitcoin is a much better store of value than fiat money such as the USD, GBP, or EUR. One reason is simply because when a government wants to stimulate growth they can 'ease' their monetary policy by printing more cash and thereby devaluing the cash already in circulation.

Take a look at Zimbabwe's $100 trillion bank note for an example of how this can go horribly wrong. With bitcoin, there is no possible way to create more, and if demand keeps increasing then there is really only one way the price will go.

Now this is where it gets really interesting.

Since Bitcoin was introduced back in 2008 there have been some interesting developments in blockchain technology. In 2014, a 19-year-old Russian-Canadian genius by the name of Vitalik Buterin invented Ethereum. Ethereum took Bitcoin to a whole new level as it proposed embedding smart contracts on the blockchain that would allow decentralised apps (dApps) to be written and entire companies to be formed and operated in a virtual environment.

Bloomberg via Getty Images

Rather than just exchanging value back and forward like Bitcoin, Ethereum is positioning itself as a giant world computer and a platform that will allow the development of companies that have the potential to displace just about every billion-dollar tech company you know.

Imagine a new social network where your personal information is not being sold; a prediction platform where you can bet on anything against anyone; a publishing house that pays anyone who creates content of value; a crowd-sourced venture capital fund driven by the people; a provably fair online casino; Airbnb without the middleman. These are all being created on Ethereum.

Imagine companies that run themselves with no board of directors. While getting off to a shaky start, these are coming, too. They're called Decentralised Autonomous Organisations (DAOs) and they have the potential to completely disrupt the legal industry by programming in dispute resolution solutions into the company's 'code'.

We haven't even scratched the surface with Ethereum. There are companies that we could not imagine today that will be the Facebook or Uber of tomorrow. The potential in the space is massive and this excitement has seen the price of Ethereum increase by more than 4000 percent in the past 12 months. Heady times indeed.

Blockchain is providing the backbone for a range of innovative projects that include completely anonymous currencies that will allow anyone to transact with anyone and the authorities will have absolutely zero visibility.

It's only early days and the impact of the blockchain hasn't even started to be felt yet. Over the coming years it will become pervasive and ubiquitous. Blockchain technology is being tested and applied in every industry, from finance to logistics, media, healthcare, legal, and government.

Estonia is already switching much of its government's backend administration to a blockchain system to achieve massive cost saving and processing efficiencies. Goldman Sachs and the biggest financial institutions have set up specialist teams to research how blockchain can revolutionise finance. In time, national elections will be run on the blockchain and even national currencies will end up being driven by the blockchain. The list goes on and on.

The future is in the hands of a new wave of tech entrepreneurs with the vision and insight to apply the principles of the blockchain to real world problems in ways that promise to unlock massive value. Blockchain has the potential to impact our lives in ways we can't even begin to imagine.

Whether or not bitcoin pushes into the stratosphere or fades into the background is yet to be seen, but you can rest assured that blockchain is here to stay.

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