So, let's talk about blockchain technology, shall we? What is it exactly? Why are people excited about it? Who invented it? And what is it used for? Today, in the first of a three-part Rational Exuberance series on blockchains, we'll try to cover the first of these questions. As with so many of our Rational Exuberance subjects, it's necessary to look back before we look forward. In this case, we really need to look as far back as people's first crude efforts at trading goods and services.
It's All About the Ledgers
For as long as people have engaged in trade, they have recorded their transactions as written records in ledgers. Fear not, we are not going to spend too much time revisiting the trauma of your high school or college accounting classes, but it is essential to connect at least a couple of dots. Simply put (I hope), a blockchain is an online record or a digital ledger of transactions. This digital ledger can record monetary transactions, perhaps the movement of goods between two parties or exchanges of information. Now, with that in mind, let's dive in just a little deeper. If we build on the prior concept, a blockchain is also represented by a perpetually growing set of records that are grouped together in blocks. Importantly, when all these concepts are wrapped together using advanced computer cryptography, we arrive at the essence of blockchain technology. Not surprisingly, then, that's where we get the crypto in cryptocurrency.
It's Still All About the Ledgers: Distributed Ledger Systems
One of the most important blockchain concepts to understand is how those infinite amounts of records are kept. Well, blockchains use what is called a distributed ledger system, or DLT. Ledger—there's that word again. Stay with me, I promise this will all be over soon. In a distributed ledger, a record of every single transaction in the blockchain is kept in multiple places concurrently. Anytime a transaction takes place or something is changed in the blockchain, everyone in the entire network is alerted and has to agree or digitally sign off. This attribute is extremely important because it makes it virtually impossible to hack or change the records as this would require changing every single record at precisely the same time. While this is mathematically possible, most computers would crash trying to calculate the odds of it happening, let alone succeed in such an attempt!
To summarize, a blockchain is an online digital record of transactions that is backed by the computational power of modern cryptography. It's at the very core of currencies such as Bitcoin and can be used to document financial transactions, the movement of goods and services, and/or the exchange of information. That's it for now, but be sure to look for part two of our Rational Exuberance look at blockchains.
As always, whether or not you are crossing the digital divide with Rubicon Crypto, please remember to do so with common sense…and with Rational Exuberance!