An Overview of Blockchain

Blockchain is a decentralized ledger, a transaction and data management system, and the technological breakthrough underlying Bitcoin and other cryptocurrencies’ success. Blockchain’s primary purpose is to create a decentralized environment where transactions and data are not controlled by third parties. Blockchain technology is now prevailing as it solves transaction-management in a way never seen before, featuring total anonymity and trust-based transactions processing. By 2025, the value of blockchain technology is expected to be worth around $176 billion, rising to a whopping $3.1 trillion by 2030. The primary explanation for these figures is the already extensive deployment of blockchain in financial transactions and cross-border payments.

Is blockchain a database? In simple terms, one could think of blockchain as a rudimentary form of a database. A database is a collection of information that is organized to make it easy to access, manage, and update. Breaking blockchain further down, think of the meaning of the word in its most literal sense: Block (the first half of the word) means a collection of data. Several elements of data are called a transaction. A chain (the second half of the word) is something that connects one thing to another, so in this sense, the chain is connecting one block to another (i.e. one set of data/transaction to another). The chain connects data to previous blocks of data and this process keeps on repeating. Hence, this chain of blocks is termed blockchain.

Moving on, most individuals who have a somewhat idea regarding blockchain most closely associate it with cryptocurrencies. It is important to understand how the two are related. Let’s say that person X wants to transfer money to person Y. This is a form of a transaction and the transaction is represented as a block (remember we defined a transaction as several elements of data). This block is then broadcasted to everyone in the network, i.e. the public ledger. This needs to be approved as being valid from everyone in the network. Once it is approved, a block (the data) is added to the chain (forming a blockchain). The blockchain provides an indelible (something that is permanent and cannot be erased/deleted) and transparent record of the transaction. After this step, person Y would receive money from person X. In terms of blockchain being related to cryptocurrency, let us think about bitcoin (since it is the most widely known cryptocurrency). Bitcoin miners have to solve a mathematical puzzle in order to generate bitcoin. The first one to solve the problem uploads the solution on the public ledger (as mentioned above), which needs to be approved by others in the community in order for it to be considered valid. As indicated above, any transaction that passes through a blockchain needs to be verified/validated by everyone in the network. Once the solution is verified as being valid, the miner is rewarded with a fraction of a bitcoin. This is the entirety of the blockchain network which indicates how blockchain is related to cryptocurrencies.

Can there be a blockchain without cryptocurrency? To answer this question, we need to first understand that there are two types of blockchain: private and public. A private blockchain is when someone controls the blockchain, i.e. it is a permissioned blockchain. There are no tokens or cryptocurrencies coming out of it. There are one or more entities which control the network and this leads to relying on third-parties to transact. Only the entities participating in a transaction will have knowledge about it, whereas the others will not be able to access it or have knowledge regarding it. Think of a bank transfer. If person A transfers money to person B, only person A, person B and the bank will have knowledge regarding the details of the transaction. On the contrary, a public blockchain is when nobody controls the blockchain. The blockchain creates tokens and awards it to people who put in effort. The person who is the first one to create the token/provide a solution gets the reward. It is a proof of work concept, wherein other miners verify the solution and only then is the person rewarded with a token (explained in the previous paragraph). Therefore, this can be termed as a lottery-based reward system. Governments want control over transactions happening in and out of a country and hence, that is why private blockchains exist. They want to ensure that no illegal/illicit transactions are taking place and that they can be in control of everything. Therefore, the answer to the question asked in the beginning of this paragraph “Can there be a blockchain without cryptocurrency?” is yes, since blockchain is not exclusive to cryptocurrencies and its presence is seen outside the cryptocurrency space as well.

A lot of cryptocurrency investors wonder whether they need to know about blockchain? To answer this question in a very simple way, think of it from this perspective. Let’s say person Z invests in equities. Before investing in a company, you would expect person Z to understand what the company does, what industry it operates in, how it makes money, and so on. If person Z does not know the answers to the above questions, then he/she is a pure speculator. They are hoping that the stock of the company that they have invested in will increase because of their gut feeling and nothing else. Hence, as an investor, one needs to do their due diligence. Therefore, anyone who already invests in or wishes to invest in cryptocurrencies needs to understand blockchain at its basic level and understand a few of its applications.

All in all, to recap, blockchain refers to a block of data that is linked together with previous data sets to create a chain, and hence the name blockchain arises. It is a public decentralized ledger (a network) that keeps track of transactions and data. Public and decentralized in this context imply without any third-party control and accessible by anyone/everyone in the network. Private blockchains also exist but not in the cryptocurrency space and since no third party can control a public blockchain, governments are always wary about the cryptocurrency space. However, as more time passes and cryptocurrencies become even more prevalent than they are today, the government’s stance on public blockchains could definitely change.

References

https://www.gartner.com/doc/3627117/forecast-blockchain-business-value-worldwide

https://www.gartner.com/smarterwithgartner/the-reality-of-blockchain/

U.S. Securities and Exchange Commission — https://www.sec.gov/ICO

By Arhan Parikh (arhan.parikh@xumitcapital.com)

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Xumit Capital

Xumit Capital is a boutique investment advisory firm that deals in equity, global & crypto portfolios and investment migration programs.