Blockchain is one of those words you hear all the time but not always entirely sure what it is. We all want blockchain technology explained. So here goes:
In simple terms Blockchain is a digital ledger that can be programmed to record not just financial transactions but virtually everything of value.
How blockchain works: the technology explained
Imagine a spreadsheet that is duplicated millions of times across a network of computers. The network of computers continually and speedily update this spreadsheet.
The blockchain exists as a shared database. This means the blockchain database isn’t stored in any one location. No centralised version of this information exists for a hacker to corrupt. Hosted by millions of computers simultaneously, its data is accessible and can be shared safely.
Safety and transparency
The blockchain network automatically checks every transaction that happens in ten-minute intervals. Each group of these transactions is referred to as a “block”. There are two distinct benefits from this. Firstly, transparency data is embedded within the network as a whole – it is totally public.
The second point is that blockchain it is not only transparent, it cannot be corrupted. Doctoring any unit of information on the blockchain would mean using a huge amount of computing power to override the entire network.
Blockchain technology is most notably associated with cryptocurrencies – though it has plenty of other uses (which we will come to in a minute). Cryptocurrencies (which are digital currencies that are immune to Central Bank interference) rely on blockchain technology to work.
Cryptocurrencies run on a distributed public ledger (blockchain), a record of all transactions that is continuously updated and held by currency holders.
There are a vast number of cryptocurrencies in existence now but the most well-known include:
- Bitcoin: was the first and is the most commonly traded cryptocurrency to date. The technical system on which all cryptocurrencies are based on was created by Satoshi Nakamoto. He said to be the man who invented blockchain.
- Ethereum. Developed in 2015, ethereum is the currency token used in the ethereum blockchain. It has not always been a smooth ride for this crypto as it suffered a serious hack in 2016. While its value has recovered significantly since then, initially, following the hack, its value crashed as low as 10 cents.
- Ripple: ripple is another distributed ledger system that was founded in 2012. ripple can be used to track more kinds of transactions, not just of the cryptocurrency. It has been used by banks including Santander and UBS and has a market capitalisation of around $6.3bn.
- Litecoin: This currency is most similar in form to bitcoin, but has moved more quickly to develop new innovations, including faster payments and processes to allow many more transactions. The total value of all litecoin is around $2.1bn.
- Dash: Originally called XCoin and then Darkcoin, a rebranding in 2015 saw the name change to Dash – an amalgamation of ‘digital’ and ‘cash’. Two days following launch, 1.9 million coins were mined, representing 10% of the total supply that will ever be issued
- Monero is a privacy-focused cryptocurrency that unlike many cryptocurrencies is not based on bitcoin's code. Monero is based on the CryptoNote protocol. In January 2017, Monero’s credentials as an untraceable medium of exchange were further strengthened by the adoption of bitcoin Core developer Gregory Maxwell's algorithm Confidential Transactions.
- Cardano is home to the Ada cryptocurrency, which can be used to send and receive digital funds. It was created by blockchain development firm Input Output Hong Kong (IOHK) and led by Charles Hoskinson, former co-founder of BitShares and ethereum
- Stellar is a cryptocurrency which uses Lumens as its units. It was founded in early 2014 by Jed McCaleb and Joyce Kim
- EOS was started in 2017 by Dan Larimer the founder and creator of Bitshares as well as Steem. EOS cryptocurrency is a quicker platform for Dapps (decentralised applications) that has the ability to process transactions in over 50,000 transfers per second.
Units of cryptocurrency are created through a process called mining. Miners build the public ledger (which is blockchain) and enable the whole cryptocurrency system to work.
Miners are members of the public that have set up application-specific integrated circuit (ASIC) machines to take part in the validation and processing of transactions.
They use their computer to create new blocks and are rewarded with new crypto coins.
As more miners are incentivised by the rewards on offer, the crypto currency community expands.
Crypto exchanges and hacking concerns
So where do you trade cryptocurrencies? The answer is a crypto exchange. Cryptocurrency exchanges allow customers to trade digital currencies for other assets, such as conventional fiat money, or different digital currencies. The exchange will usually apply bid/ask spreads as transaction commissions.
Whether you use a credit card or e-bank transfer to buy digital currency, or one form of cryptocurrency for another, the exchange sends cryptocurrency to your personal cryptocurrency wallet where it is stored.
Confidence in crypto currency exchanges has taken a few blows over the past year with security the main concern. Earlier this year, hackers stole around $532.6m from Tokyo-based cryptocurrency exchange Coincheck. The theft inevitably raised questions about security and regulatory protection in the digital assets market.
Coincheck is not alone in being hit by hackers. In 2017, almost $64m in bitcoin was stolen by hackers who broke into Slovenian-based exchange NiceHash.
And as long ago as 2014, Japanese-based exchange Mt.Gox filed for bankruptcy in Japan after collapse of its bitcoin exchange. Mt.Gox was the victim of a massive hack, it lost about 740,000 bitcoins valued at €460m at the time – but worth a lot more in today’ prices.
Despite these headline-grabbing news stories, the interest in trading cryptocurrency continues to grow as – despite volatility – cryptos have provided stellar returns, for some at least.
There are numerous crypto exchanges spread out across the world – they include:
- Bitfinex: owned and operated by iFinex since 2014, Bitfinex has been the largest bitcoin exchange platform, with over 10% of the exchanges' trading
- Kraken: was one of the first major platforms to come to market, and the company has attracted its fair share of funding along the way. Its goal is to provide fiat currency gateways for as many “worthy” cryptocurrencies as humanly possible.
- Coinbase: In June of 2012, Coinbase was a small start-up which had raised slightly over $160,000 in funding. It was designed to make it easy for non-technical people to use bitcoin. Less than one year later, Armstrong’s Coinbase was selling over $1m of bitcoins per month
- Bitstamp: is a bitcoin exchange based in Luxembourg. It allows trading between USD currency and bitcoin cryptocurrency. It allows USD, EUR, bitcoin, litecoin, ethereum, ripple or bitcoin cash deposits and withdrawals.
- Coinone: is a South Korea-based exchange platform that allows users to buy, sell and store bitcoin, ether and ether classic
- HitBTC: launched in 2014, in early 2015, HitBTC was hacked. HitBTC did not disclose how many coins were stolen and commented that no user funds were affected.
- Gemini: Gemini is the digital currency exchange launched by the Winklevoss twins in 2015
- Bithumb: is a cryptocurrency exchange based in Seoul, South Korea. Founded in 2013, it allows for the buying, selling, and storing of bitcoin as well as a range of other cryptocurrencies
- Quoine: founded by CEO Mike Kayamori, the Singapore-based exchange, now has annual transactions of over $12bn.
You may often here the term ‘nodes’ or ‘node counts’ in relation to cryptocurrency.
Nodes are computers in the network of a cryptocurrency which receive new transactions and blocks and validate those that are legitimate and ignores those that are unsound.
Node counts refer to the number of computers running the software and connected to the network. The number of nodes correlates to the security and activeness of the network.
One of the key benefits of cryptocurrency is that the value of money in a cryptocurrency cannot be affected by inflation or monetary policy in any respective country. Over recent years there have been a huge number of cryptocurrencies launched, the main ones currently include bitcoin, ethereum, ripple, litecoin, cardano and EOS.
There is more to blockchain than just cryptocurrency.
Blockchain technology in banking
Perhaps not surprisingly, the banking and financial services sector have taken an interest in blockchain technology. This is because it makes it harder for fraudulent transactions to take place. Financial fraud is a huge concern for banks and blockchain offers much greater security.
It is still early days for banks in terms of how far they are prepared to embrace blockchain technology but we are already seeing signs of movement.
In August 2017, six banks including Barclays and HSBC, announced plans to develop a ‘utility settlement coin’ (USC).
With plans to launch the product at the end of 2018, the USC would be part of a digital cash system created via blockchain technology. USC is expected to enable safer and faster payments between bank accounts.
Blockchain in finance and investing
The idea of using blockchain technology for securities and commodities trading is nothing new. Given the security and efficiency associated with blockchain it would be of little surprise if stock exchanges increasingly looked to adopt distributed ledger technology system such as blockchain.
Australia's main stock exchange The Australian Securities Exchange (ASX), announced back in December 2017 that it plans to become the first global market to use blockchain to clear and settle trades. The ASX is expected to replace its current clearing system with blockchain technology later this year.