Blockchain in a nutshell

It is “mission impossible” to explain Blockchain in a far too short blog post, but I will try.

Satoshi Nakamoto (a mysterious person no one has met) launched Bitcoin in October 2008. Bitcoin is a global cryptographic currency enabling you to pay to anyone in the world in minutes with a cost close to zero. To do so Satoshi removed most of the friction in the banking value chain of today, banks, central banks, regulator and money transfer companies like MoneyGram and Western Union, all take a fee for their services of being “man in the middle”. 

Today there are approximately 200 000 transaction every day, and some 8 million users – both private persons and companies, even some of the largest companies in the world. The number of transactions increases every month, despite all negative press around the payment platform. Bitcoin is here to stay, no question about that.

To make the payment platform work Satoshi invented Blockchain a technology and infrastructure. First of all TRUST is built into this technology and algorithm, due to the brilliant way it is designed you can fully TRUST that your payment will be received by the correct receiver. This means you do not need banks or central bank to TRUST that the payment is handled correctly. 200 000 transaction a day is proof of concept that the TRUST idea works. Secondly this is a peer- to-peer infrastructure.

When you pay from your digital wallet, money goes directly into the receiving wallet, no bank or other intermediaries between. This means there is no friction and no friction means close to zero cost. The cost of making one transaction is close to zero, but not zero. I made a Bitcoin transaction/payment last week and the cost was 0,06 USD for an international payment. Thirdly transaction included in the Blockchain cannot be changed, it is absolutely impossible to change anything in the past in the database. A “miner” (large datacenter) takes hounded of transaction and run them through a VERY large algorithm/calculation and encryption to generate one block of transaction. This block is put on top of the last block so that it forms a chain of block, a Blockchain. This makes the infrastructure much more secure than any infrastructure in the financial industry today. In addition database is distributed; meaning a perfect copy of the database is stored on many servers around in the network. This means 100 % uptime for the network, much better than any other baking network today. If one server breaks down the rest of the servers continue to keeps the network going – business as usual. 

In addition to payment Bitcoin Blockchain can handle other assets like shares on the stock exchange, ownership of property (house, flat, land,..), ownership of your car, and any other asset. This is called color coin in Bitcoin terms and “smart asset” in Blockchain terms.  This means one can use the Bitcoin Blockchain infrastructure to transfer ownership for any type of asset over the internet, for close to zero cost and in seconds – AND SECURE.

There are a few weaknesses in Bitcoin, one of them is volume. By design Bitcoin can handle only 7 transactions per second. For a global payment infrastructure this is not good enough, Visa handles some 50 000 transactions per second. There are some projects working on speed up the transaction per second (TPS), and Thunder Networks seems to be the best so far: https://blog.blockchain.com/2016/05/16/announcing-the-thunder-network-alpha-release/

Banks all over the world is looking into the Blockchain technology and trying to figure out how to benefit from this. Ripple is a Blockchain technology from the company Ripple. Ripple is partly owned by a few banks, among them Bank Santander. Bank Santander launched an internal payment system based on the Ripple Blockchain technology a month ago. Another 50 banks around the world is said to consider using the same technology for payment from Ripple. Bank-to-bank payment

The technology does also include what’s called “smart contracts”. This is logical scripts included in the transaction. For example “Send 500 USD to my saving account wallet number 42a3X67eCC623723 every month at the 10^th of the month. If interest rate is zero reduce to 100 USD a month, and if I am older than 70 years old, stop the payment”. This logical script is self-executable, meaning the business logic is moved out of the banks process and application to be stored inside the Blockchain database.

Ethereum is a Blockchain infrastructure used by IBM, Microsoft, Chain, Eris, Intel and a bunch of other vendors for a “smart contract” type of network. R3 /DLG is a consortium of 50 large banks in the world working on another “smart contract” based infrastructure they call Corda. In the future there will be other infrastructure, but all of them will be based on the principle of Blockchain invented by Satoshi in 2008.

Blockchain will change the way we transfer and store ownership of money, property and other assets in the future. Chris Skinner calls this the” value web”, that is a good word for the changing us of internet in the future. http://thefinanser.com/

Next week I will post about how central banks around the world are planning to use the Blockchain technology, some central banks have already started.