Intro Guide to Crypto - Episode 1: Blockchain Basics

What is a blockchain?

Blockchains are the underlying technology which cryptocurrencies use.

In essence, a blockchain is a fancy database. Rather than data being stored on a single computer or institutions like banks, data in the blockchain is shared amongst many computers (called nodes). All of these nodes have a copy of the database. Blockchains guarantee the security of a record of data and generates trust based on code without the need for a third party.

Data is recorded in blocks.

• When new transactions take place, the new data is stored in new blocks.

• Blocks have storage capacities – when they have reached their limit, they are closed and linked to the previous block.

• As each new block is added to previous blocks this forms a chain of data known as the blockchain.

• This creates an irreversible timeline of data.

There are three core aspects of blockchain technology to allow for efficient transfer of value:

1. Transparency: Blockchain records transactions and other data on a shared ledger (database) that allows participants to see all the information and agree on its accuracy: https://www.blockchain.com/explorer

• A person’s identity is hidden, transactions are represented by a public address rather than a name.

• If an exchange with Bitcoin is hacked, the hacker may be anonymous, but the Bitcoins stolen are traceable.

2. Decentralised: Blockchain does not store any of its information in a central location. Instead, the blockchain is copied and spread across a network of computers. Whenever a new block is added to the blockchain, every computer on the network updates its blockchain to reflect the change.

• No middlemen needed - transactions are easier, faster and require less or no additional transaction fees. International exchange easier and faster.

• Underprivileged people who don’t have access to banks can use cryptocurrencies. All you need is access to the internet

• Secure – Hackers can’t shut the network down by taking over just one or two computers since the other computers will still maintain the network and resist any changes.

3. Immutable: Means once something enters the blockchain, it can’t be tampered with.

• If somebody tries to edit or delete an entry in one copy of the ledger, the majority of the nodes (computers), who all have a copy of the ledger and continuously update it, will not reflect this change - it will therefore be rejected.

• This is valuable for financial institutions as you can identify theft and simplify auditing.

How transactions are processed on blockchains:

Banks vs Blockchains

What are some examples of blockchain use cases?

Capital Markets

What is the problem?

• Multi-day transaction times, high costs and operational risks.

• For example, with stock trading, the settlement and clearing process can take up to three days (if trading internationally this can be longer). During this period, the money and shares are frozen.

  • The time that the money is in transit can incur significant costs and risks for banks.

How are blockchains a solution?

• Faster clearing and settlement.

  • Blockchain technology has the potential to support almost instantaneous clearing and settlement.

  • This is because once a transaction is confirmed and committed to the ledger, the associated token has also settled in the wallet of the beneficial owner.

  • This speed of settlement would lead to reduced costs, and lower counterparty settlement risk and fraud.

Supply Chains

What is the problem?

• There have been countless outbreaks of E. coli, salmonella, and listeria in the food industry.

  • It has taken weeks to find the source of these outbreaks when this has occurred.

How are blockchains a solution?

• As blockchains are traceable (one of the three core aspects of blockchain technology mentioned earlier), a blockchain can allow you to track a food product’s route from its origin to delivery.

• In addition, these companies could see if it came into contact with anything else

  • Therefore, we can identify problems sooner and potentially save lives.

  • IBM has created its Food Trust blockchain to trace the journey that food products take to get to their locations.

  • Seafood supplier ‘Raw Seafoods’ are using Food Trust to trace their catch from harvest to the end user, to help build trust with consumers.

Insurance (e.g., home insurance in case of flood)

What is the problem?

• Processing claims is lengthy and complicated as many parties need to be involved.

• The whole process up until the settlement is inefficient - it requires input from various people slowing down the claims management and settlement process.

How are blockchains a solution?

• Smart contracts (built on blockchains) could be used to overhaul the customer experience and management in the claims settling process. (Smart contracts are computer programmes that automatically execute based on pre-defined conditions)

• If the claim settlement process is based on a smart contract, a GPS device can determine whether the insured house is in an affected area.

• The smart contracts then read the data and if the requirements of the smart contract are met then it is executed, and settlement is triggered automatically.

• Instead of waiting for 6 months-1 year (or even longer in some cases), using blockchain technology can allow you to get your pay-out instantaneously.