eToro’s quick and simple guide to Blockchain

The term ‘Blockchain’ has been popping up a lot in mainstream media recently, usually when discussing cryptocurrencies. While it is true that this innovative technology was created as the underlying infrastructure of these digital coins, it has numerous other applications, and some even say that blockchain technology will reshape the world as we know it. But what is blockchain? Here’s a quick explanation.

What is blockchain?

Essentially, blockchain is a chain of linear code, which is available for anyone on its network to see. It is built of code segments of predetermined size (or ‘blocks’), arranged in sequence (or on a ‘chain’) – hence the name. Each block is unique and can only be created once. The blocks represent transactions made within the network, displayed on a public ledger. Originally, it was created to power Bitcoin, but has since evolved to serve many other aspects of technology.

Blockchain development

Blockchain was created by a group of anonymous developers, under the pseudonym Satoshi Nakamoto. Their aim was to create a truly decentralised currency, Bitcoin, that would have no central regulatory authority and require no third-party trust to process a transaction. When transferring money the traditional way, parties needed to go through a trusted money transfer provider, that would verify the transaction. While this practice is widely accepted, it also incurs fees and long processing times. Blockchain was created to streamline this process.

How does blockchain work?

To eliminate the middleman, blockchain uses a public ledger. This ledger does not exist in one single place, but rather, is duplicated to every user on the network (similarly to a Google Doc). The ledger is updated in real-time with the status of all of the tokens (Bitcoin, for example) within the network. Since the ledger holds all of the information regarding the amount of tokens each member has in their blockchain wallet, there’s no need for third-party verification.

By using this process, the middleman is eliminated, resulting in much faster transaction times and essentially no commissions. However, processing each transaction requires a great deal of computing power, since each block is created and encrypted using complex mathematical formulas. Therefore, each member of the network can contribute computing power and in return  receive a small commission. This practice, known as ‘mining’ is the way many cryptocurrency owners accumulated their tokens. This being said, it is important to emphasize that mining requires high-powered computers and that there’s competition between miners for each block created.

Why is blockchain important?  

The creation of the Bitcoin blockchain technology paved the way for other similar networks, such as Ethereum, which was created to help developers build blockchain-based applications. While the original technology was created for cryptocurrencies, its infrastructure can be duplicated for many other potential uses. For example, much of the Internet still passes through central locations, such as servers, which store huge amounts of data and are vulnerable to attacks. Similarly to the trusted third-party discussed earlier, using blockchain technology, these middlemen can be eliminated when using the blockchain technology.

This opens the door to numerous new applications, such as IoT (internet of things). For example, if Google, Apple and other tech giants realize their vision of the driverless car, the communications network required to coordinate so many vehicles could potentially be a blockchain network, eliminating the need for a central server and protecting autonomous cars from being hacked.

Conclusion: Blockchain is here to stay

For the immediate future, it seems that blockchain will be discussed mostly in reference to cryptocurrencies, as Bitcoin is still the most developed blockchain network mentioned in the media. However, blockchain entrepreneurs are constantly working to harness this new form of network to numerous other uses, and venture capital firms are on the hunt for promising start-up companies which are developing such technologies. While the concept of cryptocurrencies is still being debated (and sometimes negated) by mainstream financial institutions, there is a general consensus that the application of blockchain technologies will affect many aspects of technology. We should look forward to things to come.

Glossary: A few basic terms to help you understand the blockchain jargon

  • Bitcoin: The world’s first cryptocurrency and the most widely-known application of blockchain technology.
  • Blockchain: A form of code which comprises a shared ledger that documents any addition to the code.
  • Block: A piece of code of predetermined size, which contains information about a specific action, such as a transaction on the blockchain.
  • Cryptocurrency: A decentralised network of tokens, each with its unique code, which cannot be replicated on the same network.
  • Digital Wallet: A unique, encrypted storing place for cryptocurrencies.
  • Ethereum: A network created to support blockchain applications. Ethereum has its own cryptocurrency called Ether.
  • Fork: An event which changes the nature of a specific blockchain network, such as a change in block size or implementation of faster transaction protocols. A ‘soft’ fork describes a situation in which the previous network’s form is still supported, while a `hard’ fork renders the network backwards incompatible, often resulting in the forming of a new, parallel cryptocurrency.
  • ICO: Initial Coin Offering. A form of fundraising for new blockchain networks, in which the founders offer up tokens for sale before publically launching the network.
  • Miners: Members of a blockchain network, which allocate computing power to help process transactions in return for a small fee.
  • Testnet: A network designed to test new changes to a blockchain network before implementing them.

eToro USA LLC; Virtual currencies are highly volatile. Your capital is at risk.