In The Invention of Lying, Ricky Gervais paints a picture of a world in which the idea of saying something that is untrue has not occurred to anyone. Everyone takes one another’s word as fact. The main character finds himself in a bank with a system malfunction and “invents” lying by asking to withdraw more money than he has available. The teller notices the discrepancy, but believes the computer is reporting an error. If the bank in the movie was run on a blockchain system, this would have been impossible.
In our world, there are procedures that ensure we have an accurate ledger to help us determine how funds are moving through our economy. But a centralized bank’s ledger isn’t always accurate or objective. This is why blockchain was invented.
Blockchain is a method used to remove the interested parties by relying on algorithms and a decentralized system to ensure accuracy of the ledger. It is commonly used to constantly audit and verify cryptocurrencies.
Understanding cryptocurrency
Before explaining blockchain further, it’s important to briefly explain cryptocurrency. Cryptocurrency is data that cannot be reproduced in a blockchain network. This data has value because it can’t be counterfeited, a lot like gold. It’s a kind of virtual currency.
Cryptocurrency and blockchain go hand in hand; cryptocurrency draws its value from being easy to verify and therefore not subject to unpredictable inflation. All cryptocurrency uses blockchain, but not all blockchain systems have to do with cryptocurrency.
Wearing your Block and Chain
The concept of blockchain is easy to understand; whoever named this verification system lacks creativity. Essentially, a blockchain system is made of a series, or chain, of “blocks” of information that are time-stamped and encrypted by a decentralized system. This time-stamping and encryption is done by any computer linked to the system as a whole, rather than the person inputting the information. This system functions a lot like Wikipedia, except it’s much quicker than editors and readers at finding mistakes, and it never purposefully creates them.
Probably the most famous example, Bitcoin, functions by creating a new verified “block” of information every ten minutes. A quick visit to Blockchain.com will show a public ledger of the latest “mined” blocks for several cryptocurrencies; this highlights two aspects of blockchain that are very different from traditional verification methods.
The first main difference is transparency. For example, if you use Bank of America, you trust them to keep accurate records of monetary exchanges. By law, most of those records are kept confidential by the central agency, Bank of America. Privacy makes it impossible for an outsider to audit these transactions in real time. In contrast, Bitcoin processes all transactions where everyone can see them.
The second main difference is that a decentralized network of computers participates in blockchain record keeping, rather than one corporation. Blockchain has thousands of computers competing to keep the most accurate records. The computers are not owned by a single entity, so we can trust there is no purposeful manipulation in the data like there was during the Enron scandal.
How is Blockchain Used?
So what can blockchain technology be used for? The answer is pretty wholesome, actually. Although people are quick to talk about cryptocurrency being used on “the dark web,” the purpose of blockchain is, well, to “keep it real.” Simply put, blockchain keeps data accurate through its unique verification system.
Blockchain can help us trace the origins of products and cryptocurrencies. For example, while there are a plethora of regulations in place to ensure that the drugs you get from your local pharmacy are the real deal, blockchain can help trace even more accurately the origins of a particular drug.
Furthermore, blockchain can be used to cut out the middleman in many scenarios involving the trading of currency. For example, if you own a blockchain-based company with 99 other equal shareholders and the company makes $100 in profit, you wouldn’t have to go through your accounting department (which costs money) and trust them to divy up the profits evenly.
If you use blockchain in that company, you would simultaneously receive your $1 share with the other 99 shareholders, no accountants or other middlemen involved.
Blockchain is an exciting new way we’re trying to… well, combat the invention of lying. For more explanations about finance and cryptocurrency trading, check out the rest of the Academy library!
