Cryptocurrency is revolutionizing the world. But while many people have heard of it, few can fully explain the intricacies of how this blockchain technology works. Well, this beginner’s blockchain guide is a good place to start!
First, let talk about what cryptos are. Bitcoin and other cryptocurrencies have become an entirely new asset class that can serve as a store of value – like gold – and as a go-to means of value exchange – like the U.S. dollar.
These assets designed and built for the internet age can be traded on a peer-to-peer basis (directly with someone else) or through online exchanges. Crucially, thanks to crypto’s underlying blockchain technology, this can all be done without fear that the digital transactions will be falsified by our peers.
In other words, it can be done in a highly secure and “trusted” way. That’s the real breakthrough of blockchain technology. We can trust that our digital cash is legitimate without needing a banker’s confirmation in any way.
What Exactly Is Blockchain Technology?
Many describe “the blockchain” as a decentralized ledger of transactions — a fancy sort of Excel document, for instance, that everyone can read at the same time but whose contents no one can erase, alter, or manipulate.
That’s accurate… but not quite complete.
Blockchain is indeed a decentralized public ledger. It’s maintained through an open-source software protocol, meaning anyone can read and review this software. And anyone can run the code that defines the rules of its network and operation on their own computer, also known as a node. Since no single person runs this network, there is no single point of failure.
So, blockchain gives users a way to validate a common digital history without requiring a middleman. And, indeed, this is a very important problem that the technology has solved.
It means digital transactions can’t be faked. We can use the blockchain to create new forms of money that incorporate all the convenience of the internet. And this opens up a whole new world of digital value.
How Blockchain Works
The blockchain also combines two other technologies that make it unique and important.
The first is private key cryptography, which helps prove that users are who they say they are. The other is a protocol that incentivizes participants to do the “housework” needed to keep the whole thing running smoothly. Namely, that’s the protocol’s security and record-keeping.
Essentially, private keys are your personal keys to your own crypto vault. They also allow users to release the smallest amount of personal information that are needed for an exchange, which helps reduce exposure to hacks.
The protocol includes the rules that participants must follow so they do needed things, like broadcast the correct transaction type. And it also lists the rewards for doing so.
The bottom line is that crypto uses a blockchain to decentralize payments.
Blockchain Guide: The World of Digitized Assets
There are many other applications for a blockchain. Just about any service where middlemen exert undue influence could potentially be enhanced by introducing a blockchain. Think business payments, real estate transactions, personal medical information requests, and so much more.
But one area we’ve got our eye on that could hold the most potential — the world of digitized assets.
See; the blockchain allows us to digitize real-world assets like real estate and move them onto a secure network. There, they can be bought or sold in real time.
For example, Wall Street has been packaging various mortgages, car loans, and personal debt since the 1970s. Then it sells these “securitized” instruments to investors. Tokenization brings this process to the next level.
Basically, the rights to an asset are digitized onto a “token,” which can be traded on a blockchain.
Doing so instantly transforms what was a mostly closed-off transaction into a more liquid and tradeable one.
Blockchain’s Endless Possibilities
Having a digital token also allows units of ownership to be divided into smaller, more affordable fractions. These digital tokens can then be bought and sold across digital networks and international borders in seconds.
Want to be like one of those famous, globe-trotting real estate developers? Dreaming of grabbing a piece of income from that gleaming office tower on Manhattan’s Fifth Avenue? In today’s world, you’d likely have to shell out millions, even billions of dollars to get in. With tokens, you could potentially pay mere thousands to obtain your share of the building.
The idea is to use the blockchain to unlock massive amounts of previously unattainable value.
The $1.9 trillion global payments market is another example of a sector ripe for disruption by blockchain’s tokenization solution. In 2018, HSBC made moves to use a blockchain to support the financing of soybeans. And Germany’s Commerzbank also launched a pilot project to test the technology.
In fact, as blockchain entrepreneurs set up projects offering fractional ownership of film, TV, music, and other intellectual property-driven content, investors will even be able to stake their claim in the latest potential Hollywood blockbuster. One such project will allow owners of Proxicoin, a digital token, to invest in hundreds of major films and TV shows.
The possibilities are tantalizing. And that’s why we find this area so exciting and one to keep an eye on going forward.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
