What to Know About Blockchain

Of the many destabilizing forces in the world today, blockchain may be one of the most misunderstood. We've all heard how this mysterious process is what powers bitcoin and other cryptocurrencies. Some of us may even have heard how major companies, including asset managers and brokerage firms like Vanguard and TD Ameritrade, are experimenting with the technology. But what is it? How does it work and what is it good for?

Known as a type of "distributed ledger technology", blockchain has the potential to transform how information is stored and transferred around the internet, making the process faster (even instantaneous?) and more secure. As such, it's something important to know at least a little about.

The following is from a "Blockchain for Beginners" article in an industry magazine that arrived in my office last week. I think it does as good a job as any at summarizing the key points. There's also a link to another site at the end of this post that offers a deeper dive.

There's a lot of hype around blockchain – and perhaps for good reason. Blockchain, with its cheaper and faster processes for digitizing transactions, could transform financial services. It not only has the attention of technology startups, but Fortune 100 companies such as IBM, Amazon, and Microsoft are investing as well.

And if you're still thinking: "Okay, but WHAT does blockchain do?" ... you're not alone. Here are a few answers.

Continue reading...

What is Blockchain?

Blockchain is a digitized and decentralized public ledger of transactions. Think of it as a kind of database in which you can save any type of transaction or metadata. But unlike a traditional database that is stored on a server, blockchain is stored on servers and computers (called nodes) of all the users, giving everyone the same copy of the blockchain.

Are blockchain and bitcoin the same thing?

No. Blockchain is the technology behind bitcoin. Bitcoin can't exist without blockchain just like Google can't exist without the internet.

How does blockchain work?

As transactions are recorded, they are chronologically and permanently added to blocks using an encryption method called cryptography. Once a block is full, a new block is created and is verified by the network.

Is blockchain only for currency?

No. You can digitize, code, and insert practically any transaction into blockchain. That's part of what makes the technology so disruptive and transformative. For example, it's currently being used to bring transparency to the origin and transportation of fruits, vegetables, and other food supplies.

Where did blockchain come from?

That's still a mystery. Blockchain was developed as the accounting method for bitcoin in 2009 by an individual or a team of programmers going by the pseudonym Satoshi Nakamoto. (At one time, Elon Musk was said to be Nakamoto, but he's refuted that.)

Does blockchain work internationally?

Absolutely. On October 24, 2016, the Commonwealth Bank of Australia and Wells Fargo brokered a blockchain transaction for 88 bales of cotton.

What is bitcoin?

Bitcoin is just one of a slew of cryptocurrencies. Unlike national currencies like the U.S. dollar, it is not backed by a government but is backed by its respective network.

Can anything trip up blockchain?

Quantum computing could. Current computers rely on electrical circuits and bits that are either a 0 or a 1. Quantum computing uses qubits, particles suspended in a super-cold environment, allowing qubits to be a binary of 0 or 1 at the same time. A quantum computer could monopolize blockchain. Since computing would not be spread across nodes, this lack of trust could essentially break blockchain.

Is it possible to invest in blockchain?

Right now there are two ways to invest in blockchain: by investing in companies that are creating blockchain products or by investing in blockchain ETFs.

As I've written previously, I wouldn't suggest investing directly in blockchain, or cryptocurrencies for that matter. If you still wanted to do so, you'd be wise to limit yourself to maybe a couple percent of your investment portfolio, or some other amount that you're fully prepared to lose.

The indirect method of investment would be better, I think. This is accomplished by owning stock in major financial services companies, for example, that are actively engaged in leveraging blockchain technology for the benefit of their respective businesses.

If you'd like more information, here's a good primer on blockchain from consulting firm, Deloitte:

https://www2.deloitte.com/content/dam/insights/us/articles/4436_Blockchain-primer/figures/4436_fig1.png

Have questions? Ask me. I can help.

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