20 Feb

Jamie Burke

cat : Blockchains, Learning

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WHAT IS A BLOCKCHAIN?

Most people get bogged down in what is the best and most exact definition of a ‘block chain’. The technical definition is as described here on Wikipedia; ‘a distributed database that serves as a public ledger’. But that’s not very useful to general public. I think it’s much more valuable to focus on what they can do and, in a jargon free way, how they function. This allows people to connect the dots themselves and apply the possibilities to their own worlds.

In my mind they comprise of 8 constituent parts, detailed below and explained in context throughout the following post:
– Tokens

– Electronic Transactions

– Processing Hardware

– Wallets

– Marketplaces

– Governing Bodies

– Exchanges

– Applications

 

Blockchains allow for the decentralisation and atomisation of tasks between two transacting entities, whilst removing human subjectivity and error from the process.

Transactions can be the transfer of digital tokens for their own sake, transfer of ownership of tokens associated to other values (such as services and physical or digital assets), as well as contractual agreements.

 

This allows such transactions to take place, with a lower degree of required trust between all participants, as long as they trust the integrity of the system as a whole, and at a much lower cost.

 

Blockchains generally, as open source software,  are being continually refined. In theory this means that any problems can be ironed out over time, with the addition of an innumerable number of blockchains, custom built to serve any given niche.

 

Blockchains serve as the platform to a system of dedicated app’s, known as decentralised applications. So named because they function with varying degrees of automation and independence from administrators. Beyond the applications creation, human effort may typically only be required to ensure that they comply with rules, as well as their general administration or refinement. These rules can be complex, real world, regulatory laws or just basic programming rules. Additionally, the applications can interact with their counterparts solely on a single blockchain, other blockchains or with real world API’s.

 

Broadly speaking the roles of people, involved in the lives of these applications, are based on creation, configuration, optimisation and governance. But in theory, a perfect decentralised application could live and work entirely autonomously on a blockchain.

 

These ‘Decentralised Applications’ are unusual in their business models, because in principle, they distribute their costs to a 3rd party processing network, which then acts as a transactions marketplace. This means that blockchain based businesses, in theory, should not have the up front and central costs typical of technology start-ups in order to pre-empt scaling. It’s costs are served by the processing network on a pay-as-you-go basis and processing is prioritised based on an effort vs. reward equation by the system. This is obviously in direct conflict with Net Neutrality, in as much as how the existing Internet bandwidth is evenly distributed.

 

However it does remove duplications of tasks and resources that are typically seen in a centralised market. In theory the processing can be done by anyone with the appropriate hardware, and in the case of the bitcoin blockchain, an increasing amount of centralisation has taken place in the form of processing farms that leverage economies of scale.

 

Transactions; which can include the resolution of a contract or the transfer of an asset, are processed by these 3rd parties in a semi-anonymous and automated fashion. This removes the ability or motivation for processors to corrupt the process. Both because transactions are anonymous but also because they’re recorded on a public ledger that can be accessed, at any time, by the entire ecosystem. The rules of this transaction are hard-coded at creation and are, in theory, incorruptible.

 

Tokens of value, the most commonly used being Bitcoin, power the ecosystem. The system uses wallets to store tokens to pay for application powered services and in turn, they use the same tokens to pay processors for fulfilling transactions.

 

Tokens are moved on and off blockchains via, increasingly regulated, exchanges whilst their value is converted into fiat currency at a given exchange rate on that particular day. The volatility of this exchange rate, is the single greatest concern for all stakeholders in any blockchain ecosystem and this is a key barrier to their wider adoption. Large daily movements, in relationships between tokens like Bitcoin and fiat currencies, make it impossible to know for sure how the reward for participating in a blockchain, measures against the real-world cost of doing so. The most important concern, rests with the processing network who must invest real world, fixed costs to fulfil their transactions.


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