Heads up: This article was commissioned as a part of the Adam Rush Project. It was an experiment I did a few years ago to see if having books written by ghostwriters would be commercially viable. It wasn't. That said, the following article was written by someone else and not yet edited to my standards. I hope to find time to rewrite it myself in the future, but for now, read with caution.
Disclaimer: In this article, I discuss financial topics. These are my personal thoughts and opinions. I am not a financial advisor, and none of what you read here is financial advice.
Mathematical algorithms power bitcoin transactions. Across the world, bitcoin miners run calculations to create and manage bitcoins. Bitcoin software is open source, meaning that anyone can have access to it and no one controls it.
To understand how bitcoin transactions work, you must first understand blockchains. The blockchain is like a ledger that keeps records of bitcoin transactions. The blockchain ledger is public, and no single person or entity has control over it. A network of computers running bitcoin software manages it. Each of the computers in the network is a node.
Blockchain Technology
By now, almost every nation in the world is taking advantage of blockchain. Blockchain has many uses including combating illegal immigration, taking on the black market, and selling gold bullion.
By definition, blockchain is a secure digital ledger for holding transactions. The blockchain is not limited to storing financial transactions. It can store almost any type of transaction.
Blockchain is an anonymous, immutable, and secure transaction record. Unlike conventional records used by banks, blockchains are public records of all transactions. With a blockchain, each device on a network stores records. As such, it is decentralized and protected against corruption or theft.
To send bitcoins to a recipient, the user sends three pieces of information to the system. They send information about the sender, the amount, and identification of the recipient. The network nodes then confirm the validity of the transaction. Then, the nodes update their ledgers by adding the transaction to a list. They share that information with other nodes in the system. Each node holds its own copy of the ledger. Together, the ledgers verify ownership of each bitcoin and confirm each transaction.
The validated transaction is then included in the ledger and stored on every device. The transactions are put into distinct sequences of blocks, each having several thousand transactions. Depending on the network, the time required to confirm every block and include each of them into the ledger varies. For bitcoin, it requires approximately 10 minutes.
For a valid transaction to occur, it must have an input of a particular bitcoin value alongside the digital signature of the owner. The bitcoin network verifies that the bitcoins are unspent. There can be many inputs and outputs in a bitcoin transaction. Bitcoin software also allows users to send more bitcoins than the payment amount. Users can receive change back as you would with a physical cash transaction in a store. Some bitcoin transactions have a fee while others do not. Bitcoin miners can choose what kind of transactions they want to process. The higher the transaction fee, the more a bitcoin miner earns for hosting a node on their computer. Using the blockchain prevents double-spending, which is likely to occur in an unregulated system.
Once the transactions are committed to the ledger, they can’t be changed. The immutability of the transaction record is a key feature of blockchain technology. It removes the need for a trusted third party to vet transactions.
Intermediaries in Blockchain
In the old days, monetary transactions were free of third parties. Transactions were direct trades based on the inherent value of goods. Today, currencies and banks add layers of abstraction and verification. Currencies allow you to trade based on the perceived value of goods. The banks verify that transactions are legitimate.
For instance, when you buy an item with your debit card, the seller needs to have an assurance that they will receive payment. They need a trusted third party to verify that you have the money. Blockchain provides a multi-party system to verify transactions. It applies not only to finances but also to any information exchange. One example is providing documentation that proves a customer owns a car or house.
These third-party systems that involve businesses, banks, and governments can function as long as the intermediaries are trustworthy. But, it gets tricky in a system where users question the transparency of the transactions. This is where blockchain technology comes in. With blockchain technology, there is no need for intermediaries. The transactions occur directly, securely and free of third-party influence.
Blockchain is especially appealing because it makes a record of changes. Making unauthorized transactions is almost impossible. The technology itself acts as a dependable third party.
Characteristics of Blockchain Technology
Blockchain technology is robust like the internet. By keeping identical blocks of data across its network, the blockchain cannot be controlled by a single entity. It also does not have any single point of collapse. It can maintain its integrity even when parts of the system are compromised.
Blockchain networks automatically check themselves every ten minutes. This network is a unique self-auditing digital ecosystem. It reconciles each transaction that occurs within a ten-minute interval. Every transaction is called a block. The outcome of each block is transparent and incorruptible.
Blockchain technology is suitable for almost every transaction involving value. That includes cash, property, and goods. Its potential applications are limitless. Blockchain provides a secure way for people to transfer value, especially in countries without a stable currency or government. It can also minimize fraud because each transaction is recorded on a public ledger visible to anyone.
Applications of Blockchain
One obvious way we can apply blockchain is for moving money. Under the current financial infrastructure, many wire transfers fail. International transfers take too long to go through and the costs of sending funds can almost equal the amount of funds being sent.
Bitcoin is the best-known application of blockchain technology. It eliminates all the concerns raised above. With bitcoin, users can settle fund transfers instantly. They can freely exchange value with permanent public records of all transactions. However, finance is not the only industry that benefits from blockchain. It applies to almost any system that uses transaction records.
Some companies are now looking into using private blockchains for sharing real-time information. These applications of blockchain are not concerned with mistrust of third parties. Rather, they are about speeding up processes and lowering costs.
Who Uses Blockchain Technology?
Blockchain technology allows anyone with internet access to make secure transactions. Blockchain currently controls only a small percentage of global financial transactions. The number is trending upward as insurers, banks, and companies use the technology to cut costs and speed up transactions. Some of the firms racing to incorporate blockchain include Microsoft, PwC, IBM, and UBS.
Summary
- Blockchain keeps a secure record of transactions.
- Blockchain removes the need for intermediaries like banks to oversee transactions.
- Blockchain can keep track of any type of transaction, not just monetary transactions.
- Large corporations are exploring how they can use blockchain to streamline their processes.
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