BlockChain Basics

BlockChain has become an increasingly common term, largely fueled by the highly volatile blockchain currency BitCoin. But under a surface understanding, there is a lot of uncertainty about what it offers and what it means. Let’s dive into that a bit today, starting with the main benefits and problems and then what it means.

With a little bit of simplification, BlockChain is a technology in which records are tracked in a publicly accessible way, with each record containing a piece of the previous record. This last bit is critical – this makes it nearly impossible to modify previous records without making it obvious that the content has been tampered with. BlockChains typically use something called “Proof of work” to add records. This can be completed by anyone with computing power and thus removes the need for a central authority, creating more flexibility for people to complete transactions independently. (There are still checks in place to ensure only authentic records are added). As a result, BlockChain technologies are considered revolutionary for ensuring authenticity and security of records, changing the way we complete transactions from bank account transfers to house purchases.

However, the system is not infallible. In 2016, the blockchain based currency DAO was hacked with a thief nearly getting away with $55 million (learn more). As secure as the base protocols may seem, there is always still a risk of human error or new discoveries that create vulnerabilities that adversaries can exploit. Further, the way that many BlockChain systems work today requires an immense amount of energy – according to the Economist, the amount of energy used to keep BitCoin going is roughly the same as the energy consumption of country of Ireland. In an era where we are increasingly conscious of our energy use and the dangers it poses to our environment, it is challenging to imagine BlockChain technologies growing and scaling without serious repercussions or a revolution in energy technology. The scale is also limited by the technology itself. Barron’s notes that Visa currently completes more than 5,000 times more transactions per second than Bitcoin. For cryptocurrencies like Bitcoin to take off, or other BlockChain applications in fast moving industries like commerce, the speed of transactions must dramatically improve.

There are ways to workaround these problems, and given the enormous potential benefits of BlockChain technologies, I’m sure we will see the investments to get around them. Today, BlockChain is being explored across many industries, from finance to humanitarian aid to voting. Digging into these examples more, the decentralization from authority enabled by BlockChain means that it can be used to provide finances, records, and other assets to people in regions of great instability, which is appeals to humanitarian efforts. The confidence that you can have in records and the convergence towards a single ledger is interesting for finance and voting – these industries can now make processes much faster and more secure because BlockChain tracking removes the need to extensively verify actions, and thus they can be completed much faster with less overhead. You can learn more about these three applications through Forbes, Follow My Vote, and the Harvard Business Review.

What does this all mean? First, as laid out in the HBR article, we can expect to see a transformation in our society driven by the new opportunities presented by BlockChain, since this has the potential to revolutionize how most industries work. But secondly, because many of the benefits from BlockChain stem from decentralization and the lack of an authoritative source, policymakers and society in general needs to be proactive to create the right guidelines for how this should play out. If crypto currencies overtake current government-backed money, how will The Federal Reserve adapt to still protect American finances? If medical records are moved to BlockChain based ledgers (while still encrypted to ensure only authorized people can access the information), how do HIPAA and other privacy regulations need to change to still protect individuals? The BlockChain revolution seems to be more than just a hype, but we need to take the right steps to make sure that we can get the most out of this new technology and in a way that best helps our society.