Have you ever tried sending money overseas?
When you enter an amount of money in your online banking tool to send overseas, chances are that the money essentially 'disappears' for a few days, or even up to a week, before finally appearing in your recipient's account.
Blockchain is a technology that revolutionises this process, making faster and safer transactions possible as long as all the transacting parties are in the blockchain network.
Centralised Banking - the 'Old' Way
Let's look at the example above.
When you send money overseas, your bank will be able to tell you immediately how much money is left in your bank account. This is because your bank is the authority in determining how much money you have. However, because the bank is not the recipient's authority, they will have to wait before their balance updates.
At the end of the working day, your bank might still not have posted the update to the recipient's bank because they have thousands of transactions to process, manual updates and reconciliations to make before they tell the recipient's bank.
When the recipient's bank eventually receives the transaction, they will still need to process thousands of their own transactions that day before they get to your transfer and finally update your recipient's bank balance.
Decentralised Banking with Blockchain
A blockchain doesn't rely on a single centralised system to determine the balance on the ledger; multiple computers are collaborating to solve the ledger together.
Here is how it works.
Every few minutes, the latest transactions are entered as a 'block'. All the computers in the blockchain will then compete with each other to 'solve' the ledger using computer programs rather than manually. Naturally a computer with higher processing power will have more chance of solving the block quicker.
When a computer on the blockchain claims to have solved the block with an algorithm, all the other computers begin to verify if the algorithm has solved correctly, based on what they themselves know.
If there is a consensus among the computers that the algorithm is correct, then the block is marked as solved and the blockchain begins work on the next block.
Benefits of Blockchain
In addition to being faster, blockchain is superior to traditional banking systems in being readily authenticated, hard to hack and easy to audit. Cryptocurrencies like Bitcoin go a step further to encrypt transactions for an added layer of privacy.
What is so Special about Bitcoin?
All this technology was developed in response to the economic downturn at around 2009. During this time, people lost trust in traditional financial institutions so they decided that blockchain technology is the answer to creating more transparent, authenticated transactions.
Bitcoin was one of the first virtual currencies that took advantage of the technology. Note that the technology can readily be (and now has) applied to traditional currencies as well.
A normal currency like the US Dollar or Australian Dollar is backed by a country. This means that when you hold a certain amount of currency, a country will guarantee that the money has value behind it.
Bitcoin, being a virtual currency has no such backing which means that it is a highly volatile currency (its value can rise and fall rapidly).
Why would anyone buy Bitcoin then?
Well for starters, people who have lost faith in traditional currency or who have had a bad experience from the economic downturn might decide to turn to 'buy' Bitcoin as an investment not unlike buying a foreign currency in the hope that the value appreciates.
Bitcoin, using blockchain technology is extremely hard to hack and it's completely transparent to the thousands of computers that are part of the blockchain. You can see the live ledger of all the people who have Bitcoin at all times, so you can trust that their wallet isn't empty when you need to sell them something.
If you had 0.01 Bitcoins, you can't hack the system to say you have 100 Bitcoins because multiple computers will need to authenticate your balance and you'd immediately get caught.
In the past, people could add their computer to the thousands of computers on the Bitcoin blockchain to 'mine' Bitcoin - that is to compete with the other computers and reliably solve each block algorithm, earning a return in the process. However, now that there are dedicated computers designed to solve blockchain algorithms, mining Bitcoin is no longer a profitable exercise. Of course, you can still mine other new cryptocurrencies or purchase Bitcoin as normal.
Coding and Blockchains
Blockchain is not possible without the talented men and women writing programs for this technology. In the future, even more groundbreaking technologies in the fields of artificial intelligence, renewable energy and robotics will become more prominent in everyday life.
Be sure to check out our robotics and programming classes for kids from ages 3 - 12.
If you have any questions about our classes please don't hesitate to contact us.